Staring with crowdfunding RE investments

[RJ]

So I am finally inching closer to do some crowdfunding RE investing. I extensively read WCI and POF posts on this topic. Thanks to POF, I've signed up with Realcrowd and Crowdstreet. I have to admit, picking exact investments is a little overwhelming. In state or out of state? Multi-family or commercial? Short or long hold times? What's the acceptable return?

How do you guys pick your crowdfunded RE investments?

 

TIA!

[q-school]

After careful consideration, Decided not to do too much with it.

I think the returns that people got recently were dazzling me. However less favorable tax treatment and doubt won out in end. Decided easier to try to invest in other areas.

[VagabondMD]

I have been investing in Realty Shares, and more recently, Peer Street. Early on, I picked up a couple of equity deals on Realty Shares but have soured on them because of the tax reporting, that requires a K-1. While this tax treatment is more favorable than a 1099 (debt deals), the additional tax hassle is not worth the small amount ($5000'per deal) that I am investing.

Peer Street is all debt, almost all single family residential, and has a very friendly interface. There is also a $1000 minimum investment per deal, so you can diversify your investment without committing a lot of money. I currently have 21 investments and a total of $32,000 at play. The only downside that I have found is that the deals fill really quickly, and if you want to have your pick of the best deals, you have to engage the autoinvest feature. I am hesitant to do so but might in the future.

[brentwasham]

I thought crowdfunding would be a good way diversify my Individual 401K but found the tax implications require close scrutiny.  The problem is that virtually all of them, at least of an interesting nature and significant return are heavily financed, which generates high tax rates due to Unrelated Debt Financed Income (UDFI) driving Unrelated Business Tax Income (UBTI).  It doesn't take much income in a year, about $12K, to get up to the 37% tax rate.   And this is applied to the percentage of your income that the project has financed (typically 70-80%).  The big hit is at the end of the project, usually 5 years down the road when it is sold at a hefty profit to close out the investment.   The capital gains are taxed the same so tax rate can approach 0.37 times 0.7, or 25.9% of your income and gain.  For a tax exempt vehicle this is a significant annual tax, even if at the very end.   And yes a state tax return with attendant local tax rate and Federal tax return for the 401K will be required.  And yes applies to IRAs which are also set up as a trust.  So, its not for everyone but with annual returns that can reach above 25% (received on the back end after project closeout), it can be worth it.  You just need to go in with your eyes open.  Here are a couple of UBTI and UDFI references I found that also discuss the TCJA changes for 2018, the Forbes article discusses a way to potentially get around UBTI:  https://www.forbes.com/sites/greatspeculations/2018/05/14/new-tax-law-helps-minimize-impact-of-ubti-tax-for-self-directed-ira-investors/, http://www.irafinancialgroup.com/learn-more/rules-solo-401k/what-is-the-ubti-tax-rate/, https://www.bna.com/new-calculations-unrelated-b73014473901/

Some crowd funding references aimed at education on UBTI/UDFI are:

• https://www.crowdstreet.com/ubti/


• https://blog.realtyshares.com/using-a-self-directed-ira-in-real-estate-crowdfunding/

 

[ginmqi]

RJ wrote:

So I am finally inching closer to do some crowdfunding RE investing. I extensively read WCI and POF posts on this topic. Thanks to POF, I’ve signed up with Realcrowd and Crowdstreet. I have to admit, picking exact investments is a little overwhelming. In state or out of state? Multi-family or commercial? Short or long hold times? What’s the acceptable return?

How do you guys pick your crowdfunded RE investments?

 

TIA!

Click to expand...

RJ, if you're ever going to revisit this thread/post....this is EXACTLY my concern when I think about crowd funded RE. It's not actually about the crowd funding platform...it's about the specific deals within that platform that you have to understand.

So it's not nearly as easy, you have to do the homework or trying to understand each deal. And as I just posted in a thread earlier, people are now able to skip over the traditional barriers of entry (years of experience amassing knowledge and capital) and now you can just send your money to a company to invest in real estate hoping the returns are good.

My thoughts here: https://www.whitecoatinvestor.com/forums/topic/what-i-realized-about-crowd-funding/

You need to read up alot more on how each property deals work and calculate to see if that's a good deal before jumping in.

[billy]

I got a invitation to a steak dinner in my area to listen to a pitch for 37th parallel.  Although I admit I've been intrigued and thought about real estate crowdfunding for a while, when an unsolicited dinner invite from an unknown party ends up in my mailbox I figure I've missed the boat for value.  I will stick with vanguard REITs for a while, or at least until I can get in with local real estate investors where I can visit the property and learn more about it.

[Xeno]

I’m conflicted. On the one hand, I don’t like things that are sold, not bought, and these deals have a ton of fees in them. I can analyze the sources and uses and independentlu evaluate comparable rents, recent property sales, and even go to the county website to see whether their estimate of taxes seem accurate, but it’s really hard to do your own underwriting of a big deal including maintenance, utilities, etc. There are some big data services out there like Yardi, but they are cost prohibitive for the individual investor.

That said, I really want a small part of my portfolio, particularly the taxable portion, to have some exposure to equity real estate deals. I have about 10% of my retirement savings spread among a few equity deals on CrowdStreet and EquityMultiple. What I’ve looked for is geographic and sector diversity from my own home and active income source, experienced operators, and significant co-investment (>10% equity) by sponsors. All investments made in 2018, so I haven’t dealt with the tax consequences yet, but I imagine I’ll end up with $3,000 in passive income losses due to depreciation, cost segregation, etc. and any cash flow I’ve been getting will be tax free now. There seems to be a benefit to get cash flow now and pay taxes in a few years. I keep getting debt emails from patch of land, fund that flip, and peer street, but I’m dubious of the risk-adjusted return, particularly considering that my MMA and short term treasuries are paying 2%.

I just don’t have the time/bandwidth to buy and manage my own 4-plex right now, and I’m willing to accept lower returns in exchange for instead investing in a professionally managed 200-unit complex and having someone send me the K-1 every year, rather than having to do all of the accounting and cost analyses myself.

[rrmcpa]

Vagabond MD wrote:

 The only downside that I have found is that the deals fill really quickly, and if you want to have your pick of the best deals, you have to engage the autoinvest feature. I am hesitant to do so but might in the future.

I use Peerstreet’s auto invest feature. They give you 24 hours to opt out of a deal they auto invest you in if you dont like that one for whatever reason so there is some flexibilty.  It’s gotten me in a few that I am sure would have been filled up by the time I would have otherwise logged in.

[ScopeMonkey]

RJ, check out www.therealestatecrowdfundingreview.com and read up on all the educational posts there.  If you join the private investor club (free) you can see many other options than actual crowdfunding, such as private equity funds.  These are vetted by hundreds of other investors, who lend insight.  It also teaches you how to evaluate individual deals on the crowdfunding sites you mentioned if you want to go that route.

[Dont_know_mind]

I do wonder whether diversification gets you much credit security without the basic mechanism of your name being on the loan document.

Instead of crowdfunding or P2P, the previous route, which is still available is to go to your real estate attorney and ask them whether they arrange developer loans. The going rate last time I looked was 8-12% p.a for long term or 18-24% for short term loans (4-24 weeks). The loan amount will be higher, but you then get the attorney to write a loan document for you as first mortgagee on the property, which is often good security in the event of a problem.

It seems to me people invested in crowdfunding loans often don’t understand where they are in the credit line in the event of default. If they did they probably wouldn’t choose to crowdfund. This is all good until liquidity gets tight and conditions become adverse. In that case, I think it is very possible (but it is only my opinion), if you are the poorly secured tranches in 20 deals, you will be likely to lose 100% of that in all 20 deals in a recession. Whereas if you are the first mortgagee in 1 deal, you might get considerably better recovery rate.
I’m not sure why people think they can’t pick individual stocks, but they are able to do credit analysis on individual properties in a crowdfunding structure ?

[ScopeMonkey]

Agree with above, and that's why (technically "non-crowdfunding) debt funds like Broadmark and Arixa make sense and have thousands of investors. But would definitely not just go to your local RE attorney and try to reinvent the wheel on a small scale. That's a recipe for a tremendous amount of work and DD, and will likely end badly.

[wonka31]

Look at millionairedoc and some of his articles. Agree with therealestatecrowdfundingreview as well. Educate yourself, then decide if you want to invest in this space.

[Dont_know_mind]

Vagabond MD wrote:

I have been investing in Realty Shares, and more recently, Peer Street. Early on, I picked up a couple of equity deals on Realty Shares but have soured on them because of the tax reporting, that requires a K-1. While this tax treatment is more favorable than a 1099 (debt deals), the additional tax hassle is not worth the small amount ($5000’per deal) that I am investing.

Peer Street is all debt, almost all single family residential, and has a very friendly interface. There is also a $1000 minimum investment per deal, so you can diversify your investment without committing a lot of money. I currently have 21 investments and a total of $32,000 at play. The only downside that I have found is that the deals fill really quickly, and if you want to have your pick of the best deals, you have to engage the autoinvest feature. I am hesitant to do so but might in the future.

Click to expand...

Vagabond, If you don’t mind me asking, how much as a % of net worth are the crowdfunding investments in your portfolio ?

[The White Coat Investor]

Similar issues here and thus the reason I'm gradually moving from individual investments toward funds. It turns out I REALLY like mutual fund investing (i.e. I really appreciate the benefits- diversification, professional management, liquidity and don't mind the downsides - lack of control, giving up a few tax benefits etc). So for me, funds make a bit more sense.

But that doesn't mean I haven't had an excellent experience thus far with the crowdfunded deals, both equity and debt, that I've bought and with the individual syndicators that didn't go through a crowdfunded site.

[Larry Ragman]

Xeno wrote:

I’m conflicted. On the one hand, I don’t like things that are sold, not bought, and these deals have a ton of fees in them. I can analyze the sources and uses and independentlu evaluate comparable rents, recent property sales, and even go to the county website to see whether their estimate of taxes seem accurate, but it’s really hard to do your own underwriting of a big deal including maintenance, utilities, etc. There are some big data services out there like Yardi, but they are cost prohibitive for the individual investor...

I just don’t have the time/bandwidth to buy and manage my own 4-plex right now, and I’m willing to accept lower returns in exchange for instead investing in a professionally managed 200-unit complex and having someone send me the K-1 every year, rather than having to do all of the accounting and cost analyses myself.

Click to expand...

Xeno, I was in the same position 30years ago. After a lot of consideration I found a local partner to put together deals and manage properties, and I provided funding and of course retained decision authority. I settled on keeping just two cash flow positive positive properties for the long term to diversify my portfolio. (Over time we bought and sold five others, but on reflection that was just churn.) After we stopped moving in and out of the area, my wife took over management, and these properties have been a terrific investment. Depreciation is long gone, but the two properties throw off enough cash to fund 20% of my retirement if I left today.