9 Vital Questions You Should Know Before Investing In Crowdfunding Real Estate
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Monitoring crowdfunding in real estate has made the sector of private estate to go online and now anyone can participate. While the sector of private real estate is gradually becoming more open, still non-real estate professionals find it a challenge making informed investment decisions. The structure, intricacies, and term of investment are important aspects of a deal investors should be aware of. What is more important is the quality of the sponsor. Investing in real estate is, in many ways, like investing in start-ups—ideas are a dime a dozen and success is determined by the team’s ability to execute. In real estate, highly knowledgeable sponsors will outdo average sponsors. The main determinant of success is not the purchase price, but rather the sponsor’s ability to put the right debt in place, come up with a quality business proposal, connect all the dots, and execute. Keeping that in mind, crowdfunding investors need to spend more time underwriting the sponsor as opposed to the deal itself. That said, here are 9 questions investors in real estate crowdfunding should ask sponsors before investing in crowdfunding real estate:

1. What is the sponsor’s knowledge with the market, product type, and running that business plan?

Ask for a case study showing buying price, overhaul scope, return-on-cost generated, and exit price. Ensure these deals have gone full cycle through a refinance or an exit. For a newer firm, see if the principals specialize in that asset class, market, and investment strategy in their previous jobs. Keep in mind that firms formed in the last 5 years have not yet experienced a full cycle.

2. Sponsor’s background

Look into direct real estate experience of the sponsors. Have they ever worked for best-in-class firms? More important look into day-to-day work they were doing.

3. Sponsors competitive advantage

What’s sponsors competitive advantage? And how did they manage to seal the deal? How are they uniquely positioned to execute?

4. What Type of Project are you investing in?

Most crowdfunding in real estate is done for commercial projects, such as multifamily residences, retail centers and hotels. But some sponsors source money for developers looking to repair or reconstruct, then resell, single-family units. The latter usually attract individual investors; aka “retail” investors. A retail investor is going to be particularly interested in houses, four units, six units, etc. They are reluctant to invest in large commercial properties because of their more complicated financing.

5. Is it equity, debt or both?

Some real estate crowdfunding sites sell equity in properties, some sell debt, and some both. Know which one you are investing in. An equity investment means you own part of the property. This offers a greater upside should the property’s value rises.

But is riskier than a debt investment, which provides the loan to build the property. As an investor you get a fixed income from the interest, and the loan is secured by the building. An example of a preferred equity investment is Miller’s investment in the house on Port Provence Place in Newport Beach.

6. Are they disclosing the risks clearly upfront?

The investor memo should not be overly rosy, but should clearly state the risks and details why the deal is protected from potential risks. A deal that looks too good to be true is usually is. Request the crowdfunding portal FAQ section so you can benefit from the collective questions of all investors.

7. Ask for an inside meeting

Ask for an inside meeting or at least a phone call, even a video chat. During the meeting, try to gauge what type of person the sponsor is. The purpose here is to see if the sponsor is a trustworthy professional who will act in good faith. Request for a webinar to walk you through the sponsor background, expertise, and the deal details.

8. When Will You Start Seeing Returns

Real estate investing through crowdfunding is not like trading stocks or buying mutual funds. So, you will probably have to wait a while before seeing investment returns. For example, investing money into equity investments through a crowdfunding portal can take about 5 years, even up to a decade for your investment to pay off.

9. What is Your Risk Tolerance?

Know exactly how much risk you are willing to take on before diving in. In real estate, it is important to recognize that risk levels can vary. For example, you will be taking a pretty big gamble if interested in flipping properties.


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