Real estate crowdfunding (RECF) gives investors and deal sponsors the ability to connect with each other and earn high returns from that connection. As a deal sponsor, you might be wondering what types of investors actually use real estate crowdfunding websites. Here are four common types of private real estate investors that use RECF platforms like Sharestates.
- Experienced accredited investors diversifying their portfolios – Experienced investors know the only way to truly protect their wealth is to diversify their holdings. That’s why you’ll often see stock investors or investors who hold a lot of traditional investments seek to diversify by exploring alternative asset classes such as real estate and commodities. It also works the other way around. Experienced real estate investors in a down market will often seek to move or hedge their real estate holdings with other, sometimes even traditional, asset classes.
- Traditional investors new to RECF – The difference between this type of investor and the experienced accredited investor looking to diversify is that the above type of investor may have experience with RECF but has chosen to make other asset classes their primary interest. Another difference is that traditional investors who have never tried real estate crowdfunding may not be accredited. Some RECF platforms do accept non-accredited investors, which could change the dynamic for accredited investors.
- Private investors looking for better returns – Sometimes it’s not about hedging your current investors or diversifying. It may simply be that an investor wants higher returns. A bond investor, for instance, may not be satisfied with 2%-5% returns. Therefore, either they’ll transfer some or all of those investments into an asset class that is somewhat riskier and promises higher returns, like real estate crowdfunding. Or they’ll add RECF as an asset class to their portfolio, which also effectively diversifies it. They can kill two birds with one stone.
- Institutional investors – Institutional investors, like individual investors, want to get the highest returns possible on their investments. Therefore, they’ll consider RECF for all the same reasons an individual investor would.
RECF Requires Due Diligence, Not Empty Promises
Like any kind of investing, RECF requires the private investor to undergo certain due diligence protocols in order to ensure that they can invest. There is no guarantee of a return on most investments. In general, the higher the potential reward, the higher the associated risk.
There are some things, however, that may impact the returns investors see through real estate crowdfunding. Here are a few of the ways RECF investment can be impacted:
- Downturns or upturns in the real estate market: Market conditions always have an effect on investments, positively or negatively.
- The reputation of the RECF platform: This is one of the most important factors affecting real estate crowdfunding investments. Make sure you do a thorough check on the leadership, experience, track record, and quality of deals on any platform you intend to invest or list your deals through.
- The quality of available real estate deals – Does the platform list questionable deals or investment opportunities that seem too good to be true, or that have hidden risks?
- Underwriting practices – Make sure you investigate the RECF platform’s underwriting procedures. Are there any red flags?
- The state of the macroeconomy – The overall economy plays an important role in real estate investing, as does local market trends.
- The reputation and experience of the deal sponsor – While many platforms vet their sponsors, investors should perform their own due diligence and assess the borrower’s track record.
- The mix of assets with the RECF asset class: Investing too heavily in one asset type (single-family rentals, for instance) and not enough in others could create an imbalanced RECF portfolio.
RECF opportunities are still continuing to grow. If you’re an investor looking for higher returns or to diversify your investment portfolio, you should give it ample consideration. For deal sponsors, RECF offers opportunities to get your projects funded through debt or equity arrangements.
For more information about real estate crowdfunding with Sharestates click here.