In the first post in this series, I walked through how I went about getting started with crowdfunded real estate investments. I outlined my thought process and the considerations that came into play in deciding how to invest across the (broad) types of investments that are available.
Now that I had figured that out, it was a question of narrowing down which platforms would be most suited to me. Unfortunately, there’s no MorningStar® of crowdfunded platforms – at least not as widely known or followed.
I did, however, find a couple of sites that are attempting something similar. In no particular order:
They walk through their methodology and criteria used for the ranking. If you want a quick short list to consider, then this is a good place to start. Don’t ignore the lower tiers as some of them may be pretty decent as well.
A (potentially) shorter list but with some notes and user reviews about each one.
While they may prove helpful, the above lists are just a starting point for you to do your own due diligence. If you know of any other similar sites that are worth considering, please leave a note in the comments and I’ll be glad to add them in.
Researching The Portals
Once you make a short list of portals, visit each one and do some research. Yes, it’s more work but it is *your* hard-earned money.
Look at the experience and the background of the founders and top executives. Google all the names that come up, and don’t forget to look at what they’ve been doing in the past.
How long has the portal been in business? Are they backed by some venture capital firms or a partner with deep pockets? The longer they’ve been in business and the more the experience the executives have in this industry, the better the chances they’ll still be around a few years from now.
Fees & Minimums
Look into some of the prior closed investments they have to offer. Note that you may need to sign up for an account to get access, but there’s no obligation to invest.
In addition to being accredited, some have minimum requirements of $50,000+ per investment, and that’s not where I would want to start, so to speak. Maybe it’s worth another reminder that I’m just some random dude on the internet and if you read this, invest your life savings and lose it all – don’t call me. Just don’t.
Look into the fees they charge. In general, fees they charge for closing the deal are paid by the sponsor. I’ve generally noticed a 1% fee that goes to the portal for facilitating the loan. So if its a debt investment @ 11.5% interest for 2 years, the portal keeps 1 and you get 10.5%.
Private REITs (eREITs) vs Individual opportunities
Some portals offer private REITs while the greater majority are all about individual deals. Don’t get confused between the two.
Private REITs are not tradeable on the stock market and are more of a basket of individual investments. The portal manages them and picks the investments that meet their criteria. You don’t have a say except to invest in the REIT itself. This option makes sense when you don’t want to worry about individual investments – similar to an active mutual fund. They also tend to have lower minimums and may accept non-accredited investors, making them relevant for the less-experienced.
Analyzing A Deal
I’ll start out by repeating that I’m new at this and think of myself as an unsophisticated investor. I’m also still learning and the next year or two will tell how bad I was in picking my investments.
I started out by restricting my due diligence to the more prominent portals – ones I read about on other blogs or those that I found on those lists above.
Once you’ve discovered a few portals then you have to do due diligence on the individual offerings themselves.
When a new opportunity is offered, you’ll get an email notification from the portal within a day. Most crowdfunding portals claim to do pretty extensive diligence as a general rule, but for obvious reasons, you need to do your own. After you view enough offerings across a few portals for a few months, you’ll start to notice that some do a slightly better job of due diligence and in presenting that information to you, the investor.
Either way, here’s what you should look out for:
Similar to what you did for the portal, do your research and google for the sponsors of each deal you’re considering. Is this something they’re experts at? What sort of deals have they done in the past, and how did those go?
How/When Do You Get Paid
Take a look at the payout structure. With debt investments, it’s easier but check to see if its senior debt or not. With equity, the waters are murkier. Also pay attention to the order in which each entity is paid – the sponsor, other partners, and you (including other individual investors), and what – principal vs profit.
Like any investment, there’s always a risk that the project can head south and you could lose your investment.
Worst case, there could a crash like 2008-2010. A more common scenario is that the project is delayed, or due diligence proved to be incorrect or incomplete.
Some portals will list all the risk factors down with each deal – which is part-CYA and part-reinforcing the fact that you shouldn’t ignore these risks. Reading them could make you feel like you should just park your money under your mattress but that’s not going to get you to a position of making work optional. You need to take risk commensurate with your current situation, do your due diligence, and go from there.
This seems obvious, but it merits consideration. You need to consider future growth prospects – where is it located, what is the supply and demand in that area, and is improving the property (if that is the strategy) going to bring in more tenants at higher rents?
I’ll be honest – this is the one area in which I have yet to develop some skills. The sponsor and the platform make everything look great, and if you google you’ll find statistics that prove their confirmation bias. Without personal experience in or access to information about that market, it’s tough to be objective and ruthless in your analysis.
Last but not least:
Feel free to call the portal directly to find out more details about the offering if you’re confused or have any questions about some aspect of the offering.
Yes, You Can Do It
If you’ve read all the way to the end without skipping a paragraph here or there, kudos to you!
After having read through all of that, it may feel like its a lot of work. It is, and it isn’t. The best part is that you don’t have to do it all in one day. I know I spent a few days spread over a few weeks looking into a few portals I was interested in. Then registered for them one at a time, and looked at the deals that became available.
Once, you’ve done the diligence in the portal then it’s mostly just reviewing the deals as they come up *and* if you have cash lying around to invest. Don’t hurry up and invest it all in one month. Take your time and wait for the right ones – all deals are not created equal. You’ll notice that some go faster than others – there’s a reason why.
Photo by Patrick Tomasso