For each real estate crowdfunding investment you will get a K-1. A K-1 is a tax form distributed by many partnerships, S-Corps, estates, and trusts. If you are a general or limited partner of a partnership, a shareholder in an S-Corp, or the beneficiary of an estate or trust, you’re likely to receive a K-1.
A K-1 is just like a W-2 or other tax form. You use the information provided on the form to accurately complete your tax return. Except as illustrated in the opening scenario, K-1s are often distributed much later in the year than other tax forms.
Having to file a K-1 is one of the downsides to real estate crowdfunding versus investing in stocks, bonds or physical real estate you completely own where there are no K-1s. That said, filing a K-1 is pretty straight forward and takes under 10 minutes per investment if you do your taxes with an online software like I do.
Investing In Real Estate Crowdfunding And K-1s
In 2017, I invested $500,000 in a real estate crowdfunding equity fund. The fund invested in 17 different equity deals around the country. One of my worries was that I would get a K-1 for each invest. What a pain!
But I was assured before investing that I would receive one consolidated K-1 instead. I had my doubts, but I'm pleased to say that receiving one K-1 was indeed the case.
As you can see from the image, I got a total of two K-1s. My first real estate crowdfunding investment was a $10,000 investment in a Conshy, Pennsylvania commercial property deal to test the waters. I found the platform to be intuitive, and the investment process to be straightforward.
Given I wanted to minimize the amount of time spent on analyzing investments as a new father, I decided to invest in the equity fund so they could invest for me for the cost of 0.8%. The minimum to invest was $250,000, and I had $1.8 million to reinvest after I sold my San Francisco rental property for $2,740,000, equal to 30X annual gross rent.
If you don't get a K-1 for your real estate crowdfunding investments, you may get a 1099. A 1099 is easier to file. Best to check with each platform before investing.
Invest Through Real Estate Crowdfunding
I'm a big believer in investing in the heartland of America through real estate crowdfunding. Heartland real estate is much cheaper and the net rental yields are much higher. Further, there should be a mass migration trend away from more expensive, denser cities to cheaper, wider open cities due to the coronavirus pandemic.
The tax policy, which limits the State and Local Tax (SALT) deduction cap to $10,000 and the mortgage interest deduction cap to $750,000, will hurt expensive coastal city real estate at the margin. This will squeeze high-tax states like California, New York, New Jersey and Connecticut the most.
In addition, I predict that over the next 10+ years Red state real estate will outperform Blue states due to economic and demographic trends. Here are some other reasons for Red state and 18-hour city outperformance.
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price. You are seeing this happen in mass during and post pandemic.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- The rise of real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments in Red states.
Latest Passive Income Streams
My $500,000 investment in real estate crowdfunding could conceivably generate $75,000 a year, or $15,000 MORE than what I was earning in net rent with a $2,740,000 property. This is the power of real estate crowdfunding and diversification. My goal has been to always generate as much passive income as possible in order for my wife and I never to have to go back to work again.
Below is a snapshot of our latest passive income stream. The real estate crowdfunding section is light and conservation because they are all equity investments that take 3 – 5 years to pay out.
In 2018, I invested another $300,000 in the fund for a total of $800,000. I'm glad I did because the stock market has been rocky and the real estate market has softened in expensive coastal city markets like NYC and SF. The great opportunity in my mind is Middle America real estate.
I'm thankful the tax situation is much easier than expected. Even if you have to file a K-1 for each individual investment, it takes at most 10 minutes if you using an online tax software. If you don't use a tax software, then you can simply have your accountant punch in the numbers for an extra fee.
Favorite Real Estate Crowdfunding Platform
Real estate will always be my favorite asset class to build wealth. With the rise of real estate crowdfunding companies like Fundrise, my favorite platform, investors are able to take easily take advantage of larger real estate deals around the country much more efficiently.
For most people, investing in Fundrise private eREIT is a better way to gain real estate exposure and ride the multi-year real estate bull market. With rates staying low and inflation picking up, real estate is an asset that should benefit the most. Fundrise is free to sign up and explore.
Fundrise carefully screens all their deals and lets only 5% of their applicants on their platform. After that, it's up to us to decide each deal based on the sponsor's track record, job growth in the area of the investment, and whether each deal's target return is warranted. Invest wisely!
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.