Crowd Funding VS Building Your Own Portfolio....OR BOTH?

7 Replies

I have recently been looking into the possibility of investing in Crowdfunding.  I am still fairly new to investing but thought this may be an option to help diversify my portfolio in another way.  From what I can gather crowd funding is a simpler and more passive way to invest in a large portfolio by using an experienced expert that builds and manages the portfolio.  One of my main concerns is the lack of control you have over the portfolio.  The whole concept seems simple and easy but will simple an easy make me just as much, or more money, than building a portfolio of my own?  Or would it be a good idea to dabble in both options to increase diversification?  

Any insight on this topic is greatly appreciated.  

@Joey Noel I think it could be a great option to a portfolio. I have never invested in a crowdfunding site, but I have invested in syndications. That allowed me to start doing my own syndications.

Medium screen shot 2015 08 11 at 5.23.17 pmJohn Cohen, JC Property Group Inc | 5162683500 | http://www.jcpropertygroupinc.com

@Joey Noel

I wondered the same thing and sometimes still do. I think it depends what you are looking for and what else you are investing in. 

1) Turnkey - If you are investing in TK crowdfunding can be an alternative. From what I can tell the returns are not dissimilar and the sponsor can have more incentives to ensure the success of the investment with this structure than many TKs. Throw in the benefits of diversification as well as the fact that the platforms themselves offer some protection and comfort (they need to protect their reputation) and as I have posted before I think this is a big threat to TK. The major caveat is the relationship you can build with the TK that you are unlikely to build with many syndication deals. This may provide extra comfort and make TK a better investment.  Lastly, there is definitely a learning curve to investing in syndicated deals. Structure, fees, asset types, etc. can be much different than what someone may be used to form investing in their own real estate deals. It is as important to learn this as it is to learn the rules of the game for TK because while the platforms can protect you a little bit they also have to keep putting up deals and some of those will be bad or just subpar deals just like some houses from TK will be bad or subpar. Same problem but different metrics. 

2) Lending - For lending the real problem is the lack of a personal relationship. I would rather lend to someone I know personally and that knows me personally because I think it heightens the payback probability and allows me to judge the most important thing here which is character.  Course the flip side is the platforms provide some protection because they can step in when a loan goes bad. So if I am lending to people I don't know well anyway these seem to offer a good alternative.  With that being said I have seen rates dropping on many deals from the low double digits to high single digits so returns on self originated private lending may be higher than syndicated deals. 

3) More active investing - Either a flipper or a buy and hold investor that is building up to something. In this case cash is the lifeblood of the activity. Syndication can be a good source of diversification  for investments but otherwise unless you are trying to learn syndication for yourself it can be tough to beat the returns on your own deals. The other consideration is that not all returns here are purely deal by deal monetary. A lot of success in this area will come from building a track record and I have met few people that are willing to count my syndicated deals that I invested in as part of that track record nor do most financing parties understand them at all.   The world is still catching up so it can be real tough to classify those deals for track record purposes or financing. 

For me if I was still doing TK only I would invest in more syndicated deals although I will admit that this is partially because I come from a world where they are the norm so I am used to them.  Since I have become a little more active that is tough to do without hurting the more active investment side. 

Originally posted by @Joey Noel :

I have recently been looking into the possibility of investing in Crowdfunding.  I am still fairly new to investing but thought this may be an option to help diversify my portfolio in another way.  From what I can gather crowd funding is a simpler and more passive way to invest in a large portfolio by using an experienced expert that builds and manages the portfolio.  One of my main concerns is the lack of control you have over the portfolio.  The whole concept seems simple and easy but will simple an easy make me just as much, or more money, than building a portfolio of my own?  Or would it be a good idea to dabble in both options to increase diversification?  

Any insight on this topic is greatly appreciated.  

 I too was looking into something similar a while back, just because I wanted an extra bit of diversification. However in South Africa crowd funding is not as big and there aren't many people on the platform, which is one of the reasons why I decided against it.

I liked the idea that the person whom you were lending your money to was going out and doing something constructive with it, and you could choose different projects to where you money went. 

The downside, like any investment is you don't have a guarantee your money will be paid back - the borrower might default which means you lose your investment. Although I know that a lot of these sites take action on your behalf in collecting what is owed to you, however if the borrower literally cannot pay a cent back then you wont be getting anything. 

I think in the end it comes down to vetting as much as possible the potential risk of that person's project and the return.

- Does the project seem legit?

- Are there other people funding this person's project?

- Do they have a borrower rating / default rating?

- What interest rates are they offering?

It's also about the risk you are willing to take. Loans can be quite risky, but isa nice form of diversification.

Hope this helps a little :)

@Joey Noel, in my opinion, it's best to do both if you are able.

Crowdfunding is indeed a passive investment, so it requires less effort on your part. Since hundreds of investors share the cost, you can diversify your portfolio across property types, geography, and investment strategies… which generally isn't possible when you invest direct (unless you have a very large sum of money). This also lets you access higher returning and/or more stable and/or more scalable property types than most people would be able to afford when investing directly (such as downtown office buildings).

The downside of crowdfunding is that currently there are no buy-and-hold investments, which is an important income producing part of your portfolio. This is where direct investment has an advantage. Also, with direct investment you are in charge of your property which can be an advantage if you are experienced. With crowdfunding, you are trusting a manager to do the job well, and it may be difficult for you to determine if you can trust the person or not.

Good luck.

Medium oneIan Ippolito, The Real Estate Crowdfunding Review | http://www.therealestatecrowdfundingreview.com/

@Joey Noel I would agree fully with @Ian Ippolito and have recently begun implementing by investing in one or two crowdfunding opp's to add to my buy and holds.

Good luck with whatever you decide.

I worry about sharing ownership with 100s of investors and having no say in the direction the project goes.  I understand there are probably multiple exit strategies in place and the general idea is illustrated before you begin, but it just sounds like a mutual fund to me.  Maybe someday, right?  For now I will stick with what I know.  Cheers!

I am co-managing one of the first buy-and-hold SFR funds that is crowdfunding for equity (in addition to being open to direct investment from individuals). We are up and running with significant equity commitments and operations having commenced earlier this year. This is in many ways similar to the Blackstone / Carlyle model but applied on a single market (where they are not present). We see a number of advantages to this model vs. the traditional turnkey or direct purchase models, including but not limited to:

  • Diversification / reduced volatility – by owning a fraction of hundreds of properties rather than 100% of a few properties
  • Better alignment of incentives with those managing the business – I don’t doubt that everyone has the best intentions, but in a direct ownership / turnkey model the investor makes money over time when no one on the ground is nearly as incentivized as the investor is to make the properties perform, whereas the investor typically pays the bulk of his fees upfront. In a fund model the investor makes his money over time and the economics to the managers are in large part directly tied to the return we achieve for our investors
  • Reduced management time / ability to be hands off – we would suggest that for most accredited investors, the amount of time it takes to properly understand and optimize the performance of the business, even if it can be achieved at all from a long distance and without becoming a specialist, is probably better spent on other activities
  • Benefit from greater economies of scale than one can achieve with individual purchases – everything from materials purchasing, rehab crews, property management etc.
  • Advantages on debt – specifically:
    • Funds’ debt is non-recourse to investors whereas individuals’ debt is typically fully recourse to their other assets in a worst case scenario
    • For many foreign investors debt leverage is not available at all or not on competitive terms, so this is a particular improvement for foreign investors
  • Enhanced exit scenarios, specifically becoming attractive as an institutional roll-up, with the better potential exit valuation that may drive vs. a one-by-one sale scenario

We have bought and managed 2000+ homes in a range of markets for institutional investors in the past few years and so definitely bring best-in-class management experience to the venture. Projecting 16-20% IRR to investors, i.e. 2.7x cash-on-cash at mid-case in a 7 year hold scenario meaning projecting $270K total cash return for each $100K invested. Naturally I should clarify that this is open to verified accredited investors only. Obviously I am aware there is a healthy debate on BP about the degree to which investors choose to be "hands on", and ultimately that is of course an individual decision, but wanted to make everyone aware that this is another option available. Feel free to reach out directly if you would like further information.