Cash flow is important for any type of business, but real estate crowdfunding is a different kind of business that requires a carefully thought out plan for the end game. It’s more like investing than a traditional business, but it still requires an attentive eye to business technicals like cash flow, forecasting, and profit-loss analysis. Otherwise, you could end up losing your shirt.
The alternative to investing in real estate online using cash flow forecasting is debt. It isn’t recommended to invest in any vehicle, including real estate crowdfunding, with debt.
Capital Is King of the Marketplace
Businesses of all types need capital. In real estate investing, developers need capital so that their projects can be completed on time and put on the market. Like many businesses, if a real estate developer doesn’t have the capital to fund their projects, they may seek out a loan. Real estate crowdfunding offers them a marketplace of investors who will fund their projects in hopes of seeing a return on their investment. That said, like any kind of investing, real estate investing carries a certain amount of risk. The risk involved is dependent on a few details such as whether you have performed the proper due diligence, the nature of the project you are funding, and where you sit in the capital stack. The riskier the investment, the more important it is that you be able to adjust your portfolio, if necessary, to offset potential losses.
If you were around during the mortgage crisis, then you likely know that a ripple effect in the economy led to banks going belly up after using risky home mortgage instruments to fund even riskier asset-backed securities. They were borrowing money from Peter to pay Paul instead of using their own capital to make the risky investments. The crisis illustrates perfectly well why cash flow is important for real estate investing.
How to Navigate Cash Flow to Reach Your Real Estate Crowdfunding Goals
Everyone wants to see their investments grow. But it’s important to manage growth and to manage expectations. If you are new to real estate crowdfunding, start small. Keep some of your cash in reserve until you are comfortable with the platform and with the underwriting process used by the platform. Put a small investment on a few projects first and monitor those for a few weeks or months until you understand the nature of the investment vehicle.
As your real estate crowdfunding portfolio grows, and you get more familiar with the platform and the projects available, you can begin to invest more of your capital in projects that have the highest potential for return. I’d also encourage you to start with the more conservative investments first. Analyze the types of projects available for investing and don’t go deep into the capital stack on your first investments. Another way to protect your portfolio, and to ensure a positive cash flow, is to invest in different types of investments. Diversify your overall portfolio as well as your real estate crowdfunding assets so that maturity dates stagger and you tie up your capital in different types of deals (multi-family, single-family, industrial, commercial, etc.). This will help you manage your cash flow long term.
Finally, maintain some liquidity in your portfolio, and never invest more than you can lose.