Real estate crowdfunding has rapidly risen in popularity over the past few years. If you’ve never heard of it, or if it sounds intriguing but you haven’t pulled the trigger on it yet, here’s what you need to know to get started the smart way.
Sometimes, it’s nice to know what you’re up against before diving headlong into an investment idea. With real estate crowdfunding, there have been some successes and some failures. But, the industry, overall, has been a success
- Between 2009 – 2012, aggregate capital raised for real estate private placements totalled $63 billion. This doesn’t include money raised under private equity and hedge funds.
- The average to return to investors is 8.5 per cent, with a range between 5.0 per cent on the low end to 12.0 per cent on the high end.
- Median real estate transactions and offerings was the equivalent of $2.3 million (£1.49 million) with an average of $15 million (£9.71 million).
- 47,000 investors participated in real estate investments since 2012, and this trend has been increasing.
Peruse The Platforms
There are many different platforms out there right now. Most of them don’t specialize in real estate, however. The ones that do let you in on either the equity side or the debt side. In other words, you get to join as an investor or as a creditor.
Depending on how you “buy in,” the potential for gains can be enormous. Equity investors become part owners in the business venture, while creditors are the ones lending money to the startup.
In general, creditors take less risk that part owners because, if a business venture fails, creditors can legally collect before shareholders. This is because debt must be repaid before shareholders take any profits.
Even so, any kind of investment, whether on the equity or debt side of things, can be very risky.
Speak With Professionals
One of the safeguards you have, as an investor in traditional investments, is professional underwriting and securities analysis. Most people don’t think too much about the value of this sort of thing. But, when you have to make those kinds of risk assessments yourself, it becomes clear that real estate crowdfunding is difficult to judge.
Fortunately, there are ways to make the process of judging risk easier. Read more from professional magazines, or visit with a professional in the real estate industry. Real estate professionals can help you better understand the risks of investing in property, the estimated value of a project, how much it should cost, what a potential ROI might be, and whether the builder and developer have realistic projections.
Another professional worth seeking out is a lawyer. Attorneys who specialize in real estate transactions can look over any contracts you sign before you sign them, look over the terms and conditions for any platform you’re considering, and help you better understand the regulations surrounding the investment.
For example, not every platform is open to the general public. For many platforms, the only types of investors allowed are accredited investors, or investors that have a certain minimum net worth.
Finally, you should try to speak with someone who has already invested in the same kind of platform you’re considering. Ideally, you’d speak to someone already on the platform who has been successful in other ventures on that platform.
This will give you good insight as to how to make your investment, the kinds of projects to start out with, and general guidance on the nuances of crowdfunding in this industry.
For example, crowdfunding platforms are fairly “open” in the sense that they allow for information sharing. That’s good because there isn’t a formal underwriting process and no one is analyzing the investment outside of the investors in the pool.
Most investors would benefit from performing criminal background checks on the developers. Just because a developer has built a few buildings doesn’t mean that he’s an honest builder.
Another thing to negotiate either through the platform or with the developer directly, is a “bad boy guarantee.” These guarantees give investors the right to seek personal damages from management.
Now, if a developer is inherently dishonest, then it’s unlikely they will agree to this provision, but this also tips you off to the inherent risk in the project. Even when a developer does agree to this, you still have to have some kind of trust in him or her that the project will be completed and that they won’t abscond with the money.
Buy title insurance before you sink any significant amount of money into a property.
Finally, encourage transparency in underwriting. Your fellow investors are there to help you, and you should be willing to help them. Remember, you’re all in this together. Share information you learn about the developer, management, and anything related to the project.
Make Sure You Qualify
If there are income or savings thresholds, make sure you qualify as an investor. All platforms will state minimum investment amounts, and whether there is a special investor class requirement prior to putting money into the pool.
Join A Platform With “Open Underwriting”
Not all platforms have communities that are “open” and of the mentality that information should be shared. Unfortunately, many investors are very secretive, and they view information as a commodity. These types of investors make real estate crowdfunding more risky than it needs to be. Because all investors are, ultimately, “in the same boat,” information should be shared freely with everyone to reduce risk.
Lydia O’Brien has been managing her own pension portfolio for a number of years and enjoys sharing her investment ideas with an online audience. She is a regular contributor for a number of financial and investment websites.