Investing in real estate through a crowdfunding platform can be an exciting and lucrative endeavor. This is especially true for investors who are new to the real estate investing industry. Since the crowdfunding platform is new and unique to real estate, there are pitfalls in which investors should avoid when attempting to invest in a crowdfunding opportunity for the first time. These are the top items investors should consider before investing in a crowdfunding opportunity.
1. Experienced Real Estate Underwriters
As a real estate investor, knowing that a company has knowledgeable real estate underwriters helps ease the burden of wondering if this deal is real or even profitable. The real estate underwriter’s primary focus is to analyze the deal, identify the risks involved, determine how to eliminate as much risk as possible and structure a deal that results in the best possible outcome. This process will ensure that deals are worthy of investing in. The main focus of an underwriter is in the financial portion of the deal, it is imperative that the underwriter carefully assess all assumptions to ensure that profitability is achievable and that investors will earn a generous return on their investment.
2. Investment Returns
As a rule of thumb, if you have extra money sitting around in a retirement account or savings account earning less than 10%, it would be wise to consider real estate to help grow your retirement nest egg. Crowdfunding platforms can offer exciting opportunities to new investors that were not available to them even a few short years ago. Most crowdfunding platforms offer an annualized 10% yield per deal and some crowdfunding companies offer profit participation as an additional upside to investing in a particular deal.
3. Quality of Sponsor
Having a strong and experienced sponsor is one of the best ways to mitigate risk. A strong sponsor will understand how to value the property in the initial acquisition phase. Successful sponsors understand what it takes to run a property through the investment cycle from the acquisition, managing the asset during the holding period, then timing the correct moment for selling the asset at its most profitable. Having a sponsor that can demonstrate the qualities will help ensure that the investment is profitable.
4. Quality of Asset
A strong real estate asset is a key to profitability. Depending on the asset class, being located in a highly desirable market contributes greatly to the asset as a whole. In addition to the market, the asset’s quality can also be determined by trailing financials or rent rolls for example.
5. Cost of Entry
The minimal investment may not be important to some, but others, who just want to test the waters would likely not want to shell out, for example, $25,000 on their very first investment. Lower minimal investments allow new investors to get a feel for crowdfunding especially if they are new to the platform or crowdfunding as a whole. Ultimately, smaller minimal investments give investors a chance to find out if real estate crowdfunding is for them in the future.
In addition to having professional real estate underwriters analyze the deal, the information or data from the underwriter should be easy to follow and make sense. An investor should be able to determine if a particular deal is worthwhile or not; simply by the way the information is presented on the offering page. Advance jargon is sometimes confusing for a novice real estate investor. Real estate investing through crowdfunding should be easy and seamless, and not require an advanced degree of any kind.
7. Getting Paid and How Often
Getting paid should not be a mystery, it should be clearly stated somewhere within the deal. If you cannot find how often or when you are paid, then likely you should find another deal in invest in all together; because making money is the reason you’re investing in real estate in the first place, right?
8. Exit Strategy
Knowing how and when the investor will get their money back is imperative to any investment opportunity. A crowdfunding deal should have a clear exit strategy listed within the deal that clearly tells investors how the sponsor intends to repay the initial capital investment; best if in a sequence of easy to follow steps. If the exit is not listed, you should be able to find out relatively easy from the platform’s customer service team.
9. Crowdfunding Platform
A real estate crowdfunding platform should be easy to navigate. The platforms should be secured and offer an investor every tool they will need to make an informed decision of whether to invest in a deal or not.
A real estate crowdfunding platform is best when they do not charge the investors fees for investing. It seems kind of silly that an investor who is lending their money should pay to play twice. There are more than enough deals on different platforms that do not charge the investor asset manager or accounting fees. It would be wise to seek those out first, then fall back on investor fee-based platforms when they have an irresistible deal that would be worth paying the fee to invest in that particular deal.
As you can see, there’s a lot that goes into investing in a crowdfunded real estate deal. Following these tips will help investors land the perfect deal on any platform regardless of how the platform structures the deal.
When you are ready to invest, go through t this list to ensure that everything meets your standards as a real estate investor.