Why are we doing this again (investing in single MF properties)?

29 Replies

Here I sit, working a Master Lease Option on a 60-unit. It's a decent deal: $50,000 to hold it for 3 years. It's mismanaged and has upside. Needs a minimum of $300,000 to get it from a C to a B. In other words, I will plunk down $350,000, and I'll be able to turn it into a respectable property that I can own for years. I hope to earn a 10% CoC and plenty of equity upside. It's a good deal, but it involves plenty of risk and a lot of hard work.

Or I can take that money and put $50,000 into multiple deals through crowdfunding sites. I am already in the Fundrise income eREIT, which is paying 11%. I've put $50K each into two different mobile home park funds that will pay at least that and have equity upside. There are numerous multifamily deals listed on sites like RealtyMogul, RealtyShares, and Crowdstreet. RealtyMogul has its MogulREIT. Fundrise has 3 other REITS that combine equity and cash flow. Non-accredited investors can invest in the REIT products. Soon, there will be numerous sites using Title III crowdfunding which will allow non-accredited investors to invest a little in multiple deals; SmallChange.com is the first; there will be many more, including some state-based sites).

So, with crowdfunding, we can spread the risk around multiple properties and opportunities throughout the country. We can invest a little in commercial, multifamily, industrial, you name it. Each sponsor has far more experience than I do. Yes, the IRR's offered by these sponsors are in the 15-18% range vs. 20-25% that I project for my project. One has to pay a little for others to do all the work and to get a lower risk. Should be roughly same tax incentives either way.

So why should I invest a huge portion of my life savings into one property and do all the work myself instead of just taking the money and crowdfunding it? I would be curious if others are wondering the same thing. Why are we doing this? 

Let me ask it another way: If you were an accredited investor looking to place money in real estate, why would you buy individual properties and do all the work yourself if you could place the money easily in multiple deals in multiple locations?

Thoughts?

@Marc C. Great question! I just look at it as a diversification play. While I do strongly believe real estate is the best investment out there, there are a lot of different ways to invest in real estate and we're doing more than one. I'm concentrating on flips to increase my available cash pool relatively quickly so I can be in a position to do multiple cash offers. I'm focusing my 401k-type investing in buy-and-hold properties for long term passive income generation. I'm carving off a slice of available capital to use to buy tax liens that produce slower, but dependable growth. I've looked into RealtyShares both as a source of project funding as well as a way to invest. I appreciate that there are a lot of different ways to be an active real estate investor. If, at some point, I decide I'm tired of doing flips, or tired of being a landlord, I'm sure going to be glad there are other ways to invest!

Just a note that the Fundrise eReit is not actually yielding 11% as a real estate investment.  If you read the fine print, you'll see that  are artificially propping up the return by injecting money into the fund.  Since that cash isn't being put into properties, that diluted your future return. 

@Marc C. ,  sorry I forgot to answer your question. 

 Personally, I do both. I like the control that I have on my direct investments, and the ability to cut out the fee paid to someone else. At the same time I like the diversification I get from crowdfunding investments, which far surpass what I could do on my own.

 So for me the best answer is to do both. 

i'll never participated in a "crowdfunding" thread, but i've always been curious about a few things. so let me ask the "newbie crowdfunding" questions..

1. crowdfunding is basically like buying a mutual fund, correct?
2. this "fund" has financial info that's "kinda controlled by SEC, but with so many loopholes that it can be like deciphering Indiana Jones stones, right? You have to study the information and decide for yourself. 


3. how do you get paid? yearly, monthly?

4. how do you know they are even investing? they could be spending the money on trips

5. who's "they" btw? can u see "them"?

6. can you tell them what your money should purchase? 

sorry for the newbie questions. it seems attractive to get into a "fund" that pays out 11% with no work.... really attractive. but so many questions out there, it's difficult to decide to do it.

In the GFC, in New Zealand where I am from, virtually every non bank lender went under, failed completely. Many of them were funded by private individuals, many of whom put their life savings into supposedly bullet proof investments. Thousands of people lost their life savings.   Many many more went from being quietly well off to not knowing how they could ever retire.  In America it was in some ways even worse with so many losing their homes etc.

Both events were caused by other people having control over either your money or your assets.  And a similar situation can AND WILL happen again!

So this is just one good reason to own your own assets and keep control of your assets, wealth and cashflow.

Good question, the allocation of personal capital and time is an important one.  You could add any passive syndication to the crowdfunding that you mention above.

Passive versus active are both good options and some investors do both.  You can be the pilot or the passenger...both have their merits.  I'd suggest that many investors choose direct active investment to get the 20, 30, 40+% IRRs.  They may also want the most direct control over their financial future and not be at the whims of other's, often self-serving, decision-making.  Imagine a challenging market with a good bit of your family's hard earned net worth tied up with people who you don't know well and the distribution checks stop coming.  Lastly, many investors want to hedge against platform and sponsor risk.

Regarding diversification, I often refer to Buffet's quote on it: “Diversification is protection against ignorance.  It makes little sense if you know what you are doing.”  Many investors would rather have a few assets that they understand extremely well than many assets that they don't.  Some investors factor this into risk-adjusted returns when bench-marking investment opportunities.

As @Mike Dymski said "You can be the pilot or the passenger...both have their merits" or more precisely in my opinion: Be the coach - not the quarterback. The quarterback may be the one out on the field, running the ball- but he is also the one taking the knocks and doing the hard work.

I think it comes down in the end to your personal position, preference and lifestyle. Do you want to be in the trenches for that extra ROI or are you in a position to let others do the heavy lifting.

I personally love the opportunities crowdfunding sites have brought me and the ease with which I can implement, especially considering that I am a foreign investor.

See my comments below. It would appear you have some serious misconceptions regarding the CF space. I would suggest taking a look at @Ian Ippolito 's website- Its a great place to get the overall picture.

Originally posted by @George P. :

i'll never participated in a "crowdfunding" thread, but i've always been curious about a few things. so let me ask the "newbie crowdfunding" questions..

1. crowdfunding is basically like buying a mutual fund, correct? 

No. There are fund type opportunities but there are also specific RE investment, in specific properties- debt or equity. All the info should be provided down to the assessors full report for the property, sponsors background , history and credit. - just as you would want to have available for any RE opp you were considering on your own.


2. this "fund" has financial info that's "kinda controlled by SEC, but with so many loopholes that it can be like deciphering Indiana Jones stones, right? You have to study the information and decide for yourself. 

You should always do the DD yourself. That is no different for CF than it is for any REI.

3. how do you get paid? yearly, monthly? 

It varies generally from monthly interest payments for debt, to quarterly or monthly for equity. There are also opps that only pay on exit (not my preference)

4. how do you know they are even investing? they could be spending the money on trips. 

They could theoretically but they wouldn't last long. As I said do your own DD on the platform once and then on each opp that you are considering.

5. who's "they" btw? can u see "them"?

 Definitely - the top tier sites are fully transparent, their teams have an online presence, you can visit their offices and meet with the principals 

6. can you tell them what your money should purchase? 

You have full control in picking and choosing the opps you want to participate in and at what level of exposure. 

sorry for the newbie questions. it seems attractive to get into a "fund" that pays out 11% with no work.... really attractive. but so many questions out there, it's difficult to decide to do it.

Originally posted by @Ian Ippolito :

Just a note that the Fundrise eReit is not actually yielding 11% as a real estate investment.  If you read the fine print, you'll see that  are artificially propping up the return by injecting money into the fund.  Since that cash isn't being put into properties, that diluted your future return. 

Wow. How many investors FORGET to read the fine print - to their potential peril?!!...

Crowdfunding is one of the most abused, misused and misunderstood terms out there, today.

The big change between the old rules and the new rules is the lift on the ban of general solicitation.  In some ways, it is more restrictive than before because of the responsibility of validating your investors.

You still have to follow the same rules in 506(b) as far as documentation and structure.

It's impossible to cover all the ground here.  If you want to know more, PM me, and I'll share with you some resources I use.

Option A: Crowdfunding, syndication, turnkey, etc = lower returns, less work, less upside, and a tad safer (if you do your DD), and boring, but it's a fit for someone looking for a handoff approach to REI.

Option B: Marc C Inc. = more money out, more risk, higher returns, higher upside, more control, more work, and more excitement. It's a fit for someone who wants to be actively involved. 

I would choose B because I like the thrill of the hunt and the challenge to revive ugly junk. My parents are the opposite which is why they are private lenders for us.

@Marc C. I would venture to say because most of the time operator's trust themselves over someone else. What is your CF and equity upside on the project?

That's what I would focus more on, and what % of your total wealth is $350k...and it's not like that $350k is going nowhere...

@Mike Dymski , you said.

"Regarding diversification, I often refer to Buffet's quote on it: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” Many investors would rather have a few assets that they understand extremely well than many assets that they don't."

You're quoting Warren Buffett out of context, which can be a dangerous thing. He was NOT talking about individual pieces of real estate when he made that statement. 

He was talking about something completely different: understanding a smaller number of industries extremely well, before buying companies in them (rather than randomly picking across industries he doesn't understand). And once he understands those industries he doesn't just pick 1 or 2 companies: he diversifies into hundreds. And he also doesn't pick just one or 2 industries: he has diversified into many.

The bottom line is that in real estate, an investor can do perfect due diligence on a direct real estate property, and still get hit by any of 100 unexpected factors that could derail it (several major employers close shop in that city, unexpected increase in crime in the neighborhood, unforeseeable large expenses such as environmental issues, unforeseeable a large repair expenses, etc.).

Not every investor has the means to diversify. And many of those who don't diversify will end up being fine. But not all of them. That's why in my opinion, if an investor has the means to diversify, they really should do it.

@Ian Ippolito Buffet takes large positions in specific companies and industries and does not follow modern portfolio theory of diversification.  To each his is own though.

I am not advocating for or against direct or passive real estate investment...I do both and the verdict is still out for me on which is the best path.  I was just answering the OP on why some investors prefer direct investment.

@Mike Dymski , Oh I see where you were coming from with your previous comment now.

While I obviously do believe in the relevance of diversification, I'm not a huge fan of modern portfolio theory either. Many people thought that their MFT based portfolios were bulletproof prior to the last recession, and then found out otherwise. 

I also know several investors who are the opposite of me and prefer to "put all their eggs in one basket and guard that basket very well". For me, I wouldn't be able to sleep very well that way, but as you said, "to each their own".

Originally posted by @George P. :

i'll never participated in a "crowdfunding" thread, but i've always been curious about a few things. so let me ask the "newbie crowdfunding" questions..

1. crowdfunding is basically like buying a mutual fund, correct?


 IMO, not at all.   A mutual fund is diversified over multiple assets.  Crowed funding is like having 100's of co-owners on one asset.  OUCH!

@Ian Ippolito  Buffet studies industries and companies andwaitsto buy until he feels he can get a good price. He has bought a lot of investments but that is more a function of the size of his pocketbook. Also, a lot of the investments people think are his are those of his insurance company. He certainly did pick certain companies as his big investments. With that being said most people are not Buffet and I highly doubt most people are going to have that type of understanding and discipline to be Buffett.

 @Jeff B.   Not sure what the difference that you are pointing to is. Mutual funds invest mostly in liquid securities by definition those typically have hundreds or even thousands of shareholders.  As such, you are investing not just with many others in the mutual fund (who have a lot of shareholder too) but in assets with many shareholders each. 

@Marc C.   I struggled with this too, a lot. I think one thing to remember is that crowdfunding is just the funding of the same asset you can buy yourself. End of the day forget about how its funded and think if that sponsor came to you for an investment would you invest? True the portal does some work for you so that helps but end of the day they are many times looking at filling the minimum qualifications. For instance, if someone did 10 previous deals in a great market does that really mean anything? Personally I like to source my own "crowd type deals" with sponsors I know a little and where I can vet the deal a little more but that is just my preference.

Originally posted by :


 @Jeff B.  Not sure what the difference that you are pointing to is. Mutual funds invest mostly in liquid securities by definition those typically have hundreds or even thousands of shareholders.  As such, you are investing not just with many others in the mutual fund (who have a lot of shareholder too) but in assets with many shareholders each.

 Q.E.D.  Crowd funding is not comparable at all.

@Jeff B.

ok I thought you were referring to just the number of investors in one asset which can def be a problem if something goes wrong but is one mutual funds face too. 

@Charles Worth , not sure why you addressed that to me since I wasn't advocating investing like Buffet. But I agree with you.

@Ian Ippolito because you said,

"He was talking about something completely different: understanding a smaller number of industries extremely well, before buying companies in them (rather than randomly picking across industries he doesn't understand). And once he understands those industries he doesn't just pick 1 or 2 companies: he diversifies into hundreds. And he also doesn't pick just one or 2 industries: he has diversified into many."

@Charles Worth ,  if you look above that to my previous post, you can put it into context. I was arguing against following what was presented as the "Buffet model".

Bottom line: I feel that if an investor has the means to diversify in real estate it is better than not doing so.

Thanks to all who responded on this topic, but we've wandered off-topic now so let's close the discussion. The gist is: Some folks like lots of control and want to be active, while others prefer to be passive and give up a small part of the returns. I think for me, the answer is to do some of both: I'll proceed with my local 60-unit deal; get it under master lease-option, take possession, raise the rents/improve management, but syndicate all but a small part of the investment required to rehab and complete purchase the property. Meanwhile, I'll keep placing $50K pieces in various passive private placements in order to diversify the risk across property types, sponsors, and regions. (Personally, I think Crowdstreet.com appears to do a pretty good job making sure their deals (and sponsors) are properly vetted. I have read tons of their PPM's, subscription agreements, and LLC operating agreements. Note that NONE of the crowdfunding sites allow deals from anyone but experienced sponsors.)

Thanks again to all who posted! 

Originally posted by @Marc C. :

Here I sit, working a Master Lease Option on a 60-unit. It's a decent deal: $50,000 to hold it for 3 years. It's mismanaged and has upside. Needs a minimum of $300,000 to get it from a C to a B. In other words, I will plunk down $350,000, and I'll be able to turn it into a respectable property that I can own for years. I hope to earn a 10% CoC and plenty of equity upside. It's a good deal, but it involves plenty of risk and a lot of hard work.

Or I can take that money and put $50,000 into multiple deals through crowdfunding sites. I am already in the Fundrise income eREIT, which is paying 11%. I've put $50K each into two different mobile home park funds that will pay at least that and have equity upside. There are numerous multifamily deals listed on sites like RealtyMogul, RealtyShares, and Crowdstreet. RealtyMogul has its MogulREIT. Fundrise has 3 other REITS that combine equity and cash flow. Non-accredited investors can invest in the REIT products. Soon, there will be numerous sites using Title III crowdfunding which will allow non-accredited investors to invest a little in multiple deals; SmallChange.com is the first; there will be many more, including some state-based sites).

So, with crowdfunding, we can spread the risk around multiple properties and opportunities throughout the country. We can invest a little in commercial, multifamily, industrial, you name it. Each sponsor has far more experience than I do. Yes, the IRR's offered by these sponsors are in the 15-18% range vs. 20-25% that I project for my project. One has to pay a little for others to do all the work and to get a lower risk. Should be roughly same tax incentives either way.

So why should I invest a huge portion of my life savings into one property and do all the work myself instead of just taking the money and crowdfunding it? I would be curious if others are wondering the same thing. Why are we doing this? 

Let me ask it another way: If you were an accredited investor looking to place money in real estate, why would you buy individual properties and do all the work yourself if you could place the money easily in multiple deals in multiple locations?

Thoughts?

I think what this discussion is missing is a mention of leverage.  Investors tend to invest in larger and larger deals over time to achieve scale and leverage a greater amount of OPM (debt and equity), not something you're doing with crowdfunding investing.  

If you're tired of the business, send me a message and tell me about your 60 unit.  If I like it, and I think it I can improve its value, I'll put a small percentage of my own money in the deal, obtain 75% of the deal with the banks money and the rest with HNW equity capital.

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