Notes, Crowdfunding investing vs. tangible property investing

19 Replies

I was hoping to get thoughts from other BP members who may have experience in investing in crowdfunding type opportunities such as Realtyshares, Realtymogul, Fundthatflip, the Noteshop etc versus using fix and flip or buy and hold strategies. I am trying to figure out which strategy will work best for my family. 

My wife is a very busy residential agent here in Richmond VA, and I am a busy facial plastic surgeon. She was diagnosed with bone marrow cancer last year and went through an arduous year of treatment, including a stem cell (bone marrow) transplant. She has fully recovered and working full-time again. Though I have a solid medical practice, it is not going to give our family financial freedom and will not make us truly wealthy. Any big increases in income that I strive for get hit hard by taxes.

Our goal is to create horizontal streams of income that will get us to our Big Why: to be able to spend as much time together with our 2 kids age 7 and 5 without financial worry or guilt. Specifically, I want to take the pressure of of my wife to continually produce income for our family. She loves her job, but works too hard. I want us to be able to get the most joy from life everyday that we can, for her illness has made us truly realize how precious everyday really is. Though that sounds trite, it is true. 

Our financial advisor is a close family friend. His advice follows what most FA seem to all say: invest for the long-term in stocks and mutual funds and gradually build a solid portfolio of securities . I don't feel like this will get us to our goal. 

Ive read the forums and listened to several BP podcasts covering RA investing while working a full-time job. Its truly awesome what so many have been able to accomplish. 

We have 3 SF properties here in Richmond that give us cashflow, appreciation, loan amortization and tax benefits. The cap rates are in the 7-8% range. I have been looking for MF units that might accelerate the path to our goals, but have not seen any outstanding deals in our local market. We really enjoy this investing and appreciate what is does for our family. 

As with so much in life, the biggest problem for us is time. Time to look for deals, obtain financing, and manage property. No whining here, just stating the facts. 

I am hoping to hear from folks who have invested in notes or used crowdfunding successfully and achieved good ROI numbers. This kind of investing sounds appealing to me in that it at least sounds to be truly passive investing, and thus might require less of my own time, while still achieving cashflow and asset appreciation. Specifically:

1. What kind of ROI have you personally attained?

2. Are there tax benefits in this kind of investing you have taken advantage of?

3. Do you find this investing takes less of your own time input, management etc?

4. Outside of the risk level for this kind of investing, what disadvantages have you seen?

5. On the flip side, if anyone has considered this kind of investing, but decided to stick with tangible RA assets, what made your decision?

Certainly these web-based investment vehicles are rather new, and have not stood the test of time that traditional RA investing has. The returns look pretty good when comparing to the RA market here in Richmond (at least the properties I have come across and analyzed.) I have a dentist friend in NC who is buying up SF homes and getting about 20% cash on cash. I have not seen those kinds of numbers come across my screen in Richmond. I see several deals a week, but once again, trying to run my medical practice and look for deals is a true time juggle. 

Thanks so much in advncce

Travis   

Travis,

Those are some great questions.  I  have a few thoughts.

1) It sounds like you should spend some time looking into ways to invest tax free. Self directed Roth IRA's, Coverdell's and HSA's are all amazing vehicles in which to invest tax free.

2)  I have bought, sold and created notes.  Buying them in today's market is difficult.  There are large hedge funds that are buying them in bulk and any scraps that fall off the table there is a lot of competition for.  Second position notes can be lucrative, but are very time consuming and are hit and miss.  Creating notes using seller financing is a great way to get a good yield.

3)  I looked hard at crowd funding for awhile.  Ultimately I thought the platforms were to new to predict the long term results.  I have never though invested in this manner directly.

4)  Cap rates for 20% are definitely possible in the Richmond market.  It takes a considerable amount of time to find them though, as competition from other investors is very high at the moment.

5)  I typically try to invest with infinite return.  If I have no money in the deal I can buy as many properties as I can find.

6)  The best position at the table for a real estate investment is to be the money.  It is absolutely the easiest, and if you can learn how to do it tax free, legally :), the yield is better than owning rentals.

Congratulations on the health of your wife.  A scare like you and your wife experienced is a reminder to us all that life is to short.  Obtaining financial freedom allows us to spend time with the ones we love while we can.

I bought 40 houses in the Richmond market in 2015, and am trying to get that number again this year.  If you ever want to have a cup of coffee let me know.

in your IRA I like Notes.. syndications if your accredited can be good as well. but the sponsor is the key component here.. more important than the underlying asset.

I have personal knowledge of realty mogul and realty shares.. both companies that boot strapped it and are now doing quite well.  Real estate is risk.. no matter what you do its managing that risk .

Tenants are Tenants so really depends on if you want to manage them or a PM either way your managing someone...

There is a sponsor out west that is doing some pretty interesting reposition plays.. if you would like a referral be happy to do that.. ( full dislcousre I invested with them but I do not get compensated for a referral)

@Jay Hinrichs thanks for the response. It looks like part of your response was but off. I certainly get what you are saying about managing tenants or others. It seems like with some of these other vehicles the opportunities are pre-screened. Of course there is still risk. 

I would love to hear more about your sponsor out west

Hey @Rich Lennon

I put your suggestions to my accountant- thanks!

In 5) when you mention having no money in the deal, are you referring to wholesaling without having to put your own money down?

Im blown away that you have found 40 houses in RVA. Congrats! My limited foray into the market here has shown that competition is going crazy. My wife has echoed that sentiment from her experience as a residential agent. Multiple offers are becoming the norm, especially on bread and butter homes. 

I would love to hear more about your experience. How about I buy you a beer?

@Travis Shaw , there are literally millions of owner financed notes across the country, with many yielding 12-15% after discount. While there are large institutional investors picking up packages of notes as Rich implied, there are still plenty out there both old and new to be purchased by "the little guys". In my experience in working for two different banks that purchase performing owner financed notes across the country, why would anyone want to deal with the tenants- rather than studying up and investing in notes?

I have purchased millions and millions of dollars worth of notes, across the country, but particularly in Texas, and have seen a certain type of asset class outperform the majority, in which not many people (in the note buying industry or just a personal investor) even consider. Our bank has a large portfolio of these type of notes, and the default rate has been less than .01% in the last 7 years. I would be more than happy to discuss how to go about finding these, and put away the hassle of tenants and focus on letting your money make money. Don't let the guise of "competition" fool you into thinking there are not new, creative ways to make money in real estate. Feel free to PM me any time!

I've always liked the saying that problems are opportunities in disguise. If I were in your shoes, here is what I would do.

1. Dig deeper with your CPA or find a new one the specializes in real estate.

I'm not an accountant. However, if you file a joint return and elect to group all your rentals as a single activity, you should be able to bypass the passive loss limitation since your wife is a realtor working full time and assuming she is working on the rentals. This is partly why Donald Trump can avoid paying federal income taxes. This is my understanding and you need to verify this of course since my advice is worth exactly what you are paying for it right now.

  • Sit down with your wife and map out your why.
  • Do you really need all this taxable income?
  • Could you simplify your lifestyle?
  • Downsize?
  • Move to the same market as your Dentist friend for a lower cost of living/lifestyle with better real estate returns?

You are in a unique position with your income and skill set. Technically, you could go after multi family deals instead of single family deals to replace all of your spouse's income. She could run the multi family side by overseeing the property mangers.

Here comes the interesting part. If you look at your after tax take home income, you could easily replace it by finding the right buy and hold deals after you factor in the almost tax free nature of buy and hold real estate. This might require buying and holding a series of multi-family properties. Maybe it means a 50 plus unit deal. 

Check out the Wheelbarrow Profits podcast or book by Jake and Gino.  Don't worry, I'm not affiliated with these two guys. 

Bottom line...depreciation expense offsetting my active income was my big wake up call after my CPA called me about 12 years ago and said I was getting a tax refund after having to always pay taxes in my day job. 

I still work my day job, but my professional real estate/rental income status dwarfs my other income. 

Once I discovered my true take home income, I set a course to replace all of it with tax favored rental income. It was actually easier than I thought it would be since the tax benefits kept snowballing as I added more multi's. 

2. Notes or crowdfunding?

You are smart to question the high returns in notes and other ventures. I'm VERY biased here so here is my opinion on notes and crowdfunding. 

Real money goes to the owners and not the loaners. On a note, you lose all the amazing benefits of buy and hold real estate. Frankly, buy and hold residential real estate is the most tax favored investment in the country.

Let's count the 6 ways you make money.

1. Cash flow

2. Depreciation which makes the cash flow virtually tax free if done right. Better yet, can offset active income.

3. Equity capture by purchasing a value add deal

4. Appreciation. Real estate keeps pace with the cost of living.

5. Mortgage paydown. Your tenants pay your mortgage and you keep the benefits of the interest deduction and the principal paydown on the loan.

6. A bank will loan you the money to capture all these benefits. Try asking for a loan to invest in stocks or one of the crowdfunding platforms or notes.

You are asking all the right questions. Now you need to design your perfect life and then execute on the income portion via real estate, a small business, etc. 

By the way.....never ask financial advisor who only knows how to sell stocks and bonds if real estate is a good investment. 

@Travis Shaw , crowdfunding is great if you are an expert at evaluating offerings on your own. You might consider using an investment advisor to evaluate which offerings are suitable and promising. Crowdfunding makes real estate easily accessible, however, in regard to institutional real estate investments, the advice of an expert who works in the industry every day, knows all the players and their track records, and performs due diligence on each offering is a great benefit to you and comes to you at no cost.

I live in Silicon Valley, and I'm an investment advisor who specializes in real estate. I can tell you what people here have done to set themselves up for retirement. There are two types of investors here:

1. Buy or inherit and hold for a long time, then cash out and redeploy equity into potentially higher cash flowing properties or other investments.

2. Buy or inherit and hold all their lives while working the properties for income.

I've seen teachers, firemen, software engineers and all sorts of people utilize both strategies successfully. One way or another, however, the investors must work to pay down loans, increase rents and decrease expenses wherever possible. One way or another, they are building their net worth.

Building net worth is how you may possibly retire with fewer worries. If your retirement utterly depends on having adequate cash flow from your properties, any downturns will cripple you. AND you must maintain adequate reserves to take care of the disasters that may happen.

Most of my clients fall into the first group above. If you are or become an accredited investor, you can buy into institutional grade $50-125M projects with as little as $100,000 and diversify. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. This is the world of Delaware Statutory Trusts.

So my advice- build your equity.

Best of luck! Leslie

Originally posted by @Jay Hinrichs :

There is a sponsor out west that is doing some pretty interesting reposition plays.. if you would like a referral be happy to do that.. ( full dislcousre I invested with them but I do not get compensated for a referral)

 Hey @Jay Hinrichs, I'd love to hear about the sponsor you're investing with.

I made almost 100 crowdfunding investments over the last 3 years.  You can see some of the results at my BP blog. 10%+ returns are not unreasonable.

https://www.biggerpockets.com/blogs/6400-equity-an...

Crowdfunding is pretty much online syndication. Before crowdfunding you had little or no access to deal flow unless you had a superior network or paid high fees to a broker.  Thing have changed and you can direct and bypass a lot of fees.  

DST's are fee ridden instruments. Google it and see results like this:

Under a DST, an investor is prohibited from entering into new leases or renegotiating current leases. This prohibition adds a layer of complexity, requiring the DST to enter into a ground lease for the property with a master tenant" who in turn enters into may smaller leases with tenants. The investments are also completely illiquid and there is no secondary market for beneficial interest in DST's Assuming such a market even did exist, the sale of a DST interest would trigger capital gains tax- the exact thing investors hope to avoid.

Additionally, in many cases, initial fees associated with investment actually exceed the income tax deferred. Fees paid to the FINRA member brokerage firm or stock broker at a closing also increase the fees related to DST's.

Hi @Travis Shaw ,  that's a great question. Too many people jump into the first type of investment that they learn about, without investigating all the options. You're doing the right thing by taking a big picture approach first, before deciding to drill down. 

  As someone who invests in buy and hold properties, notes and real estate crowdfunding, I personally believe that the best choice is to do "all of the above".  Buy and hold properties are nice because you are in complete control ( and thus easier to predict future income).  Crowdfunding  investments are nice, because you can invest in much larger properties then you would as an individual and diversify into many more asset types and geographical regions to protect your portfolio. 

I also strongly agree with @Mark Robertson , that DSTs are loaded down with fees.  Since you're not doing a 1031 exchange, there are much cheaper alternatives that will do the same thing. 

If you have any specific questions, just let me know.

Thanks so much to everyone who has written! These are all really thought provoking responses. 

As I was reading @Cory Binsfield response, I was thinking that notes and crowdfunding potentially lack certain of tangible RA, such as decreased taxes, debt amortization, equity pullout and forced appreciation. 

Does that sounds correct, or am I missing those advantages in the realms of crowdfunding, notes, etc?

@Travis Shaw , no crowdfunding is not just limited to debt investments, and you can also invest in equity. This means that some crowdfunding deals have pretty much all those  characteristics of do it yourself equity: they pass on depreciation, may distribute cash out to investors at certain times (allow equity to be pulled out via financing), etc. 

@Travis Shaw Like Ian, I am an investor who has done buy and hold rentals (turnkey mostly) for my own portfolio, and equity based crowdfunding, as well as private lending, joint ventures, and most recently debt crowdfunding. All of these investments are considered passive investments, but some are definitely more passive than others. Regardless, all take considerable due diligence up front, and you should be prepared for that no matter what kind of investments you make. You have to find the balance of control you want to have over the asset vs. how ongoingly passive the asset can be. All best on your REI journey.

Larry Fried, Real Estate Agent in OR (#201211636)

@Ian Ippolito what sources of crowdfunding allow one to invest in equity like you mention?

@Travis Shaw , There are quite a few that allow you to invest in equity.

I created a detailed spreadsheet on all the top sites which contains this information, but BP rules prevent me from posting a link to my own site. So to find it, do a Google search on "Real Estate Crowdfunding review top 100 sites". My reviews will be the 1st link. Then click on any of the sites I've reviewed. At the bottom of the review you'll see a link that says "feature by feature comparison matrix".

If you have any questions, just let me know.

There are a lot of good suggestions from others in this thread. Travis, it all comes down to your personal preference. If your main focus is passive income, I think crowdfunding is one of your best options. Everything is handled online and by the sponsor, allowing you to sit back and reap the benefits of investing real estate without the hassles of ownership. As Ian mentioned, there are quite a few options when it comes to equity crowdfunding. The most important thing is to do your due diligence and find the right investment for you and your individual needs. Good luck to you!

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