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Real estate investing can be as complicated as you’d like it to be. There are a million and one ways to do it, and all require some amount of education and due diligence.

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That’s one of the reasons it took me a long time to do much in the way of real estate investing. It’s only in the past few years that I’ve devoted a more significant portion of my portfolio to real estate and other alternatives.

Crowdfunding platforms have made it easier for outsiders like me to have access to deals that used to be for insiders only with a lot more capital than is now required. We now have more money invested through crowdfunding than we have invested in the house we’re living in. So far, we’ve been very happy with this setup.

Dr. Peter Kim gives a nice overview of the options open to investors today. This post was first published on Passive Income MD.

 

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The Different Types of Real Estate Crowdfunding Deals

 

The first real estate investment I ever made was done through a real estate crowdfunding platform back in 2014. I invested $5,000 in a debt deal that was lending out money with an 11% interest rate, but because of additional fees to investors, I made a total of $687.07 on my investment, which amounted to a 14.3% annualized return on investment.

I was hooked.

I found myself actively trying to find other opportunities in the crowdfunding world, and I discovered that there were a ton of crowdfunding platforms – each with different types of deals.

The deal I had selected for my first investment was a debt deal. In my search, however, I also found syndications, debt, and equity funds. It took me a while to figure out what they were and what platforms presented which type of deal.

By the way, if you want to see some of my favorite crowdfunding platforms, check them out here.

Since that time, I’ve learned that crowdfunding is really all about access. Different platforms offer different types of deals. You just have to know just what kind of deal you’re looking for beforehand.

That sounds easy enough, but selecting the right deal can be a little intimidating. It helps to know when you go to which store and what to expect.

Let’s start with the opportunities you might see.

 

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Debt Deals

 

With debt deals, you act as the bank. You agree to lend the borrower (often a fix and flipper) money at a set rate of interest. You will be paid back at a predetermined rate, usually on a monthly basis, and paid interest owed.

At the very end of the term, you’re paid back the principal (the original amount of money) you invested. These types of deals are easy to understand, because you’ve likely dealt with something very similar when buying a car or house.

Income from a debt deal is taxed as ordinary income. You don’t participate in any upside, but you are paid back first before any other investors are paid back.

 

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Equity Deals

 

An equity means that you participate in the upside, that you’re essentially a part owner in the property. There are a few types of equity deals.

 

Single Syndication

 

With a single syndication deal, you’re investing in a single property.

There are a couple of different ways you might get paid depending on the type of deal.

If it’s a classic apartment deal, the sponsor (the ones running the deal) uses investor capital to purchase an existing apartment building, renovate, and improve current rental income. The sponsors of the deal agree to pay you a certain preferred return before they participate in any profit. After hitting that return, then they’ll like return your capital, then start to split profits.

If it’s a syndication deal involving new construction like the development of an apartment, office, or retail space, the payment structure will likely be completely different. In this case, you often just get your capital back at the end of the deal, plus a portion of the profits.

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Funds

 

Though not as common as the previous examples, you might find real estate funds on these platforms. These funds may have been created by outside entities or, in some cases, by the platforms themselves.

The way I think about funds is that if syndications are like owning a single type of stock, funds are more like mutual funds. As an investor, by participating in a real estate fund, you’ll own shares of multiple properties.

The benefit here is that you get instant diversification by investing in multiple properties at once.

Since this involves more management and administration, there might be another layer of fees, but again you’re getting access to multiple properties as well as the sponsor’s collective knowledge and management skills.

 

REITs – Real Estate Investment Trusts

 

A REIT is a company that makes investments in and owns income-generating real estate properties. As an investor, you buy shares of the REIT. The REIT earns income from the properties and makes distributions to investors.

You’ll find these types of deals on many platforms as well, and they’re often created by the platforms themselves vs some outside party.

 

Fees

 

Just thought I’d make a quick mention about fees since people are always curious about them. Fees are part of the investing world, and crowdfunding platforms are no exception.

These fees vary wildly according to platform and type of deal. When selecting a platform/deal, it should be easy to see what the returns are net of fees.

Ultimately, fees are necessary because they provide an incentive for the sponsors to continue to keep active in the deal. No one works for free and so fees will always be a part of these types of deals. It’s just important for you to understand what they are and whether you’re happy with the end result net of fees.

 

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Examples of Platforms and Different Types of Deals

 

Here are some great examples of platforms, along with what kind of deals you can expect to find there:

 

So How Do You Choose?

 

You have to decide whether you want to invest in equity or debt, and what kind of returns you’re looking for. That takes time to learn the differences between debt & equity deals, learning the numbers behind deals, and what kind of tax implications each of them has.

It also matters if you’re an accredited investor–if you’re not, you will likely only be able to invest in some of the previously mentioned platforms with REITs.

 

How to Build a Portfolio Using the Different Platforms

 

All of the platforms go through a rigorous vetting process before allowing deals onto their platform. Even though they might not be running the deal themselves, they understand that if anyone finds a deal on their platform and it doesn’t do well, it’ll look poorly on them.

Every platform will eventually have some poor deals that end up on their sites. That’s inevitable. That’s why it’s on you to do your own due diligence as well, and the key is to diversify.

Personally, I’ve invested across multiple deals in different areas to get wide exposure.

Plus, it allows me to build a real estate crowdfunding ladder where different deals are exiting at different times. This helps ease the issue of liquidity that usually comes with real estate investing.

Ultimately, crowdfunding platforms can be a great way to test the waters. More than that, though, they can help build your portfolio and be great sources of passive income. That is, if you know what you’re getting into.

The best thing you can do is research each platform, and use this post as a place to start.
Whatever you decide, the key is to get right into it. As I found with my first investment, it doesn’t take a huge amount of money to kickstart a long-term strategy.

By the way, you may or may not be one of the thousands of physicians who follow my blog on the regular, so if you haven’t already, be sure to subscribe to the email list for content to add to your investing toolbox.

 

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8 thoughts on “The Different Types of Real Estate Crowdfunding Deals”

  1. These various investments are of interest to me, but which can be done while keeping your tax situation simple? I don’t want to invest and then find out I have to file state tax returns in 5 states I didn’t used to file in.

    Thanks.

    Reply
    • Most states require a substantial income before you’d be required to file a state tax return there — more than you’re going to see from investing at common minimums of $5,000 to $25,000 in many of these deals. It has not become an issue for me with a low six-figure total investment in various deals.

      One way to make filing different state tax returns a non-issue is to invest in deals taking place where no income tax is levied, like TX, FL, WA, AK, SD, NV, WY, TN, +/-NH.

      Best,
      -PoF

      Reply
  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. Glad to see you’re not recommending PeerStreet. They foreclosed on a deal I was in, now own it and are collecting rent while they rent it out.

    We investors are left with nothing. No interest payments; no sharing in the rent.
    Our only hope is one day they sell it and we get our initial investment back. Meanwhile, dead money and I’m powerless to do anything.
    Very disappointed…

    Reply
    • The link didn’t work for me, but I’m sorry to hear you had a bad deal. I actually did invest in one loan with Peerstreet — made my 8% or so and had no issues. I’m not convinced the risk / reward ratio is great there, and your example supports that theory.

      My risk mitigation strategy has been to invest in different types of deals on a variety of platform. REITs and funds, which I’ve also invested in, also help reduce the risk of a single bad deal, since they group multiple projects together.

      Any platform is going to have some deals underperform or worse. You hope to make up for that with others returning 20% to 30%. It is a high risk / high reward class, which is why only accredited investors are accepted for many of the investments.

      Sorry things did not pan out for you.

      Best,
      -PoF

      Reply
  4. Hello,

    I am a new MD and just learning about this.
    1) after the maturation period, are you guaranteed the initial investment you put in?
    2) I thought you can write off everything you earned through depreciation. Why do you have to pay taxes on this income?

    Reply

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