What makes a solid real estate crowdfunding (RECF) investment? Is it anything like traditional real estate investing? You’d be surprised at how similar it is to analyze a real estate crowdfunding investment and a traditional real estate investment, but there are differences. Let’s discuss those, point by point.
1. It’s all About the Underwriting
With traditional real estate, you may not be the underwriter, but underwriting is important and should be considered. Your RECF underwriter will be interested in many of the same metrics that you, as an investor, should be interested in, namely, loan-to-value (LTV) ratio, after-repair-value (ARV), and estimated repair costs, just to name a few. When evaluating a real estate crowdfunding investment, you should take a good look at the criteria the platform uses to evaluate risk and to underwrite a project. If those aren’t readily available, be prepared to ask questions.
2. Deal Sponsor Experience
If you’re going to invest in a real estate project, you want to know that the person managing that project has the requisite experience to pull it off. Whether we’re talking about a ground-up development, a fix-and-flip, or a value-added commercial rehabilitation project, you want the person managing that project to have some experience and a successful track record in that specific type of project. That’s true of both traditional real estate investing and RECF.
3. Deal Structure
Real estate crowdfunding investments can range in deal specifics from straight equity to debt, or some form of a mix between the two, and more complex arrangements. Pay close attention to whether or not you are investing in equity, in which case you get a percentage of ownership in the investment, or in a debt arrangement. With loan deals, you’ll get a periodic payout based on the terms of the loan whereas in an equity deal you may not see a payout until the property is sold. Understand how each deal is structured before you invest.
4. Risk Factors
Risk factors are very important. Is your investment going toward a first lien position or mezzanine? Is the investor putting some skin into the game? How about the platform? Or do investors on the platform fund the entire project? How much cash flow do you have? How liquid is your portfolio, and do you have a well-defined exit strategy for your investment? You should ask all the same questions you’d ask on a traditional real estate deal plus additional questions based on the platform and the structure of the investment.
5. Platform Considerations
Any RECF platform that wants your investment should have customer service representatives available to you at reasonable times. You’ll undoubtedly have questions about the platform itself, investments listed, and your payouts. When you do, you want the platform to be responsive to your requests. You should also evaluate the management team of the platform itself. Do they have experience in real estate investing? How old is the platform? Does their technology facilitate easy transaction management and analysis? You’re not just investing in real estate. You’re also investing in the platform.
6. Realistic Financial Projections
Finally, just like in traditional real estate investing, you want RECF projections to be realistic. If it seems too good to be true, it probably is. That said, RECF returns can be higher than expected on traditional real estate investing due to streamlining of processes offered by technology and the differences between your local economy and the economies of geographic locations where real estate projects on the platform are listed. Evaluate all claims to financial projections against realistic expectations and, if possible, get testimonials from past users.
Real estate crowdfunding is still relatively new, but it’s been around long enough that all of these criteria can be assessed relatively easily.