Have I Found the Holy Grail of Passive Real Estate Investing?

Alright call me lazy (or busy), but since starting out in REI, my focus has always been on relatively passive investments. This has included private lending to rehabbers and purchasing turnkey residential rental properties for my own portfolio. The latter has let me earn good cash flow while taking advantage of tax benefits and the like, but it has not been without a good deal of stress and worry. 

Of the two, the lending is by far more passive, but it is usually over a short time frame and carries none of the benefits of actually owning real estate, and in fact is not really an investment at all. The ROI of owning property has definitely been higher then the lending, while the lending offered lower risk (given a low risk reliable partner to lend to) and peace of mind.

Late last year, I came across a crowdfunding platform that seemed to offer the benefits of both strategies, ownership in rentals and very passive low stress investment with excellent returns. It also had additional benefits not inherent to either of these other strategies – instant diversification with even a small investment and interests that are nearly totally aligned with the Managers. I had looked at a number of crowdfunding platforms before and this one stood out as entirely unique. Further it did not require being an accredited investor, but still operates under SEC regulations.

After doing my due diligence on the company, the properties they were holding in their portfolios, and the principals involved, I decided to make an initial investment from my self-directed retirement funds (Solo 401k in my case, but SDIRA would work as well) in what is a portfolio of 10 rentals that the company already owns. My investment actually bought a small percentage of an LLC that holds that portfolio, and my solo 401k is a silent partner in the LLC, along with any number of other investors. 

The managing partners hold a 30% stake on returns in that portfolio, and thus they are highly motivated to manage the properties effectively for the best returns. Other portfolios they are opening or have opened they may retain as little as a 20-25% stake, which is still substantial.

The projected returns are 9-11% cash flow from rental income alone, with an overall IRR after a 3-5 year exit strategy projected to be 16-20%. That’s pretty hard to beat for anything nearly as passive and as diversified as this. And the entry points are very low, generally starting at $10,000, although I invested considerably more. So far, and I have only seen two quarterly reports, but the cash flow has been at the top or even a little better than the projections on this portfolio, and the rest of this year looks on track to beat it. 

Now granted, the IRR figure is considerably more speculative and largely dependent on successfully implementing their as yet untested exit strategies – of which they have several possible ones, including selling the portfolio in whole or part and cash out refinancing. Still, given that these properties are all in at less than 65% of estimated full market value (FMV), I view their chances of success pretty high.

No investment is without risks and potential downsides. Some that have come up for me is that the company is very young, and has a short track record having just launched their first public portfolio in 2015. 

The model is new, so long term performance and how it plays out is simply unknown. Although each portfolio diversifies an investment over 10 properties, and I can diversify my investments over multiple portfolios, they are currently operating in a single city, which carries its own risks of concentration from economic shock. 

How they manage and handle growth and scaling up can be critical to the long term viability and performance of the company as whole and thus what happens to each of the portfolios.

In early March I met with the principles and toured the neighborhoods they are investing, as well as some of the homes. I came away very impressed and most of the risk concerns I had were ameliorated to at least some extent. Young as they are, the partners struck me as savvy with a deep understanding of their local real estate market. 

They are continuing to improve the model and their crowdfunding platform. They are making good use of legal and other professionals who have deep knowledge in crowdfunding and/or real estate. They plan to add a second city before the end of the year, and eventually spread the model elsewhere as well. 

Finally they seem very focused on “organic growth” and not speeding up the model faster than they can obtain and manage well the right properties at the right prices. I hope they stick to that.

I am actually very keen on this investment strategy. I plan on making it a very significant part of my REI portfolio over time by investing in multiple portfolios, and probably not just from retirement funds. I have already reserved to make an investment in the next portfolio they are opening, which pre-funded weeks ago by interested investors. Then we will see, just maybe that Holy Grail of passive investing is within my grasp. 

Read my Performance Update in Part 2