**Win a $100 Amazon Gift Card!** (Which is the best method for PASSIVE real estate investing?)

72 Replies

*** Win 1 of 2 $100 Amazon Gift Cards*** This is a sponsored forum discussion from RealtyMogul.com - and they've generously offered to give away TWO $100 gift cards to participants in the discussion! To enter to win, all you need to do is engage in this conversation! Realty Mogul will pick two people engaged in this conversation to win. Winners will be announced on Monday, September 29th.

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Sometimes tenants can drive investors crazy.

We can't wait for the day when we can make all our activities "passive" so we can enjoy life without worrying about what our tenants are doing (or not doing!). So today we wanted to discuss, here in the forums, the idea of "Passive Investing" and look at three common strategies:

1.) Direct Lending

2.) REITs

3.) CrowdFunding

Each have benefits and disadvantages:

With Direct Lending, you can have a hands-on approach to meeting the real estate investor, walking through the investment, and seeing your investment up close, with potentially higher returns. However, you also have the increased risk because you have the responsibility of analyzing the deal yourself, and your real estate investor may or may not be experienced and will not have been reviewed by a third party.

With REITS you are able to more easily invest passively in real estate -- almost like the stock market -- but you probably won't know what buildings you are investing in, and you won't get all the tax benefits of directly owning real estate.

With CrowdFunding, through a site like Realty Mogul, you get a nice mix between the two: still hands-off, but with a specific property in mind. The properties are pre-reviewed, so you have additional information and viewpoints in hand before having to make an investment decision. You can pool your money with other investors and get started with as little as $5,000.

So our question for you is: What do YOU think is the best method for passive real estate investing?

Why? Would you consider investing your money in a crowd funded investment through a company like

Realty Mogul?

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©2014 Realty Mogul, Co. Realty Mogul is licensed in California under DRE license #01926613. Realty Mogul currently does not lend in the following states: AZ, MN, ND, NV, OR, SD, TN, UT, VT, & WY.  Realty Mogul offers equity securities through WealthForge, LLC, member FINRA/SIPC. RealtyMogul.com is intended only for accredited investors (for persons residing in the U.S.), and for persons residing abroad in jurisdictions where securities registration exemptions apply.

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Yes, I will try crowed funding if my COC return is above 15% - means my $5000 investment will be doubled in every 5yr! Additionally, I hope I will own some equity (my share) of the property I am investing in.

I like  Direct or Private lending for Passive income. I can control how much risk to take on, plus I get the property if the borrower doesn't perform.

None of the above.  None of these strategies have the cash-generating power or the tax advantages of owning cash-flowing real estate assets.  While the 3 investment strategies may be backed by real estate, you also don't have control over whether the RE assets are being managed effectively. 

Single family properties if fixed up after purchase and before renting so the property is perfectly functional can be nearly passive (semi-passive) and provide >15 or 20% cash on cash returns alone (plus equity pay down, appreciation, and indefinite capital gains tax deferral on sale with 1031 exchange). 

Larger multi-family apartment complexes (>50-60 units) once stabilized offer all those same benefits with a greater degree of passivity (you have your own management team to run the operations) and in some value-play scenarios it is possible to make 50, 100, or even 500% returns by turning around a poor performing property. 

I like direct lending and crowdfunding. With REITS I am too far removed from the sponsors and deals. 

Ultimately, if I'm going to invest passively I want to a) know the sponsor and b) know the deal. 

I think direct lending is stronger on the "know the sponsor" part because I'm able to have a face-to-face meeting with the sponsor. However, I wouldn't have the added security of another 3rd party institution evaluate and filter the deal before it gets to me. 

With crowdfunding it's the opposite. You don't get the meet the sponsor in person and likely don't have an unfiltered access as you would with direct lending. However, you do have a 3rd party institution evaluating and filtering deals before they come across the desk. 

Im a newbie, but from my research I would think that direct lending would probably be the best route to go if you have money burning a hole in your pocket but dont have the time or will to be an active investor. Im not sure if syndication falls into this catagory but if i was to be passive I would rather put my money in a pool with someone who knows what they are doing and have it tied to a specific Multi-unit property. Maybe it is more like crowdfunding but with an actual human being who is accountable and would be able to answer questions you have. I am just not a fan of semi-blindly giving your money to someone and just hoping for the best

@Brian Burke  

 any thoughts? If I remember correctly from listening to you on the BP podcast, you would be a great person to clarify for some other new investors.

Simply love the ease and simplicity of tax lien and certificate investing.  To me they are like high paying CD's and if you have multiple locations to invest in, the money will keep turning and roll right back to keep it constantly earning $. 

Direct lending takes a high level of due diligence,,and can get messy with non performing notes and defaults.  However, if managed with discipline, it can give you double digit returns, even through downturns. Not many investments can can do,that. 

REITs can give passive income and growth, but typically trails the performance of direct ownership.  Possibly a fit for the passive investor who wants to spend the least possible time learning and managing, but still wants real estate exposure. 

CrowdFunding Is the new kid on the block, bringing something shiny and new to the game. A lot of what I've seen so far looks really promising, but I expect we will see unintended consequences, we just don't know what they will be yet. I'm planning to do some investing to learn it, and then possibly do a capital raise for a development project. 

I would not invest it REITs. I have done direct lending and plan to keep doing that, especially as I make a move to more passive investments over the next couple of decades.  And I'm going to give crowd funding a try, just dipping my toes in the water to begin with, and closely watching those who've dove in already. 

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When it comes to comparing multiple investment strategies, it all boils down to the risk reward relationship and where an investor falls on the spectrum.After giving a biased breakdown of the three options, we are asked which is the best option for passive investing.The problem with the question is it lacks the answer “none of the above.”Just because none of the options include fixing a toilet or driving a nail, doesn’t make the strategy passive.The options given have varying levels of risk and passiveness.

However, to answer the follow up question specific to crowd funding, yes I would consider it.If I were to pursue this strategy, I would look to invest smaller amounts into multiple properties.If I am going to invest a large sum into a single property, it is going to be one I have some level of decision making.

What hasn't been discussed is the various ways that crowdfunding can, and is being used in real estate; and investors need to understand all of those things that have been mentioned above, in regard to actual "ownership" of the property, etc.  Will the crowdfunder actually own the property and those investing would be a financial partner receiving a set return on the investment or would the investor participate in any future sale and the profits?  What are the qualifications of those running the crowdfunding, that make the decisions as to what properties to invest in? 

There's also the potential to use crowdfunding to raise equity and debt for development projects, etc., which have a faster turn around. We see @Bryan Hancock   and @John Blackman   using it quite successfully on their projects and they may be able to shed some light on some of this. 

I can see where there would be benefits to some forms of crowdfunding. I can also see the problems that might arise if investors are not clear on exactly how the transaction is being put together, what exactly it is they have as security, and what the exit strategy is. 

@Karen Margrave  

Realty Mogul has a pretty good FAQ page that answers the questions you asked. 

What types of investments does Realty Mogul offer?

1) Cash-flowing equity investments and 2) real estate loans.

1) At Realty Mogul, we focus on equity investments with existing cash-flow, like apartment buildings, office buildings, retail shopping centers, self-storage facilities and pools of single family homes.  In this investment, investors pool their money to purchase a piece of a specific property or a pool of properties.  The investment is acquired and managed by a professional real estate investment company, also known as a “sponsor”, with a track record and a history of success.  Investors are entitled to a share of the cash-flow from rents as well as a share of the proceeds when the property is eventually sold. The average hold for an investment like this is 3-7 years. These investments are sometimes called “syndications” because the real estate company is syndicating some of the investment from other investors.

2) The other investment opportunity available on Realty Mogul is loans.  In this investment, investors pool their money to buy a specific loan or a pool of loans.   The underlying loan is tied to a residential or commercial property and the loan is secured by the property until the borrower repays the loan in full. Investors earn monthly interest on their money typically with a balloon payment at the end. Hold periods for the loans could be as short as a few months and as long as a few years.

Interesting responses.

I am solidly in the camp that REITs do not produce the desired returns.  There have been a couple in Canada which claimed amazing (12-14%) returns, which later turned out to be little more than ponzi schemes (cash inflow from new subscribers was being used to bolster the returns to existing subscribers) which eventually ended badly.

Crowdfunding for real estate is not {yet} legal in Canada, so I have to eliminate it from consideration.

That leaves direct lending or, an avenue which was not mentioned, purchasing third-party notes.  As mentioned by @Jon Klaus  , both of these require a high level of diligence and have a not insignificant learning curve, but the returns are good and the on-going effort is less than managing properties {unless you have non-performing notes}.   If you want be even more passive, you could sacrifice a little return and work with a mortgage broker who will perform the screening (diligence) for a fee.

To me the decision comes down to time, return, & diversification. 

REIT's are good for people with very little time to devote to RE investing and do not mind giving up almost all the decision making control to a 3rd party. There is also the timing risk. At any given time the stock market's price of a REIT can either overvalue or undervalue the underlying assets. The "true" value at any given day for a REIT is very subjective at best.  5 years ago this was my best option to giving my portfolio exposure to real estate returns.

Direct Lending is the obvious choice for the greatest return, if you have the time and knowledge to devote to it.  I personally run or help run 3 business's and have a family that requires my time. This pretty much rules direct lending out for me. Having said that, 3-4% origination fees and 12%+ interest rates is very appealing.

For my circumstances, RE Crowdfunding is a no brainer.  Access to deal flow across many different asset classes & different geographic regions is a game changer for a passive investor.  You can also now further diversify by investing in different durations and putting money in both debt and equity deals. With Cd's paying less than 1% and the stock market at record highs, this is the perfect time for a new investment alternative.

The hard part is choosing which deal to invest in.  There are really 2 routes you can take. 

1. Use a crowdfunding platform that curates the deals  and does a great deal of due diligence on your behalf before they offer the investment on their platform.  The platforms that do the most due diligence also charge the highest fees.  

The 2nd route is not to rely as much on the crowdfunding platform and do extensive research and due diligence on the individual deal. You usually do not have to pay the 1 to 2% yearly platform fee when you go this route. It depends on how important your time is to you and how confident you are in you research and due diligence skills.

I  made investments using both types of crowdfunding platforms.  My ultimate decision comes down to the unique characteristics of the deal.  I am willing to pay the 2% yearly platform fees on some self storage, mobile home parks and similar non traditional deals because of the higher returns and the diversification they offer.  However, if I can choose between 2 similar shopping center deals and 1 platform has a .25% fee and the other platform 2%, the lower fee deal gets money.

For the typical investor that may not have a great deal of real estate investment experience, there is a strong need for a crowdfunding platform like Realty Mogul.  Having the benefit of a platform's investment committee and dues diligence will greatly reduce the risk of investing in real estate.

Originally posted by @Mark Robertson:

REIT's are good for people with very little time to devote to RE investing and do not mind giving up almost all the decision making control to a 3rd party. There is also the timing risk. At any given time the stock market's price of a REIT can either overvalue or undervalue the underlying assets. The "true" value at any given day for a REIT is very subjective at best. 

 Your statement about value is why I would go with an Index Fund if I were investing in REITs. 

I think it is also a matter of where you are in your investment career. If you have been renting properties for a while and are tired of dealing with tenants or PMs, finding deals etc, then moving into Direct Lending or investing in Notes may provide the relief you are looking for. Having actual RE experience under your belt will allow you to play in this arena and you get to decide how involved or not you get.

I think everyone agrees that REITs are not interesting.

If you are starting out and are still dazed and confused but are dying to get your feet wet, then investing in crowd-funding through something like Realty Mogul may be just up your alley. Deals will be curated and although you get to watch you don't have to make the decisions yourself with your limited experience. It will give you greater exposure to REI while limiting your risk.

Others starting out may find crowd funding too passive. In the end it comes down to how passive you want your passive income to be.

I would most of all like to invest in property myself.  However, if I had to go to one of the 3 options presented (as that's the question), I like either Direct Lending or Crowd Funding.  

From what I've read, REITs seem to be investing in things that don't have a very high return.  Direct lending I would do with someone who has a proven track record and who knows what they're doing.  Crowdfunding is nice because all my eggs are not in one basket.

The question before an investor interested in real estate as an alternative investment is which of the three major vehicles offer the best price/risk reward: 1). REIT's 2). Direct investment. 3) Crowdfunding.

Commercial real estate (CRE) comprises approximately 10% of the investable US space vs 62% bonds and 28% Stocks. The central benefit in the portfolio space is that CRE returns are not correlated to the other classes. The class is a perfect way to hedge your nest egg.

So, once we have elected to deploy at least some of your portfolio to the CRE space, the question then becomes which of the three methods are the best?

I will posit a question while that REIT's while having the benefit of adding CRE are they not indeed adding the moodiness of Mr. Market to the mix? The second troubling aspect for me is the agency problem: how closely aligned are the interest of the management and the investor?

For some, the above problems are not enough reason to avoid REIT's. For those wishing to avoid those two problems we are left with direct investment or crowdfunding.

Direct investment is a great model that offers superior returns. As with anything, there is no free luch. To reach those returns significant effort and education are required. To be sure it is not a passive model.

Crowdfunding is a brave new world and perhaps a superior investment. It offers access to REIT like management excellence while elimating Mr. Market from the quation and seems to have a tighter alignment of sponsor and investor interest.

Realty Moguls model withinin the crowfiunding space opens new opportunities for sponsors and investors alike. The private placement method by definition keeps the meeting of the two parties more difficult. With

Critics of the crowdfunding model worry that it will be the wild wild west. It is an Internet phnenom. However, Realty Mogul puts a heavy emphasis in sponsor vetting. This seems like a winning combination of all possible passive investments.

It is a brave new world.

Direct Lending  - If you can do hard money lending and can anticipate the market  ! YES ! If you are doing first deeds of trust and managing risk  and can CHURN properly through a broker - YES ! If you can evaluate properties and trust your broker  - YES ! If you can ... no longer passive is it ?

REITS - Screw REITS. They suck and have a dismal track record in low times. Atleast if you are in the Stock Market you can get out quicker.

Crowdfunding - If you have less than 10k to start with and need to go completely passive then go for this. If you trust that the SEC is not going to bog down once a couple of idiots mess  up a few deals that they have raised money through crowdfunding  then go for it.

For the actual risk reward equation nothing beats a Triple Net , Major Tenant anchored commercial complex bought in a low market at a high cap rate this can be a great retirement and can be much more passive than any of the other three options mentioned before.

Sincerely,

Tapan Trivedi

www.sacramentorealestateclub.com

Crowdfunding looks the most enticing of the 3 choices, for perhaps newbies, with no experience and/or $5K+ to want to invest.

Is it for me? I doubt it. I'm a hands-on, stick-my-nose-in-everything type of guy! Not quite the control freak, but maybe deep-down I am!

One of these days when I have enough money, Direct Lending will be what I want to do.  I have never done any research on crowd funding but based on what im seeing in this thread, it sounds very interesting to me.  I will do some more research on it.

Has anyone actually invested in crowdfunding and would care to shed their experience with it?

Originally posted by @Joseph Cox:

Crowdfunding looks the most enticing of the 3 choices, for perhaps newbies, with no experience and/or $5K+ to want to invest.

 Just to be clear for everybody here, crowdfunding is NOT a choice for beginners, newbies, rookies, etc. You must be an accredited investor to participate in these offerings and likely, most newbies do not make over $200k per year (as a single person, $300k married combined with expectations to make the same the following year) or have in excess of $1M in net worth (not counting personal residence).

Now, on to the 3 options addressed in this thread:

1. REITS - In my opinion, the worst of the 3 listed options as you have no control and are more open to the whims of the open market which is often manipulated by fear, greed, or any number of other emotions (similar to stocks). It is also similar to investing in blind pools where you have no ability to research any specific property or portfolio. Certainly an option for those who want the ability to invest in real estate but lack the knowledge or desire to learn the business before jumping in.

2. Direct Lending - A very good option with very high returns rewarded to the savvy investor who has a full understanding of the real estate market, trends, and ability to perform due diligence on the borrower and the specific project securing the loan. Of the 3 options, this is the least passive option (though some of these tasks to the lender can be outsourced), however, still semi passive at start and full passive after making the loan (unless the loan becomes non performing in which the investor must take a more active role again). I prefer this option simply because of my nature to have control and my desire to have the highest yields as possible. With that said, this is also the option with the least amount of possible diversification and as with any investment, there are not only risk vs rewards, but benefits and detriments associated with it.

3. Crowfunding - The new kid on the block and at least for now, nobody knows what the parents may do as far as implementing new rules (parents being government) that could change the landscape of this option. For now, it is a wonderful opportunity for accredited investors to gain access to private investment opportunities that may otherwise not be privy to. While such a service and opportunity does come with a fee, it may well be worth it as it saves the individual investor the task and cost of marketing to locate such private opportunities. It also affords the investor a third party on their team to perform specific due diligence on each potential investment to weed out the garbage and only list the opportunities that have mitigated risks, previous good histories of sponsors, and potential returns that are higher and more securitized compared with other investment options on the market.

For me, I would have two options to choose from as the REIT option is out for me. For others, it comes down to your personal abilities, strengths, time, etc and only each investor can decide which is right for him or her. Certainly there are other options out there not listed in the beginning but mentioned by another poster (investing in commercial for passive cash flow) but again, crowdfunding can bring such options to the investor.


1.) Direct Lending

2.) REITs

3.) CrowdFunding

Each have benefits and disadvantages:

So our question for you is: What do YOU think is the best method for passive real estate investing?

Why? Would you consider investing your money in a crowd funded investment through a company like

Realty Mogul?

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©2014 Realty Mogul, Co. Realty Mogul is licensed in California under DRE license #01926613. Realty Mogul currently does not lend in the following states: AZ, MN, ND, NV, OR, SD, TN, UT, VT, & WY.  Realty Mogul offers equity securities through WealthForge, LLC, member FINRA/SIPC. RealtyMogul.com is intended only for accredited investors (for persons residing in the U.S.), and for persons residing abroad in jurisdictions where securities registration exemptions apply.

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I choose to start being a direct lender a couple of years ago and its turned out nicely for me. I did a lot of research on the background and experience of several professional flippers and narrowed my scope down to the most promising few, then I reached out to those on my short list. So far I have enjoyed not only nice returns, but also have learned a lot, to the point that I would not hesitate to call any of these pros's and ask for advise if I needed it. I have developed a very high level of trust.

I have owned a few REITS in my Traditional IRA and they have under preformed the other Blue chip investments and index funds that I own in the same portfolio. I still own one because I like the dividend but the amount I have invested is very low, I would not be burned too badly if it failed.

I really like the Crowdfunding platform, being able to diversify among several investments reduces risk and gives you a chance to measure the actual performance of the sponsor. However, not being accredited prevents me from spending the time to research them as options. Maybe someday the government will decide I can make up my own mind and they do not have to "Protect Me"  from these evil doers. When that day comes I will become a very active researcher and hope to make some decent investments with quality companies, and I have heard Realty Mogul has a very good reputation.

A final point, my stock portfolio has outperformed my direct lending portfolio by a wide margin, but as a former owner of Both ENRON and TYCO stock, I am reluctant to be a pawn anymore, so I choose to spread the risk..........

Given the options, I would certainly pick crowdsourcing. REITs behave more like stocks so they aren't bad in a portfolio but I'm looking for more meaningful things. Direct lending sounds too difficult for me since I have more practice with house purchases from buying my own place. However, I personally prefer owning my own cash-flow properties since I get to re-build a community while getting a good return.

I am interested in private lending from both the lending and borrowing side. I definitely see the benefits of crowd funding for all types of loans, but I don't plan on using a crowd funding site for real estate any time soon.

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