All platforms and deal types are not the same.
Note: The following is an excerpt from our new white paper, Real Estate Crowdfunding 101: The Changing Nature of Real Estate Investing. The white paper reviews the fundamentals of real estate crowdfunding and discusses why investors are turning to this new form of investing. You can download a free copy of Real Estate Crowdfunding 101 here.
All real estate crowdfunding platforms are not the same, and any real estate investment is only as sound as the underlying property. Here are a few things investors should consider when evaluating real estate crowdfunding investments:
- Vet the platform. Does the platform have a track record of successfully finding great deals? What is the background of the platform operators? Real estate crowdfunding requires knowledge of two separate disciplines – real estate and securities law – and platforms lacking experience in one of these two fields will run into problems.
- Perform due diligence on the sponsor. What other real estate projects has the sponsor done? How many similar projects have they done? How long have they been in business? What is the worth of the properties that they currently have under management?
- Research the market. The California market is very different than the Midwest market. Even in larger cities, different neighborhoods have varying potential as real estate investments. While the platform will conduct its own due diligence, conducting your own research will help you understand whether the offering is right for you.
- Consider your investment profile. Investors willing to accept a lesser return in exchange for less risk might want to consider a debt offering. Conversely, an equity development project might work for investors looking for a greater return and willing to accept greater risk. While real estate crowdfunding is an exciting new investment opportunity, it does not suspend the laws of economics. High return equals high risk.
- Read the offering documents carefully. Any legitimate platform will make all offering documents (including a pro forma, deal financials, offering memorandum and a subscription agreement) available to investors prior to asking them to invest. Investors should closely review the deal financials to determine if the assumptions the sponsor is making are realistic.
While there are many factors to consider, real estate crowdfunding makes many new investment opportunities available. Investors can now invest in a wide variety of real estate deals all across the U.S. We at PeerRealty are excited to be part of the democratization of real estate investing, and we look forward to seeing how the industry continues to evolve in the future!