What you need to know before you hit that “invest” button.
Real Estate Crowdfunding, while still a relatively new concept to many investors, has truly taken the industry by storm. This is evident in the billions of dollars that’s been raised since its inception and the fact that more and more investors are discovering its unique and unprecedented opportunities. And while anyone who’s actively invested in real estate (or any asset class, for that matter) should follow the same method of analyzing potential deals, crowdfunding presents several distinct facets that should be considered before getting started. Take a look:
1. Real Estate as an Asset Class
It wasn’t until quite recently that commercial real estate rose from existing as an alternative investment to becoming the fourth major asset class for investment. And although many people have learned and relied upon their real estate investments for diversification, cash flow, appreciation and other benefits, understanding the intricacies and uniqueness of this asset class is key before taking on your first crowdfunding deal.
What makes real estate so desirable as an asset class?
- Cash flow
- Portfolio diversification opportunity
- Insulation against inflation
- Global opportunities
- Harnessing the momentum of local, national and international market
- Certainty in an uncertain market (as compared to stocks, etc.)
Depending on the nature of the deal, whether it’s a hotel, multifamily, industrial, retail or office property, before investing in a crowdfunding deal, it’s important to consider the market of the property.
Questions you should consider include:
- What’s happening in and around the area?
- Are there improvements underway in the form of city and state investments?
- Is it a thriving market or one that’s in the process of being gentrified?
- How much are units being rented/leased for?
- What are the demographics of the area?
- What other developments or projects may compete with the subject deal in the market?
Taking the time to research and gather information on the market will give you a better sense of the potential for the investment and what kind of results you can expect. Market studies are typical for a development or redevelopment deal, and contain most of the information you need to address all of the points mentioned above. The crowdfunding platform you choose should have this information readily available for each deal they’re presenting.
When considering an investment in a real estate crowdfunding deal, it’s crucial to view and analyze the financials of the offering. Is it a debt or equity offering? Are there figures in place for cap rates, cash-on-cash and net operating income if applicable? Having a clear view of the deal’s financials is necessary to decide if it’s suited to your goals and the level of risk you’re comfortable with. On EarlyShares, this information is readily available and laid out in an easy to understand format for each deal. Here are some of the documents you can reference that address economics in the deal:
- Operating Statements (Historical & Proforma)
- Market Studies
- Historical Occupancy Reports
- Rent Roll
4. Supporting Docs
A truly reputable crowdfunding platform will make all supporting docs available to you before you are able to make an investment. This includes all the deal financials, a pro forma, the offering memorandum, and a subscription agreement. Before you click that invest button, it’s crucial for you to review these documents.
In every real estate crowdfunding deal, it’s critical to take a good look at who the sponsor is. Whether it’s a developer, an owner-operator or an acquisition firm, the team that’s backing the deal is key to its success or failure. Do your homework and research the sponsor’s experience, their track record, their expertise and their portfolio.
Making the move to crowdfunding is daunting to many investors because they simply don’t know a lot about it or how it works. But those who’ve begun to reap the rewards of this investment vehicle have discovered the importance of choosing the right platform—and the team that’s running it.
One of the main considerations you want to take into account is the team and their background. Are they professionals who have extensive experience in real estate and securities law? How broad is their network in the real estate industry and what’s their track record in successful deals thus far? Even though crowdfunding is still relatively new to many, you want to choose a team that has a broad range of skills in investing real estate and technology.
6. Time Frame
Each real estate crowdfunding deal has a time frame associated with the investment. Some offerings, like many debt investments, have a shorter hold time than others. Choosing the deal that is ideally suited to your investment goals and style is key and to do so, it’s important to consider the time frame or expected hold period. For many investors who don’t want to have their money tied up for long periods of time, a deal with a shorter hold time is more desirable. Hold times should be listed along with all the other pertinent information of the offering.
Like any other investment vehicle, there are risks involved with commercial real estate crowdfunding. In order for a deal to be viable, there should be a balance between risk and reward—and this balance can be determined by taking into account all the other considerations discussed so far. The location and type of project, the structure of the deal, the projections and assumptions and the hold time all factor into figuring your risk and reward.
It’s also important to be mindful of your risk tolerance, keeping in mind that less risk often yields a lower return and vice versa for those with high risk. Another key consideration here is to invest with a platform that has a realistic view of the risks and rewards—be wary of those sites that boast out-of-this-world returns on every deal.
Real estate crowdfunding is being touted as an investment phenomenon which is alluring to many investors. There’s no debating the success of this method, but before getting started, take the time to get acquainted with these key considerations. If you have questions or want to learn more, feel free to take advantage of the many resources on our site or shoot us an email and we’ll be happy to answer your questions.