Crowdsourcing vs Turnkey

[Kyle Scholnick]

What is your opinion on the big crowdsourcing platforms for real estate investing now vs Turnkey? 

This is not a question about active real estate rentals or flipping or wholesaling, I understand those are better returns for the right people. 

But for the more passive real estate income people, what are your thoughts on this? Any difference in returns? Much less hassle with crowdsourcing now? Any reason to continue with turnkey? 

[Ian Ippolito]

Crowd funded investments have a lot more flexibility. You can choose to invest in residential rentals, just like a turnkey provider (but with several advantages I’ll mention next). Or you can invest in residential debt instead of equity, or commercial real estate, or almost anything. And you can also invest in value added or opportunistic strategies, which come with higher returns, but of course more risk.

If you are wanting to stick purely to owning residential rental properties in a city that you don’t live in, there are still several advantages to going with Crowdfunding/syndication, versus a turkey provider.

With a turnkey provider, you have to purchase the entire property yourself. So most people can only own one or a handful. You could invest the same money in a crowdfunding/syndication residential rental deal and be diversified into hundreds of properties, because you own a portion of each instead. That eliminates a lot of individual property risk.

You can also diversify into a lot more markets than most people could afford to do on their own using turn key. That eliminates single market risk.

However, the biggest advantage of going Crowdfunding over turn key is much better alignment of incentives.

In a proper crowdfunding/syndication fund, the manager should be compensated based mostly on the profit. So it’s in their best interest to make sure that you make the most money, and for the duration of your entire investment.

On the other hand, turkey providers are compensated simply on completing the transaction and they are done. The structure creates more conflicts of interest and potentially an adversarial structure. If they took shortcuts and did cheaper work on the rehab, that helps them profit at your expense. (You have no way of knowing for years, and by then it’s too late to do anything about it).

Plus, the whole business model of a turnkey provider is that they take all of the profit from the rehab to fund their business. With Crowdfunding, that is *your* profit instead.