Crowdfunding vs Turnkey -for passive investing/ wealth building

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Crowdfunding vs Turnkey -for passive investing/ wealth building

Tim C.
Investor · Queens, NY · Member since 2014 · 16 posts · 4 votes

Hello good people of BP!   I'm currently a armchair Crowdfunding RE investor and have been researching turnkey investments for passive income and wealth building.   I have had pretty good #s ( 8% cash on cash) on average on 8 deals over 24 months, plus appreciation (i hope)with crowdfunding, I tend to stick with the stricter platforms (RM) who vet the deals very tightly in my humble opinion so my survival chances are greater with each deal.  The only thing I'm not getting is leveraged appreciation you get with a mortgage which is a exponential wealth builder... which I would like.  That said, I have read a lot of the posts and learned a lot about turnkeys on here... and it seems like its not as "passive" as crowdfunding.   I have also called and spoken to a lot of the turnkey companies who post on here and from what I gather you are paying for a renovated house with all major problem areas ( roof, heat/ac systems, floors/walls, electric and plumbing) redone to new or almost new.  The price of this seems to be at market or a little over market prices.  If one buys at or a little above market prices then gets 3-5 months vacancy right off the bat they will be underwater fast... should the market also take a dip, even with 30-35% down ( which some turnkeys are asking for) you could be underwater in equity and will need to hold for 3-5 years to break even. ( also many other factors didn't mention, location.. location.. location)   On the positive side.. I think housing demand will go up. Recently Roofstock got a big round of funding and it will challenge the private costly turnkey model.  The one thing that sells me is the PM.. the independent turnkeys that have a good reputation of taking care of the house after the sale seem to be the most popular turnkey companies.... and that seems to be the deal closer for me. 

I believe the macroview is up, I want to leverage myself with 10-20 house in a few growth cities where a good turnkey can help me purchase, then have the rent pay me 6-8% cash flow, pay for expenses and mortgage while I ride the wave up and sell in 20 yrs....... but 10-20 houses will require me to keep up with PM, loans, fees, contracts, possible lawsuits.  Is it worth the time VS the truly passive, no legal recourse, crowdfunding R.E model even tho you don't get the leveraged appreciation?    Did anyone ever crunch the #s going back a few yrs  turnkey(leveraged up) vs crowdfunding ( all cash)..  any thoughts, opinions and comments welcome.. I am curious how real estate investors who do it part time or a few hours a week feel about this?

 My aim is to spend less than 10 minutes a day on my investments  =)  

Thanks for reading.. I can babble on, misspell and go on different train of thoughts all in the same sentence.. lol  

Thx!

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Mark RobertsonPro Member
Investor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
10y

I agree 100% with Ian.  You do get leverage and tax benefits with Crowdfunding.  I've made over 80 crowdfunding investments over the last 30 months and the average leverage is 65 to 70% (as high as 80%).  My cash flow has averaged 10%, but my taxable income has been less than 4% of my equity invested.

I have yet to lose any equity in a CF deal, but a couple have broken even and one looks like a 10% loss or so unless the platform steps up and covers the loss (promised but we shall see). I had one investment that more than double my money in less than 24 months. The key to me is I never gotten a phone call about plumbing or noise complaints etc ... that can happen with turnkeys.

The #1 advantage of crowdfunding is deal flow and diversification both geographically and by asset type.

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  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Lane Kawaoka, Considering rental real estate is plastered all over the site, including several e-books, I'm not sure anything about it is considered "hidden" anymore.

    Also, it's incorrect to say that rental real estate doesn't have any fees. Either you pay a fee to your rental property manager, or you essentially pay a fee by working for free as a property manager yourself. 

    Personally, I do both crowdfunding and rentals.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y

    @Ian Ippolito those fees are called expenses that are taking into account in your cashflow.

    Personally, I jump on other PPMs and syndicates and rentals.

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  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Lane Kawaoka, Yes and in crowdfunding the expenses are also taken into account in your cash flow. 

    Both crowdfunding and owning direct rentals have management expenses. Maybe a person prefers to pay for the expense by working for free in the direct rental, rather than paying a management company or crowdfunding fund. Or maybe vice versa. But either way the expenses exist in all the different investments.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y

    If I'm going to be making less than 12% I really want control to 1) pull out when I want and 2) be able to have influence on the direction of the ship.

    I realize that many people are not like me.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    Major difference is any one can buy a TK property but only accredited investors can invest in CF deals.

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  • Ryan Fox
    Member since 2019 · 27 posts · 7 votes
    7y

    I realize this is an old thread but I have the same question as the OP and am still a bit unclear as to why a site like Fundrise or Realty Mogul would be more beneficial than purchasing a turnkey property, from a reputable company (so you don't have to deal with 2am phone calls about clogged sinks).

    The main thing that makes me lean toward turnkeys is the fact that if you leverage using a mortgage you are having someone else purchase your equity.

    I am weighing my options:

    Option A: Invest 100k in a CF site (let's just say Fundrise since I've been looking at them) and maybe I get a 10% return (to make the numbers easier). That equates to $833 per month. I am unsure how that is taxed... Perhaps someone can let me know.

    Option B: Put down 25k on four turnkey properties, each with an asking price of 100k. After all costs, management fees, PITI, that leaves about $200 per month (This is a specific example from a turnkey provider that I've been in contact with. The numbers may not be typical but they are there to help make the point).

    How can option A be better? Option B has $800 / month in rent coming in (remember, it's 4 houses @ $200/month each) and after 30 years I will own four homes that may have appreciated in value and I only put 25k down on each. Also, once the mortgages are paid off each every home will be bringing in ~ $650 / month (In today's dollars). That's $2600 per month, or $31,200 per year, and my initial total investment was only 100k.

    I'm 37 y/o and I can't see how option B isn't significantly better than option A... when I retire I will own four properties that each bring in significant rental income, and during that process I will be bringing in supplemental income from rentals.

    Perhaps I am missing something and that is why I am here. I am new to investing (we purchased a two family home last year and live in it and how have extra income and are looking to grow our wealth and have some extra income coming in).

    Thank you in advance for any replies!




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  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    7y
    Originally posted by @Ryan Fox:

    I realize this is an old thread but I have the same question as the OP and am still a bit unclear as to why a site like Fundrise or Realty Mogul would be more beneficial than purchasing a turnkey property, from a reputable company (so you don't have to deal with 2am phone calls about clogged sinks).

    The main thing that makes me lean toward turnkeys is the fact that if you leverage using a mortgage you are having someone else purchase your equity.

    I am weighing my options:

    Option A: Invest 100k in a CF site (let's just say Fundrise since I've been looking at them) and maybe I get a 10% return (to make the numbers easier). That equates to $833 per month. I am unsure how that is taxed... Perhaps someone can let me know.

    Option B: Put down 25k on four turnkey properties, each with an asking price of 100k. After all costs, management fees, PITI, that leaves about $200 per month (This is a specific example from a turnkey provider that I've been in contact with. The numbers may not be typical but they are there to help make the point).

    How can option A be better? Option B has $800 / month in rent coming in (remember, it's 4 houses @ $200/month each) and after 30 years I will own four homes that may have appreciated in value and I only put 25k down on each. Also, once the mortgages are paid off each every home will be bringing in ~ $650 / month (In today's dollars). That's $2600 per month, or $31,200 per year, and my initial total investment was only 100k.

    I'm 37 y/o and I can't see how option B isn't significantly better than option A... when I retire I will own four properties that each bring in significant rental income, and during that process I will be bringing in supplemental income from rentals.

    Perhaps I am missing something and that is why I am here. I am new to investing (we purchased a two family home last year and live in it and how have extra income and are looking to grow our wealth and have some extra income coming in).

    Thank you in advance for any replies!




    I own turnkey properties, local properties, and also online syndicated investments and I still struggle with this very same question whenever I have new capital to deploy.

    I will say however, that based on your turnkey scenario above, it looks like you are assuming an expense ratio of only 38% of gross rent (if using a mortgage interest rate of 4.875% and gross rent of 1% of purchase price). TK providers will generally provide you with rosy figures when estimated expenses. While your first year expenses may very well be pretty low, in the long-term, it will probably be closer to 50% of gross rent. Also, keep in mind that when leveraging 80%, it just takes one lease turnover to wipe out 1-2 years worth of cash flow.

    Also, regarding appreciation potential, depending on the type of CF or syndicated deal we are talking about, the appreciation potential for value-added or core+ is higher than turnkeys with the same excellent tax benefits. In fact, your first year "paper losses" should be large enough where you'll have passive-losses that will need to be carried into subsequent tax years, despite having positive cash flow.

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  • Ryan Fox
    Member since 2019 · 27 posts · 7 votes
    7y

    @Tony Kim

    Thank you for the response. Hoping you can clarify a couple of more questions...

    - Regarding expenses - great insight, thank you.

    - Regarding over-leveraging - hadn't thought of that, thank you.

    - After mortgages are paid, however, you now own four homes that you didn't pay for and will now be producing significant income (assuming you hold for 30 years... kind of need to make a lot of assumptions). I just don't see how I could pass on purchasing an asset with someone else's money.

    - Regarding appreciation potential - Can you please elaborate or point me in the direction where I can learn more about tax benefits of CF? 

    - Can you tell me which CF sites you have had success with?

    - What about option C, the idea of "splitting the difference" where I purchase two homes instead of four and put down significant down payment for each? To me that would (1) increase monthly income and, (2) set myself up for two nice assets come retirement.

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  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    7y
    Originally posted by @Ryan Fox:

    @Tony Kim

    Thank you for the response. Hoping you can clarify a couple of more questions...

    - Regarding expenses - great insight, thank you.

    - Regarding over-leveraging - hadn't thought of that, thank you.

    - After mortgages are paid, however, you now own four homes that you didn't pay for and will now be producing significant income (assuming you hold for 30 years... kind of need to make a lot of assumptions). I just don't see how I could pass on purchasing an asset with someone else's money.

    - Regarding appreciation potential - Can you please elaborate or point me in the direction where I can learn more about tax benefits of CF? 

    - Can you tell me which CF sites you have had success with?

    - What about option C, the idea of "splitting the difference" where I purchase two homes instead of four and put down significant down payment for each? To me that would (1) increase monthly income and, (2) set myself up for two nice assets come retirement.

    Hi Ryan,

    Yes, the equity build-up via principal paydown using rental income is one of the many benefits of direct ownership and is a great way to built wealth in the long term. This is why I struggle when deciding between these asset classes. Right now I'm actively looking for deals and adding more units to my portfolio. The thing that slows me down the most these days is the time it takes to process the mortgage. But I'm also anxious to invest in new syndicated deals as funds become available.

    Tax benefits for syndicated investments (assuming they are equity and not debt) stem from the same dynamics as direct ownership....i.e., depreciation...especially when cost segregation is involved. You will basically earn cash flow while having virtually zero tax liability. And then when your sponsor sells the underlying property after 4-8 years, you will have to pay cap gains tax.

    https://www.biggerpockets.com/blog/apartment-syndication-passive-income-retire-early

    https://www.biggerpockets.com/blog/multifamily-investors-cost-segregation-friend

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  • Ryan Fox
    Member since 2019 · 27 posts · 7 votes
    7y

    @Tony Kim

    Unfortunately I'm just under the requirement for being an accredited investor so, for now, those ideas are shelved.

    How do you feel about a strategy with a larger down payment on less rental properties?

    Given two options, 50% down payment on rental property vs. invest in CF it always seems that the rental property wins out.

    Perhaps you should understand our (my wife and I) financial goals: We just rented out the lower-level of our home and will do so for the next 7 years. With the money we save, from the renter, we want to (1) find a way to make supplemental income so when we expand our family to both levels of our home the lack of rent doesn't hit too hard and, (2) have something we can count on to help us in retirement.

    Thanks for the info and your time!

    0Reply
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    7y

    Speaking in regards to apartment complexes..

    I personally prefer a "value add" strategy over "turnkey".  Value add provides more meat on the bone and opportunity to increase the value of the property.

    I've never invested through the crowdfunding sites but I'd make sure to vet everything extensively.  I know MOST of the deals on the big crowdfunding sites are not hitting their proforma.  Building a relationship with a local syndicator is a better way to do it, in my opinion. 

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  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    7y
    Originally posted by @Ryan Fox:

    @Tony Kim

    Unfortunately I'm just under the requirement for being an accredited investor so, for now, those ideas are shelved.

    How do you feel about a strategy with a larger down payment on less rental properties?

    Given two options, 50% down payment on rental property vs. invest in CF it always seems that the rental property wins out.

    Perhaps you should understand our (my wife and I) financial goals: We just rented out the lower-level of our home and will do so for the next 7 years. With the money we save, from the renter, we want to (1) find a way to make supplemental income so when we expand our family to both levels of our home the lack of rent doesn't hit too hard and, (2) have something we can count on to help us in retirement.

    Thanks for the info and your time!

     Hi Ryan, sent you a PM.

    0Reply
  • Travis Watts
    Investor · FL · Member since 2017 · 247 posts · 245 votes
    7y

    @Tim C. Great question. For me, the best decision I ever made in real estate was transitioning into passive investing vs active investing. I learned so much when I was doing fix and flips, and single-family ventures, but going into passive apartment syndications has made all the difference and allowed me to completely free up my time. Everybody is different, but for me, my time is most valuable. Best of luck! 

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