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Real Estate Crowd Funding
Old 09-09-2016, 10:09 AM   #1
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Real Estate Crowd Funding

I am to hear what the ER community's opinion is on the Real Estate Crowd Funding investment world is. The concept is pretty self explanatory - thinking lending tree but with real estate. The minimum investment is as low as $1k and they are touting annual returns of greater than 13%.

I have been reading about "Fundrise". (Fundrise.com)

Curious to hear your thoughts?
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Old 09-09-2016, 10:37 AM   #2
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Some years ago my Mom put $5000 into a group loan on a property - think the total loan was $60,000 and some real estate company administered the loan and took a percentage - like they charged 12% to the borrower and some fees and the group members got 10%. Worked out for my Mom. I would want no part of it.

We make hard money loans, but have had enough defaults that we no longer do second position loans. Foreclosure is an expensive drawn out process - I can't imagine the pain and ponderous legal process adding a whole slew of extra members would cause. Also like steering my own boat too much to just toss money in a pot and hope -
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Old 09-09-2016, 10:49 AM   #3
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Originally Posted by younginvestor2013 View Post
I am to hear what the ER community's opinion is on the Real Estate Crowd Funding investment world is. The concept is pretty self explanatory - thinking lending tree but with real estate. The minimum investment is as low as $1k and they are touting annual returns of greater than 13%.

I have been reading about "Fundrise". (Fundrise.com)

Curious to hear your thoughts?
Touting returns is a sure sign of excessive positive thinking. Very bad idea to invest in real estate you don't control.
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Old 09-09-2016, 11:21 AM   #4
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I have been involved in real estate and real estate valuation valuation since 1983 and I own a number of investment properties. I looked at a couple of specific investments on RealtyShares and Peer Street. In each case, I concluded the properties were significantly misrepresented. One was local and I drove the house and neighborhood. Busy feeder street and close to the freeway. The borrower was on their third loan extension. The legal square footage was difficult to pin down. Last I checked, the flipper had not sold the property, which, in my opinion, was overpriced.

The office building outside of Philadelphia that I reviewed was shown on the website as Class A. It's class C, two blocks from the city sewage treatment plant with a long history of odor problems, on a narrow street, in an older mixed use neighborhood. The buyer thinks the 30 percent vacant space can be leased up at a rate higher than the rest of the building with a fairly low tenant improvement allowance. Vacancy in this building seems to be a long standing problem, Google Street View shows "space available" in 2014.

Two fairly random selections from two of the major companies, and I would not touch either one.

The other thing potential investors should understand is that in the case of the debt investments, you are not acquiring a security interest in the property. You are buying what are basically unsecured notes from the real lender.

In my opinion, these crowd funding companies are going to blow up, similar to the limited partnership disasters of the late 80's to early 90's.
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Old 09-09-2016, 11:26 AM   #5
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I would prefer to team up with a disciplined, experienced hard money lender like calmloki. Putting up money is easy, the real skill set is evaluating risk for a specific deal. I am thinking about going to some meetup.com or REIA meetings to evaluate the local scene, but I expect it will be of little use.


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Old 09-09-2016, 11:59 AM   #6
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If it was that easy to lease or sell those "crowdfunded" notes, why wouldn't the principals just do it themselves?
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Old 09-09-2016, 06:22 PM   #7
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If it was that easy to lease or sell those "crowdfunded" notes, why wouldn't the principals just do it themselves?
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Old 09-09-2016, 06:55 PM   #8
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I have not invested yet but have considered patchofland.com

They actually feel so good about the due diligence they invest their money and then sell the investment to members. I feel like them taking the risk shows they believe in it.

I do agree with Another Reader, above, that I question the valuation. I was familiar with a couple properties and felt they were fairly over-valued.

I have investigated it though and might make some small investments.

I have asked a lot of questions and feel comfortable... well, almost comfortable. I guess once I pull the trigger I am totally comfortable.

I was concerned about the company going bankrupt but they claim the investments are set up in type of trust so they are not deemed assets of patch of land. That makes sense.

10% return with some risk may be worth a small amount!?!?
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Old 09-09-2016, 07:20 PM   #9
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I'd rather invest in a REIT. Lower fees, more diversification.
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Old 09-10-2016, 03:27 PM   #10
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YoungInvestor2013, a lot changed after the great recession, and many people aren't comfortable with new ideas. As a result of Dodd-Frank, regulations on banks were tightened, creating a market for alternative lenders. Also, Congress passed the JOBS Act and the SEC continues to write new rules to regulate the new opportunities which arose. Most recently, Reg A+ and Title III of the JOBS Act has been enacted to open up new opportunities to everyday investors. Many of the previous opportunities were only available to "accredited investors" but new regulations have lowered the bar. Lastly, more people are renting than buying homes nowadays and this has brought new opportunities. Many billions of dollars have flowed into new real estate offerings in recent years and I guarantee you there are good offerings, good sponsors and good crowdfund sites out there. But it's new, many folks are wary of it, and it doesn't have a long track record.

There are many new players in the Crowd Funded Real Estate marketplace, not all of them equal. But with the power of the internet and focused SEC attention, it's really hard to hide any malfeasance for very long. I suggest you do your due diligence, not only on the property, but also on the sponsor, manager and portal (the CF site). Sometimes the portal (Fundrise, etc.) acts only as a middleman with no requirement to perform any due diligence of their own. You should also look at their fee structure.

I prefer direct investment instead of a REIT, because REITs aren't very tax friendly (they pay ordinary, unqualified dividends) and you don't get any deductions for mortgage interest deductions or depreciation. If you make an equity investment you would get a proportionate share of these deductions for yourself, but if you make a debt investment, you would not and you would be paid interest income. Debt investments are more secure than equity, but do not appreciate in value.

I invested with CrowdStreet and am pleased with their no-fee structure and the offerings available. I also like RealtyMogul, but you should look for a repeat sponsor and try to get background info on their track record and what the final IRR was. FundRise may be fine, but I have no experience with them and no opinion, except to note they have some attractive offerings available. You want the portal to perform their own due diligence, a sponsor with a track record and check into how they've done in the past. Needless to say, you need to closely review the current offering, any pro-formas, the private party memorandum (PPM) and must understand and accept all the risks. It's also good if each party has their own skin in the game, i.e: they invest alongside you, with the same fees, risks and rewards.

It's funny to me how many people think nothing of the risks with stock market investing, but find real estate to be especially risky. People lost 2-3% of their stock market portfolio in one day yesterday, but consider it normal. Everyone is expecting a 20%-30% correction in the market, since the bull has run so long, but that's normal. Meanwhile, I have about half my portfolio in 15 different commercial real estate investments, diversified as to sector, geography, market, operator, you name it. They primarily rely on corporate-guaranteed leases where the big A-rated companies would still be liable for the lease payments even f they close the facility. Beyond that, lease payments are considered an operating expense, so most bankruptcy courts require they be kept up, even in bankruptcy. These investments perform like bonds, with mailbox money to me paying anywhere from 5 - 10% annually. 13%, as you mention, is possible, but you must understand returns like that indicate higher risks than normal. The RE market is nearing a top so you should be especially careful where you invest now, seeking safety, and minimizing interest-rate risk and inflation risk. Mortgages are still really cheap though, so this is still a good time to lock up some intermediate term loans. The people who lost it all in 2008 were over-leveraged with adjustable rate loans, insecure tenants and not enough LTV.

The Fed has penalized savers with its zero interest rate policy, but it has rewarded investors capable of adjusting to new situations. My looming retirement wouldn't be possible without the true diversification and more generous returns offered by real estate and other crowdfunded alternatives, like P2P and P2B marketplace lending.

Good investing,
b.
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Old 09-10-2016, 03:45 PM   #11
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Thanks, b.
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Old 09-10-2016, 05:40 PM   #12
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Forgive my ignorance, what is real estate crowdfunding? I googled it but most of the results where actually companies investing.
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Old 09-10-2016, 05:56 PM   #13
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Forgive my ignorance, what is real estate crowdfunding? I googled it but most of the results where actually companies investing.

Wikipedia
Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Crowdfunding is a form of crowdsourcing and of alternative finance.


Bruce, thanks for the Crowdstreet info. Very interesting.


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Old 09-10-2016, 06:30 PM   #14
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I am to hear what the ER community's opinion is on the Real Estate Crowd Funding investment world is. The concept is pretty self explanatory - thinking lending tree but with real estate. The minimum investment is as low as $1k and they are touting annual returns of greater than 13%.

I have been reading about "Fundrise". (Fundrise.com)

Curious to hear your thoughts?

So I looked it up and it is simply a REIT.
They can talk about crowd funding, but really so could IBM (" hey everybody buy a piece of this great company")

Their own website links to their SEC filing as a REIT
https://www.sec.gov/Archives/edgar/d...8441_253g2.htm

Not sure what you are wanting that is new, because this does not look like a new idea.

Now 35 years ago I crowdfunded a real estate venture, and it grew to 5 times the number of members as I had initially expected.
So even crowdfunding is not really new, it's just a bunch of folks coming together to share in the purchase of something.
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Old 09-10-2016, 07:08 PM   #15
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Syndication is not new, but up until the JOBS Act was passed, the sponsor had to already have a "personal relationship" with the investors. Now, these syndicates can reach out to anyone using general advertising. And there's also the fact that investors who aren't accredited are now allowed to access these investments which were previously reserved for "sophisticated investors." I'm not stating my opinion, but only repeating the language of the SEC.
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Old 09-10-2016, 07:17 PM   #16
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Is it correct to say a REIT like Fundrise takes money from investors and chooses the investments vs a Crowdfunding entity that takes your money but investor chooses the project they want to participate in?


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Old 09-10-2016, 07:35 PM   #17
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Is it correct to say a REIT like Fundrise takes money from investors and chooses the investments vs a Crowdfunding entity that takes your money but investor chooses the project they want to participate in?


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That's somewhat correct, Jazz, but some CF projects are funds which invest in multiple properties, like a REIT.

A REIT is liquid, meaning you can buy and sell at [almost] anytime on an exchange. Because it's liquid, it tends to be more correlated to the stock market than most real estate investments are. This correlation reduces the diversification value of a REIT, but liquidity is important.

REITs get preferential tax treatment in their own operations, which the investor benefits from, but those are not passed on to the investor. Income from a REIT is in the form of ordinary dividends, return of capital or capital gains. REIT Taxes: A Lesson on Real Estate Investment Trust Taxation

Making an equity investment directly in a property (via CF or other syndicate) usually "passes through" preferential tax treatment to the investor. Some of my investments actually showed a tax loss last year. Passive losses can offset passive gains.

It's true that the investor has no control over the property, but after many years of managing my own properties, this is exactly what I needed. The cash on cash return is better than I could get in a single- or multi-family property and I don't mess with the 3 Ts (toilets, tenants and trash).

I don't take advantage of this myself, [yet], but any travel costs I incur to check on my properties are tax deductible. Going to Vegas? I'll check out my 0.25% investment in the CVS there. Going to be near NYC? Check out the property in NJ. You get the idea... Do REIT owners even know which properties are in their portfolio?
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Old 09-10-2016, 08:41 PM   #18
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A lot of good info Bruceski. Thank you. Where do you do your lease investments? I assume there is some type of middle man that puts the deals together!?
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Old 09-10-2016, 09:41 PM   #19
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I hope I don't get in trouble if someone thinks I'm spamming or otherwise behaving inappropriately, but I'm just answering your question. I'm happy with these organizations, and I recommend them, but this is not a solicitation and I m not affiliated with them, except as a private investor.

Early on, I worked with Kay Properties who brokered some DST purchases. DST is a Delaware Statutory Trust which is another method (besides the LLC typically used by CF) to hold fractional shares in a direct real estate investment. My initial investments were done via 1031 tax-deferred exchanges out of my rental property. I also did some direct cash purchases (not rollovers) through KPI. All these investments will be rolled over via 1031 tax-deferred exchanges into other DST properties when sold. The 1031 defers capital gains tax and depreciation recapture while still capturing appreciation and cash flow. The cash on cash return for these DSTs is a little lower than you can find through a crowdfunded investment, but they are rock solid with longstanding track records. Capital Square Realty Associates (CSRA) is my favorite DST sponsor.
1031 Properties - DST, TIC & NNN | Exchange & Investment

Thereafter, I found a company called Caliber in Phoenix and have made my recent investments through them. I'm familiar with Phoenix, find it to be a growing market and the folks at Caliber are extremely skilled at finding, buying and managing their properties. These are all LLCs and will be taxable upon sale, but the deals are just too good to pass up. Caliber is going public soon.
Caliber, The Wealth Development Company :: Scottsdale, AZ

Most of these investments are marketed only to "accredited investors." There are a few ways for an individual to achieve this, but the two primary methods are:
1. Amass a net worth of $1M, not considering your house or its mortgage (unless the mortgage exceeds the house's value).
2. Earn $200K per year on your own, or $300K per year with your spouse. You did this for the last two years and reasonably expect this to continue.
eCFR €” Code of Federal Regulations

My advice to young people is to live below your means and save like mad so that you can achieve the $1M point whereupon a whole new world of investments opens to you, because you instantly become a "sophisticated investor." I don't agree with that, but I also don't make the rules. These are the types of investments Kiyosaki refers to in "Rich Dad, Poor Dad."
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Old 09-10-2016, 09:58 PM   #20
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This may be slightly off-topic, but follows on nicely from my previous message.

My wife and I have a revocable family trust which holds title to all our investments. Since we are accredited the trust is accredited and will remain so after our death. The trust assets will pass to our heirs with a stepped up basis. All of the deferred capital gains and depreciation recapture disappears; our heirs will owe no tax, except for gains or depreciation which occurs after the transfer. It's my intention that the assets remain in the trust, rolling over on a tax-deferred basis, paying monthly cash flow for our heirs. This is the type of legacy that can make a change for generations to come.
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