Crowd-Funding vs. self Investing is it comparable?

Question

If you can find +9% cash on cash and +18% total IRR via crowdfunding would it be better than doing R.E deals yourself since you back out the time and effort factor to take a few % points less.  I wanted to see what other thought about crowdfunding R.E.. there are many good cash flow + high IRR investments with a click of a button, vs looking, planning fixing, managing investments, funding.. ect.   Plus, one can get started in at a lower cost per project .. especially if you are in high priced areas where R.E projects run 500k+ for something just decent.   I'm in NYC ( Queens ) and its really hard to find good cash flow R.E.  I have been thinking long and hard and find Crowdfunding as a viable alternative solution .. I have limited time, my own capital is under 300k, I have a full time job, have two young kids.. I'm sure a lot of people are in the same boat.   I just wanted to see what others thought .. can you build a portfolio via crowdfunding to mirror physical R.E investment returns?   I am seeing very good deal flows..stuff normal people can not get access to ( self storage, mobile park homes,  hotels/extended stays in the shale belt states. apt complex in hot areas ( TX, ATL ) .. just to name a few.   I am almost ready to jump in with both feet.. just pausing for a deep breath before the leap.   Curious to see what others think.   Thanks!

Bryan Hancock · Answer

In my humble opinion MOST investors would benefit by investing in the deals of experienced operators online instead of doing things on their own.  Unfortunately our gov-mint is "protecting" you from these profits by not fully implementing Titles III and IV of The JOBS Act and thus presently these opportunities are limited to accredited investors.  Thus you get to assume MORE risk by doing out and doing things on your own to make your capital work and stumble through things on your own.

Assuming you're accredited and you are inexperienced with limited time to devote to learning things on your own and going through the trial and error process of gathering experience and a track record I think you're better off investing in crowdfunded deals online.  You gain geographic and sector diversification and benefit from the experience of the operators presenting opportunities online.  Most people getting started in real estate completely discount all of the time spent, risk, etc. with investing on their own and then claim they made some outrageous return on their money.  If they factored in their time spent it and risk in almost every scenario they would have been better off investing in someone else's deal.  Of course a lot depends on your long term goals, but if your real angle is to make your money work optimally you need to strongly and critically examine the utility of doing things on your own.

Brian Burke · Answer

The answer is...it depends. In the crowd funding space there are good deals, fair deals, and bad deals. Not any different than in the direct investing world.

I do, however, want to point out a problem with your statement, "there are many good cash flow + high IRR investments with a click of a button".  Just because an investment sponsor or crowd funding portal produces a projection yielding high cash flow or IRR doesn't mean that it's a good investment. What if their projections are wrong?  What if the sponsor is inexperienced and has no track record?  Can they actually produce those results?  What if they don't properly execute the investment plan?  Nothing in the investing world is as simple as clicking a button and cashing the checks.

OK, my soap box is put away now so back to the question.  Direct investing requires that you spend a lot of time vetting properties in an attempt to find a good investment. Investing in a crowd funding deal (or private offering that isn't listed on a crowd funding portal --which, by the way, is how it's been done since the securities act of 1933 until crowd funding came along and is still done more than crowd funding to this day) not only requires that you do due diligence on property, it also requires that you do due diligence on the sponsor.  While that might sound like more work than direct investing, it isn't. You are cutting out the process of looking at dozens if not hundreds of properties in search of opportunity, and then financing and managing it once you do find it.

I think that carefully selected investments with the right sponsors can not just equal the returns of direct investing, but in many cases exceed it. The professional investor with a great track record can locate properties and execute the investment plan better than the individual direct investor that lacks the experience, systems and time of the professional investment sponsor.

So the question shouldn't be which method of investing produces the highest return (impossible to answer), but which option best fits your experience, available time, and lifestyle.  It's a similar question to which is better: individual stocks, or mutual funds?

AdaPia DErrico · Answer

This has been an excellent thread all around, and I would like to add this: @Tim C. or anyone considering a RECF portal - due diligence on the portal itself is paramount. Most of the leading, legitimate portals will answer your email, call, chat very quickly. The executive team members will speak to you personally and even spend a few hours walking you through every part of the business. The portals have a mandate of transparency and openness in communication, so make the most of it and make sure you feel comfortable with the management team.

I believe one could easily build his/her own personal REIT by investing in deals across the portals, with enough time, patience and willingness to understand and learn the fundamentals in order to make the best choices for his/her personal investing goals. Always look at any investment from a holistic perspective, risk tolerance, duration, etc. And come back to BP for guidance and advice! This is an awesome community.

Tim C. · Answer

Thanks for the awesome feed back all!!  I agree... working with a experienced sponsor who has a proven track record will limit the risk and should make it a smoother investment.  I love the deal flow access and will use crowdfunding RE to get my feet wet in R.E and my cash flow going while I "learn" everything I can about physical accumilation of R.E and move into a buy and hold to build some wealth!  Great feed back.. thank you for your responses!

Jay Hinrichs · Answer

With crowd funding or any pooled investment its all about the sponsor.. The crowd funding portals are nothing more than brokers bringing the investor a deal together and making a fee to do so.. The portals are using to some extent this hype that is crowd funding to crate traction.  However you cannot rely solely on the portal to vet your potential investment.

And in many cases the deals you will look at are the exact same you would see with any good HML.. I have had a half dozen of my projects funded through crowd funding portal.

And talked to a few more, and was pleased with the experience, the folks we ended up doing business with did do a good amount of background and Due diligence on us and the assets.. However our projects were just simple buy and hold SFR's so pretty vanilla stuff.... Many now are moving into larger commercial deals that have large strips of debt ahead of the equity ( IE the crowd funding investor) these are the one's were an investor needs to do very good research on the project and more weight must be given to the sponsor  as Brian pointed out... Crowd funding like all things new brings out a lot of newbie types that are putting their first deals together.

Scott L. · Answer

Hi Tim, I've had similar experience to Brian, Bryan, Mark.

I've relied on a few foundations to get into investing: books first, direct investing locally, Bigger Pockets for questions, and crowdfunding for diversification.

After 9 months of looking for truly trusted local developers with good deals in my price range and close enough to visit the properties, I came up with 2 developers and 2 deals that consummated.   You do need a significantly larger nest egg (a few hundred K disposable, depending on your region?) if you want to be a primary deal backer. Even my good relationships could take 3-5 months to find one next 'right' project. The returns can be somewhat better than crowdfunding though the 'most eggs in one basket' risk is increased.

Crowdfunders allow investment minimums of $100-$10,000. I researched originally and came up with 5 platforms that looked solid, each with different investment strategies - equity or debt, income-driven, home or commercial, and invested in a few different types. After researching about 15 deals, I've now invested in 6 deals in the 5-figure range each and feel like this is the fastest way to get your feet 'wetter.'

For books, I've especially liked "Commercial Real Estate Investing - 12 Easy Steps", "Find it, Fix It, Flip It," "What Every Real Estate Investor Needs to Know about Cash Flow," "The Book on Estimating Rehab Costs" and even "Real Estate Investing for Dummies."

Bigger Pockets as a learning tool of course is premiere for asking detailed questions you can't find in books.

Best wishes,

Scott Lichtman

iFunding

Mark Robertson · Answer

Crowdfunding gives the investor access to deal flow and that is a huge change.  It also gives the investor with  somewhat limited resources the means to diversify their real estate portfolio.  You do give up some of your return to the portals.  However, as you develop more relationships, you can bypass the platforms and work directly with the RE sponsors.  I've done about 30 crowdfunding RE deals this year and so far so good.

Mark

Crowd-Funding vs. self Investing is it comparable?

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