Notes, Crowdfunding investing vs. tangible property investing

[Travis Shaw]

I was hoping to get thoughts from other BP members who may have experience in investing in crowdfunding type opportunities such as Realtyshares, Realtymogul, Fundthatflip, the Noteshop etc versus using fix and flip or buy and hold strategies. I am trying to figure out which strategy will work best for my family. 

My wife is a very busy residential agent here in Richmond VA, and I am a busy facial plastic surgeon. She was diagnosed with bone marrow cancer last year and went through an arduous year of treatment, including a stem cell (bone marrow) transplant. She has fully recovered and working full-time again. Though I have a solid medical practice, it is not going to give our family financial freedom and will not make us truly wealthy. Any big increases in income that I strive for get hit hard by taxes.

Our goal is to create horizontal streams of income that will get us to our Big Why: to be able to spend as much time together with our 2 kids age 7 and 5 without financial worry or guilt. Specifically, I want to take the pressure of of my wife to continually produce income for our family. She loves her job, but works too hard. I want us to be able to get the most joy from life everyday that we can, for her illness has made us truly realize how precious everyday really is. Though that sounds trite, it is true. 

Our financial advisor is a close family friend. His advice follows what most FA seem to all say: invest for the long-term in stocks and mutual funds and gradually build a solid portfolio of securities . I don't feel like this will get us to our goal. 

Ive read the forums and listened to several BP podcasts covering RA investing while working a full-time job. Its truly awesome what so many have been able to accomplish. 

We have 3 SF properties here in Richmond that give us cashflow, appreciation, loan amortization and tax benefits. The cap rates are in the 7-8% range. I have been looking for MF units that might accelerate the path to our goals, but have not seen any outstanding deals in our local market. We really enjoy this investing and appreciate what is does for our family. 

As with so much in life, the biggest problem for us is time. Time to look for deals, obtain financing, and manage property. No whining here, just stating the facts. 

I am hoping to hear from folks who have invested in notes or used crowdfunding successfully and achieved good ROI numbers. This kind of investing sounds appealing to me in that it at least sounds to be truly passive investing, and thus might require less of my own time, while still achieving cashflow and asset appreciation. Specifically:

1. What kind of ROI have you personally attained?

2. Are there tax benefits in this kind of investing you have taken advantage of?

3. Do you find this investing takes less of your own time input, management etc?

4. Outside of the risk level for this kind of investing, what disadvantages have you seen?

5. On the flip side, if anyone has considered this kind of investing, but decided to stick with tangible RA assets, what made your decision?

Certainly these web-based investment vehicles are rather new, and have not stood the test of time that traditional RA investing has. The returns look pretty good when comparing to the RA market here in Richmond (at least the properties I have come across and analyzed.) I have a dentist friend in NC who is buying up SF homes and getting about 20% cash on cash. I have not seen those kinds of numbers come across my screen in Richmond. I see several deals a week, but once again, trying to run my medical practice and look for deals is a true time juggle. 

Thanks so much in advncce

Travis   

[Cory Binsfield]

I've always liked the saying that problems are opportunities in disguise. If I were in your shoes, here is what I would do.

1. Dig deeper with your CPA or find a new one the specializes in real estate.

I'm not an accountant. However, if you file a joint return and elect to group all your rentals as a single activity, you should be able to bypass the passive loss limitation since your wife is a realtor working full time and assuming she is working on the rentals. This is partly why Donald Trump can avoid paying federal income taxes. This is my understanding and you need to verify this of course since my advice is worth exactly what you are paying for it right now.

• Sit down with your wife and map out your why.
• Do you really need all this taxable income?
• Could you simplify your lifestyle?
• Downsize?
• Move to the same market as your Dentist friend for a lower cost of living/lifestyle with better real estate returns?

You are in a unique position with your income and skill set. Technically, you could go after multi family deals instead of single family deals to replace all of your spouse's income. She could run the multi family side by overseeing the property mangers.

Here comes the interesting part. If you look at your after tax take home income, you could easily replace it by finding the right buy and hold deals after you factor in the almost tax free nature of buy and hold real estate. This might require buying and holding a series of multi-family properties. Maybe it means a 50 plus unit deal. 

Check out the Wheelbarrow Profits podcast or book by Jake and Gino.  Don't worry, I'm not affiliated with these two guys. 

Bottom line...depreciation expense offsetting my active income was my big wake up call after my CPA called me about 12 years ago and said I was getting a tax refund after having to always pay taxes in my day job. 

I still work my day job, but my professional real estate/rental income status dwarfs my other income. 

Once I discovered my true take home income, I set a course to replace all of it with tax favored rental income. It was actually easier than I thought it would be since the tax benefits kept snowballing as I added more multi's. 

2. Notes or crowdfunding?

You are smart to question the high returns in notes and other ventures. I'm VERY biased here so here is my opinion on notes and crowdfunding. 

Real money goes to the owners and not the loaners. On a note, you lose all the amazing benefits of buy and hold real estate. Frankly, buy and hold residential real estate is the most tax favored investment in the country.

Let's count the 6 ways you make money.

1. Cash flow

2. Depreciation which makes the cash flow virtually tax free if done right. Better yet, can offset active income.

3. Equity capture by purchasing a value add deal

4. Appreciation. Real estate keeps pace with the cost of living.

5. Mortgage paydown. Your tenants pay your mortgage and you keep the benefits of the interest deduction and the principal paydown on the loan.

6. A bank will loan you the money to capture all these benefits. Try asking for a loan to invest in stocks or one of the crowdfunding platforms or notes.

You are asking all the right questions. Now you need to design your perfect life and then execute on the income portion via real estate, a small business, etc. 

By the way.....never ask financial advisor who only knows how to sell stocks and bonds if real estate is a good investment.