Invest in Others' Projects vs Have Your Own Projects

50 Replies

Could you please give some inputs on the pros and cons of two types of investment opportunities and which one is a better choice overall?:

  • 1.Invest in other investment companies’ projects, you got 18%-26% return on the investment.
  • 2.Find your own property and then look for investors/partners for this project (if you don’t have enough capital).

The risk of Type 1 is to lose your initial investment, but the investment company seems pretty robust and has good credibility. The cons of type 2 is you have to do everything to ensure the project is going right and of course you are in control of everything. Any other risks of both types I should be aware of?

I also heard if you are new to the game, it is better you do Type 1 first so you will have something on your profile to establish your credibility.

So what is the best strategy: Do Type 1? Do both? Do just Type 2?

You should always be extremely cautious of who you're lending money too especially if you are new. Those returns seem high unless its a profit split or equity as opposed to someone you're lending money to. If you're lending money out most people would likely only say that they'd give you 6-8% so they can lend it out to rehabbers or other investors at 12-14% and make some points and a spread. First, start local. Visit local real estate investment clubs and seek out the hosts or owners. Be familiar with your market and don't rush into any deals. See if you can get your feet wet by doing some errands and ground work for an investor doing a type of project that you want to do. Even if you want to lend money some day you should still understand the mechanics at the ground level. You might be able to put a little bit of skin in the game and learn a lot by doing some grunt work. I wouldn't lend money to anyone I didn't know or vet. Again, the real estate investing market is a close nit community in most places and word travels fast about bad individuals. The hosts/owners of these groups usually know what is going on locally and can help. I like the idea of finding a good deal, having someone else fund most if not all of it, and negotiate some equity in it or take a finders fee and watch the project unfold as it goes. Take it slow...

Originally posted by @Elle Bi :

Could you please give some inputs on the pros and cons of two types of investment opportunities and which one is a better choice overall?:

  • 1.Invest in other investment companies’ projects, you got 18%-26% return on the investment.
  • 2.Find your own property and then look for investors/partners for this project (if you don’t have enough capital).

The risk of Type 1 is to lose your initial investment, but the investment company seems pretty robust and has good credibility. The cons of type 2 is you have to do everything to ensure the project is going right and of course you are in control of everything. Any other risks of both types I should be aware of?

I also heard if you are new to the game, it is better you do Type 1 first so you will have something on your profile to establish your credibility.

So what is the best strategy: Do Type 1? Do both? Do just Type 2?

Regarding option 1, you will be very hard pressed to find an opportunity to invest in someone's project where you get 18% to 26% ROI, unless maybe it you are hard money lender, I think.


Which option is best greatly depend on the skills you have. if you can execute a project yourself and achieve higher returns, there is no need to invest in someone's project. 

@Jeremy Kloter @Patrice Penda :

Thanks very much for your input. 

Those returns seem high unless its a profit split or equity as opposed to someone you're lending money to.

- I believe there is some profit split, both from monthly rentals and also sales of the property (talking about multifamily properties). The company/owner seems credible and experienced. Returns are like 18%-26%. 

See if you can get your feet wet by doing some errands and ground work for an investor doing a type of project that you want to do

- What kind of errands are you referring to? 

I like the idea of finding a good deal, having someone else fund most if not all of it, and negotiate some equity in it or take a finders fee and watch the project unfold as it goes.

if you can execute a project yourself and achieve higher returns, there is no need to invest in someone's project. 

- But with the lack of experience, funds or network, you might not be able to get an as good deal as the well experience investment company (As the Type 1 I am referring to)  and gain as much returns from it, isn't it? Of course this problem might go away as you get the foot wet and gained more experience or credibility in finding and managing your own deals. 

Best,

@Elle Bi  I think that investing and learning from others is a great way to build your knowledge before you put together your 1st deal.

Some things I would consider when you are evaluating sponsors/investors to work/invest with.

1.  What type of opportunity are you investing in? Development/Value-Add/Stabilized?  Does this fit your desired investment strategy moving forward.

2. Assess the experience level of the investor/sponsor

3. Search for a preferred return.  This essentially ensures that the investors will receive distributions of any available profits before the sponsor get their splits.

4. Review the profit splits. Profit splits are arguably one of the biggest factors that will determine your ROI.

5. Look for conservative projections.

6. Assess the sponsors business plan and overall strategy

7. Assess the location and surrounding demographics.

8. Make sure that your review all of the legal docs and work with a trusted counselor/legal team to make sure your understand everything in them.

Going through this process will help you determine if the investment is right for you and give you a due diligence process to assess the sponsor.

@Elle Bi Basically any errand an investor needs to get a project to the finish line. #SweatEquity

@Jeremy Kloter Ok thanks.

@Ryan Cox : But being someone new to the game, wouldn't investing in others' projects (especially those with lots of experience and credibility) put something nice on your portfolio (or resume)? 

There is also requirements to be an accredited investor if you are investing in others' projects and it must satisfy these, correct?:

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-accredited-investors

@Elle Bi Yes, you would need to be an accredited investor in a number of scenarios.

@Ryan Cox : so for those private investment opportunities, if it is said to be accredited investors only, it is usually very strictly to be so correct?

@Elle Bi It sounds like your option 1 is a multifamily syndication - correct? The accredited investors only is an SEC rule, not their own rule, so yes, it is strict.

If you are an accredited investor, investing in a syndication is a great way to learn the business and see how to properly execute a business plan.

If you're not, you can try partnering with a syndicator by bringing value to them somehow. For instance, maybe you can find an off market apartment community for them to purchase in exchange for bringing you in on the GP (general partnership) side.

@Elle Bi Maybe a few thoughts:

1.) You'll never get a risk-free 26%.  I'd posit you'll never get a risk-free 18%.  Not all of these kinds of projects have (or will) pan out.  Otherwise you'd never have anyone buy bonds, you'd just throw your money into something with a 26% return into a sub-2% return.  

2.) Becoming an investor (i.e. passive) might not do anything to help establish your credibility.  I'm a limited partner in a round that a venture capital company raised, it doesn't mean that I'm qualified to be a VC.  If I buy Apple stock it doesn't mean that I'm now an expert on mobile technology and you should invest with me if I found a smartphone company.  Active is active and passive is passive.

3.) You have to decide where you want to be in 5, 10, 20 years.  If you want to be active then the "feet wetting" could be the proverbial house-hacking that's a favorite around here.  The down payments are low, you get to be a lovely property manager, you can start building actual financials, all sorts of fun stuff.  

@Elle Bi  Do some quick google searching on 506(b) and 506(c) to get your footings there.

if an offering is 506(c) investment offering then yes, you 100% will need to be accredited and are generally 3rd party verified (you can't simply 'check a box'). 

If an offering is 506(b) then that investment can take up to 35 non-accredited investors, but then the offering has many limitations (mainly surround the 'advertising' of the deal).

Also echoing what @Andrew Johnson mentions about credibility.  It may get you some credibility with your future investors, but banks/lenders give about zero weight to a passive investment.  (I've had calls with lenders about a specific area where I'm a limited investor, and the response was basically 'so what?')

I would suggest downloading Rod Khleif's book on syndicating multifamily (Free from his website) or also pick up a copy of Crushing It from Amazon.

Great job jumping in!

@Grant Rothenburger : I guess I just learned the term from you! But I called it private investment. Sounds like you  suggested Option 2 for me.

@Andrew Johnson : If according to them the major funding is already ready and they are going to start constructing it this month (It is actually a big, expensive house) and anticipating to sell it by the end of the year, do you still see risks down the road and what kind of risks? I want to be in the game for the long term and invest as many as I can. Sound like you also suggested Option 2. 

@Chris Collins : The contract mentioned: "meets the criteria for being an “Accredited Investor” as defined in Rule 50 1 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended (the “1933

Act”)". So it looks to me to be strictly accredited investor. Please confirm! Ok if it doesn't mean credibility to loaners, what about credibility to investors if you want to bring them in for your own multifamily project? Thanks for the books recommendation, I will check it out!

Thanks Folks ~

@Elle Bi yes if you're being offered an investment and the offering is stating 'accredited investors only' (and if it's being advertised to you in any fashion regardless...) then it will be a 506(c) offering and be for accredited investors only.  Simple as that :)

I would say that the credibility will depend on how you spin it to investors, and what you are personally learning from your passive investment.  If you simply invest passively, then go about your day and receive checks, and nothing more, then whether you have 'credibility' or not won't matter when it comes to running your own deal.  

But you can certainly spin it to potential investors that you are 'involved in multifamily real estate and list off all your 'investments.'  That's a great way to gain personal credibility in my opinion. 

@Elle Bi It's not that I see random risks in any particular project. What would always ask myself is: "Why would someone give me potentially a 26% return on my investment - in less than a year - when they can get a loan, use a HML, heck just take a credit-card cash advance?" Interest rates are still really low so why...oh why...oh why would I need to pay 26% for capital? There might be a good reason, I just can't figure out what it can be.

By the way, I take the same approach when I look at deals.  If the price looks great, the pro-forma looks great, then it's either a desperate/foolish seller or there's something about the property that I don't know.  I never bank on finding a desperate/foolish seller so I always try to figure out what they know that I don't.  

If someone was going to offer me a deal with a 26% return for holding my cash for less than a year, well, I'd want to know where the risk is.  If the risk is minimal they could get a loan for 10% or 15%.  There's no reason to offer me 26%.  Lending isn't a charity.

So anyway, those are my thoughts.  Who knows, could be an awesome deal for all I know.

@Chris Collins : Yes that is nice credibility spin off :)

@Andrew Johnson :  Great thoughts! I heard they want to treat investors right and have lifetime investors (they want you to keep investing), would this be a good reason? The company owner is also a coach/mentor that he trains people over the years on real estate investing and seems honest, ethical and have some credible background. 

@Elle Bi You could be right, this guru could be the greatest thing since sliced bread, I have no idea.  I really don't.  But if he had such a loyal following why didn't someone else snap up the opportunity to put more money into this deal?  I mean it's a 26% return in less than a year, isn't it?  Why didn't a current investor take a cash-advance on a credit card and put their money into it?  By the way, I'm not saying that's a smart thing to do :-)  And maybe this guru keeps a certain amount of debt in his portfolio for new investors.  Again, I don't know.  

But I can't ever get out of my head the many lovely episodes of American Greed.  Or even those stories that you read of Madoff investors that were getting such good returns that they never pulled money out.  And, in retrospect, so many of those American Greed investors (that were suckered in many lovely schemes) always said "I should have known better but I was blinded by the returns that I was getting".  

Again, you could have a great guru who is working magic and be completely above board.  It's possible and I'd like to think it's probably and extremely likely.  And what's important to note is that the Doubting Thomas side of my personality is coming out and showing itself.  It's why I buy-and-hold my own properties.  My DNA makes me question some of these deals a little too much.  If it's my choice to buy, my down payment, my debt obligation, my returns, I get to own my successes or failures.

So, hey, take my thoughts with a grain of salt :)  

@Andrew Johnson : what is the typical range of returns for multifamily syndication? Even crowdfunding platforms boasting 11% returns, isn't it? 26% is on the higher end but their investors typically have at least around 18% returns. 

@Andrew Johnson : have you ever worked with any partners/investors? When it comes to multifamily/commercial (more than 4/5 units), you might often times have to work with a team than just yourself. 

Elle,

Honestly, most folks get really good by working with or participating in deals w/experts to start in whatever niche they are seeking.  Observing, asking questions and being "intentional" with your investments so you can earn and learn in a safer environment is an angle worth pursuing.  Most folks won't give you $ w/o experience and credibility.  Some of the worst advice you will ever get is if you have a good deal, money will come.....not happening !  It takes a good market, deal and experienced team to have the solid underpinnings to start raising capital.  Couple articles on vetting deal sponsors and raising capital.  If you go the latter route, seek legal counsel and understand the compliance angles w/this approach.

https://www.biggerpockets.com/blogs/9145/67627-rai...

https://www.biggerpockets.com/blogs/9145/53959-vet...

@Elle Bi the typical range for syndicated multifamily offerings at this point in the cycle is 12% on the low end to 16%-18% on the high end. Unless of course the sponsor is over-projecting—but there is a difference between forecasted return and actual return, and that difference will show itself eventually.  

As to your question about using your experience as a passive investor on a resume, the best answer is @Andrew Johnson ’s Apple stock example above. I see this all the time, new multifamily syndicators touting all of the units they have been “involved in” but it really means they invested $5K in that, $20K in this, and $10K in the other. But that doesn’t translate to being an operator. Sure, having experience as a passive investor can demonstrate that you know how to sit on their side of the table, but it shows no correlation to being on the operations side. 

@David Thompson : great points and angle :) Thanks!

@Brian Burke : I heard there is COC vs IRR returns. The percentage you gave is IRR right?

Now I heard two sides of the opinions. I guess investing in others' projects doesn't really mean you have been a real operator. But it could work on the psychological end - if you have been associated with big guys on certain deals, that is always a good reinforcement, at least better than if you have never done anything. 

Yes, IRR. CoC ranges in the 4% to 12% range, depending on the asset, strategy, length of hold and which year of the hold you are looking at. Long term averages tend to be in the 8% to 10% range.

I am interested in hearing stories from people who has actually done passive investment or participated in syndicated deals: how was the experience, what are the returns and have you ever lost your investment? 

I have heard it from some syndicators' sides that their investors' never lost money (they might have less returns) because they find the right deals. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here