I received a question on a Google+ post yesterday in reference to my blog “How to Get Started in Real Estate Investing.” I was asked what I thought about crowdfunding for real estate and I thought it would be good to share my response with everyone here on the blog. Crowfunding seems to be the hottest thing lately but really it’s just something old that is new again.
I have to admit that ‘crowdfunding’ is a new term but it sounded familiar to me. I wanted to make sure that it referred to the same thing I thought it did before commenting so I did some research and looked at a variety of websites that offer crowdfunding opportunities. Crowdfunding is the modern term for syndication. While I want to encourage anyone/everyone to participate in real estate investment, I’m not certain that this style of investing would be for me.
Investing in real estate is the best financial decision I’ve ever made. I own property, I control it, I rent it to folks/businesses of my choosing, I decide on financing options, and I get the tax benefits associated with financing and maintaining it. I decide if/when and for how much I’ll sell, refinance, redevelop, add onto, or split the unit. By owning directly, I’m in the driver’s seat.
Here’s what I don’t like about syndication/crowdfunding. The thought of having a professional organizer or syndicate identify well selected assets worthy of acquisition and then make that asset available across different levels of investment ability is a great theory. However, the reality is that syndicates are not always invested in real estate directly. Normally the syndicate investor owns shares of a corporation/a company that in turn owns real estate related assets. Everything from apartment buildings to commercial strip centers, shopping malls, pools of residential mortgages and loads more of real estate related assets might qualify for the portfolio of a syndicate.
While it would be fair to say that many people who have no desire or experience in selecting a good investment property and those who have no desire to find a qualified professional to help them negotiate a good deal to acquire assets directly or manage tenants may see syndications as a reasonable way of participating in the power or real estate investing without becoming directly involved. Herein lies the danger. By not owning or being involved in the acquisition of the asset, how does an investor know that he’s getting in at the right/fair price? Syndications often acquire an option to buy at a set price; then seek to find investors to invest in a corporation that then purchases the asset at a higher price than the one first negotiated with the profit from that transaction going to the syndicate leaders.
It’s not illegal and everyone needs to make money – but often that’s just the beginning of how the syndication leaders get to make money from OPM (other peoples’ money). Management fees and maintenance service contracts may also be run through the syndications other businesses and, when the investors learn of this, it can be a shock. Again, not illegal but investors should know that syndications are inviting others to participate in the investment for their own benefit not the investors’ benefit. The investors are not partners and normally have very little control of the decisions made as they relate to the assets under control.
So while the idea is good, I still encourage anyone/everyone to buy a simple little house with a basement suite. Rent it! Because you get to leverage your money against that of the bank it almost doesn’t even matter if you paid too much – really! You’re using the rent you collect to pay down 70-80% of the purchase price on an asset that will likely double over the time it takes to pay it off! So in the end does it really matter if you paid $5 or even $10,000 too much when you bought it? The point is that you control it. There’s no need to complicate things with syndications or crowdfunding unless you really want to.