Building a REI portfolio by buying SFH vs investing in CrowdFund

12 Replies

Building a REI portfolio by buying SFH vs investing in equity-based Real Estate Crowdfunding

This question is coming to my mind again and again whether I should start investing in Real Estate Crowdfunding through sites like – RealCrowd, RealtyMogul, RealtyShares, CrowdStreet, etc. because I am finding it really difficult in today’s market to find a good “Turnkey” cash flowing property meeting the criteria that I have setup for my portfolio.

However, I am not sure whether someone can make it really big with CrowdFunding even when it is equity-based and not the debt investment.
So my questions are –

  1. Are returns similar if let's say I invest $30k each in 10 equity-based CrowdFunding offerings vs. buying 10 Single family homes (SFH) with $30k down payment each over the next 5-10 years?
  2. What are some of the pros and cons? 
  3. When to go which route?

Please share some of your experiences.

you should check with Mark Robinson he makes some good post on the subject I think the equity deals have been hit and miss

when you say criteria .. i assume this is your wish list of what kind of returns you would like to get to consider real estate at all

Curious what's the returns you would expect for "buying 10 Single family homes (SFH) with $30k down payment each over the next 5-10 years"? Plus where would be find such homes? Definitely, not in your home backyard of CA. :)

The crowdfunding platforms all show projected returns so you could do an easy compare. Now if you want real world data points, then think it's still too early as the crowdfunding platforms are all pretty new. 

In general I imagine that doing everything yourself you'll make more money as all those are added costs in a crowdfunding deal. 

So it's more of a trade-off that you'll probably make less but you get to be much more passive (literally you just wire money) vs getting your hands dirty in sourcing, funding, and maintaining 10 SFH. That just sounds like a lot of work to me :).... at that point you should just consolidate into a single multi-family project.

The other aspect of crowdfunding is it lets you participate in deals you perhaps could never do yourself. Like a new construction high rise, a retail shopping plaza, a hotel, etc.

Also when you say "make it really BIG" what do you mean?

I saw a webinar where the fund had over 15% annualized returns. So they illustrated an example where if you put in $250K in fund 1, and in five years your money would double (this assumes that you re-invested your distributions back in). So year 5 you're at $500K and if you participate in the next fund that also has similar projected track record you would end up at year 10 (from start to finish) at $1M. 

Actually, in your example you're investing $300K ($30K across 10 deals), if those average 15% annual return then you're looking at doubling your money to $600K at the end of 5 years (assuming your money is re-invested for compounding).

@Manish A. Pros of buying turnkey are tax write offs in the form of depreciation, principal paydown, and the potential for appreciation over the years.

Cons: Tenants, capex, did I mention tenants?

Your investments will be made or ruined by your team. If you are investing out of state you must have a proven, reliable partner on the ground.

@Manish A. , Each has its pros and cons. In my opinion it's best to do both (and that's what I do). But your situation will depend on your specifics.

1st: Virtually any investment strategy you can achieve through normal/direct investing you can achieve through crowdfunding (and achieve similar returns). For example, if you want to focus on the equity in single-family homes, you could invest in a crowdfunding fund that invests only in the equity of single-family homes. The only difference in the return is going to be the fact that you pay a fee to the professional manager in the crowdfunding fund. However, if you choose well, this fee should not be affecting your return significantly.

The difference with doing it yourself is that you have complete control over it. The downside is that it is a lot of work and takes time and effort as well as knowledge.

Crowdfunding on the other hand is completely passive once you have selected the investment. So it takes a lot less work. In many funds, you might even have a professional manager with decades of experience more than you. The other advantage is that you can diversify your investment money across many properties, which insulates you from a single disaster wiping out your entire portfolio or return. Additionally, you can get into the investment at a much cheaper minimum than if you bought the investment yourself, because you are pulling your money with other people.

On the other hand, you have to feel comfortable outsourcing all of the control to another party. If you can't do that, then crowdfunding is not for you. And as I mentioned, there is a fee. So if you have the time and knowledge to manage it yourself, and you are looking to maximize every tiny bit of the return, then again crowdfunding may not be for you.

If you have any questions, just let me know.

Equity crowdfunding is riskier than debt investing, but the returns can be higher,  The key is due diligence and diversification. Diversify by assets class, by sponsor, by term, and geographically.  I recently put up a post on my 31 investments that have gone full cycle.  I will add that to this post.

Of my pure equity investments, only 6 have gone full cycle with a 23.78% IRR. In 2015, I had 36 pure equity investments outstanding and its cash on cash yield was 10.1%. For 2016, I had 40 pure equity deals and the cash on cash yield was 9.4%. 12 of those 40 had no cash distribution. Some ware ground up, some invested late in 2016, and only one was suppose to have a cash yield and did not.

These numbers are good in my opinion, but this has been a good period of the real estate cycle.  I am focusing on counter cyclical investments like self storage and mobile home parks and investments with a "special sauce". 


My old post on full cycle investments:

I made many post over the years showing the yearly and quarterly results of my crowdfunding investments. While that information is useful, the most important metric is the final results once an investment has gone full cycle. I’ve invested online for over 3 years now and of the 95 real estate investments, 31 have gone full cycle.

IRR Returns for Investments going Full cycle

15 Debt Deals - Average IRR 11.56% - projected 11.50%

10 Hybrid Deals - Average IRR 11.15% - projected 18.02%

6 Equity Deals - Average IRR 23.78%, projected 19.25%

Debt Investments

I had a 15 Debt deals go full cycle. Most were on Patch of Land and a few on Fund That Flip A lot had extensions etc. and some delays, but they all paid and I averaged about 11.56% over the past 3 years.

Hybrids Investments

These deals that have an "interest" payment a kicker at projects completion - I have 10 of these go full cycle and 80% of them missed projections (all IRR's ). The average return was 11.15%. Almost all of these deals were single family fix and flips. A typical structure was 8% interest paid monthly and the a 9% kicker once the property sold. As you can see, many of the equity kickers did not materialize.

20% projected IRR at iFunding realized 10%

13% projected IRR at iFunding realized 13%

18% projected IRR at iFunding realized 14%

20% projected IRR at iFunding realized 16%

20% projected IRR at RealtyShares realized 0%

20% projected IRR at RealtyShares realized 13%

20% projected IRR at RealtyShares realized 15%

17% projected IRR at RealtyShares realized 12%

15% projected IRR at RealtyShares realized 3%

13% projected IRR at Fundrise realized 13%

By Platform iFunding 13.7% IRR, Fundrise averages a 13% IRR, , and Realty Shares 9.2% IRR.

Equity Investments

Six equity deals have gone full cycle and overall, they have outperformed. The weighted return for my equity investments was 23.7%. The average term on my equity investments is 5 to 7 years. I should have more data on the equity investments in the coming years.

21% projected at Realty Mogul self-storage realized 16%

28% projected at RealtyShares office realized 18%

18% projected at RealtyShares fund realized 20%

15% projected at RealCrowd MF realized 28%

20% projected at RealCrowd Industrial realized 29%

15% projected at RealtyShares retail realized 29%

It's a little bit of an apple and orange comparison. As pointed out by others, buying SFR yourself entails dealing with tenant risk and having more eggs in a single basket (i.e. you own a house with one tenant so it's all or nothing on the rent). I invest in equity crowd deals w/some platforms you mention but I also own a couple SFR's for diversification so I have wrestled with your same questions many times the past few years. When I look at the SFR's, if you have solid, long-term tenants in relatively maintenance free homes, who take good care of the property, the COC returns probably beat the crowd/syndicate investments I'm currently invested in (I say probably since very few have gone full cycle). However, if I invest in a competent, experienced, sponsor that is purchasing a multi-tenant apartment complex, office bldg, self-storage facility or what have you, my risk is mitigated somewhat since the properties in question do not depend on 1 tenant for 100% of their income and I get to invest alongside an org that has years of experience owning and managing these types of properties; i.e. it's their full-time job. Also, I don't take on recourse debt personally to invest in crowd/syndicated deals while still being able to capture a piece of the depreciation. However, knock on wood I like owning a few SFR's so far since I have more control over my entry and exit timing (in theory) and there is a little more tax benefit since I am the only one capturing the depreciation. However, I can see how it would take only one really bad tenant experience, extended vacancy and/or some really expensive maintenance issues to change my tune. As mentioned by others, a top quality property manager is absolutely critical when buying far away from your home base (as I did). Lastly, there are times when the quality of crowd-funded deals are not so great, regardless of platform and botton line you are still taking a leap of faith when you turn your $ over to a sponsor let alone you have no say over the exit timing or day to day decisions regarding the property or fund management. The crowd platforms perform their due diligence but it's imperative that you do your own deep dive on the sponsor(s) and try to verify the marketing pitch they've provided you. Jay Hinrichs mentioned Mark Robertson. He manages a site that has user reviews of crowd-funding platforms and sponsors at crowddd.com so you should check that out. Also, Ian Ippolito has a crowd-funding review site called therealestatecrowdfundingreview.com for additional information.

Manish, also there is a recent podcast that does a pretty good job discussing crowd platforms and syndicate investments in various asset classes vs owning SFR's yourself. The podcast is called Cash Flow Connections Real Estate; the host is Hunter Thompson and the guest in the episode I'm referring to is Jeremy Roll. Jeremy is known to some of the others in this thread for the syndicate deals he invests in, his due diligence standard, his views on the RE cycle etc. If you listen to it, keep in mind he is not personally a fan of owning SFR's individually so take those comments with a grain of salt from the standpoint that everyone has their POV and risk tolerance. As Ian mentioned in an earlier comment, he invests in both SFR's and syndicates and he is a very prudent RE investor in my view too. Everyone brings different perspectives at end of day.

@Lawrence Hsieh - $30K I used as an example but you can find properties with that in mid-west and Texas.
When I say "really big" - maybe it's a misnomer but I will be happy if I reach somewhere between $10k-$20k cashflow per month.

@Mark Robertson , @Ian Ippolito   and @Chris Falk - thanks for all your input and the insights that you have shared.

@Mark - the logo for CrowdDD looks very similar to RealCrowd's ;-)
Also, if I need to compare the returns for buying SFHs and CrowdFunding - what should I be comparing COC, ROI or IRR?
Assuming - we can get 10-15% IRR in CrowdFunding and close to 20% in SFH (see numbers below from one of the Turnkey provider's for a $150k home in Dallas) then why buy SFH and take all that risk? Is it correct to compare IRRs?

FINANCIAL PERFORMANCEYEAR 1YEAR 2YEAR 3YEAR 4YEAR 5YEAR 10YEAR 20YEAR 30
Capitalization (Cap) Rate5.5%5.5%5.5%5.6%5.6%5.7%5.9%6.1%
Cash on Cash Return (COC)2.3%3.5%4.7%5.9%7.2%14.5%34.1%63.2%
Return on Investment (ROI)30.0%54.3%79.6%106.0%112.5%264.2%681.7%1,317.4%
Internal Rate of Return (IRR)12.4%18.2%19.3%19.5%19.3%17.7%15.9%15.1%
Originally posted by @Manish A. :

@Lawrence Hsieh - $30K I used as an example but you can find properties with that in mid-west and Texas.
When I say "really big" - maybe it's a misnomer but I will be happy if I reach somewhere between $10k-$20k cashflow per month.

There's definitely people out there that are full-time passive investors. Probably one of the best known ones is Jeremy Rolls, you can search for his stuff and has really awesome tips on how to conduct due dillegence and why he likes RE passive investing approach.

At 10k per month, you're looking at cash flow of $120k per year. The CoC that you see in most equity deals is around 8-12% so doing some simple math you just need to invest in about $1.2M+ in such deals to get that desired cash flow. Now that's just the CoC, your actual IRR is higher but those exit events are usually 5-7Y out. Ideally, you stagger so you can get some exit cash flows coming back so it's not completely reliant on CoC. So the all in may not need to be as high.

This is where if you did it yourself (setting up your own deals) you could probably get to the equivalent cash flow target "cheaper" as you can use leverage so you don't need the full $1.2M of your own money to deploy. 

Unfortunately, you can't invest in real estate syndicates using margin unless you do things like equity lines of credit on your existing properties and go that route.

So both approaches can achieve your result. 

As someone mentioned it's not an exclusive this or that and you can dabble in both and see which you like.

@Manish A. , There is no one perfect way to compare options.

Cash on cash is a useful metric to compare investments, because it removes the effect of leverage (which tends to be different on investments, causing an unfair comparison otherwise).

IRR was invented as an attempt to determine if any *single* investment is worth investing in. It was actually not intended to compare 2 mutually exclusive investments and choose between them (even though that is what most people use it for). Additionally, you have to be careful with IRR because it can overstate your earnings, and is not a perfect metric by any means. For example see this: https://www.boundless.com/finance/textbooks/boundl...

ROI numbers can be fairly easily manipulated, depending on how leverage is calculated for example, which can make it difficult to compare 2 different investments when someone else is providing their own numbers. Also, the less money you put into something, the higher the ROI tends to be, which again can throw off a true comparison if you would be willing to invest in the larger amount either way. For example see this: http://www.investopedia.com/articles/basics/11/cal...

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