5 Ways to Evaluate an Online Real Estate Investment Platform
The good news for average real estate investors today is that thanks to changes in regulation by the SEC, individuals with only a small amount of capital to invest can now participate directly in million-dollar deals — even multi-million dollar deals — that were once available only to financial institutions and the very affluent.
But the tremendous success of online real estate investing has brought out a vast crop of new platforms in recent years. With so many companies vying for attention and investors’ money, how can you determine which platform is the right one to protect and grow your investment?
Here are five ways to help identify the best one for you.
1. Learn about the team behind the platform.
Every business is built on the strength of its leadership team. Real estate is no exception to this statement. Successful operation in the real estate industry depends largely on having expertise in the fundamentals of real estate, underwriting, finance, and business strategy.
While online real estate marketplaces are a relatively new format for connecting investors and real estate owners, these platforms should be analyzed in the same way you would look at any other real estate company. You want to know that the one you choose is run by a team of experts who apply a strict vetting process to every deal. You want to know they evaluate not only a deal’s financial projections but factors beyond investment returns, such as the underlying value of the real estate, the operator’s business strategy, and the quality of the market and submarket. It is imperative that online real estate investment platforms demand that all deals meet a high threshold of quality before making them available.
Your first step in researching an online platform for real estate investing should be to learn about its leadership team. You’re looking for a strong mix of experience and expertise in all of these areas: real estate, underwriting, finance, and business strategy. Ideally, the team will bring decades of years of combined experience in these and related fields.
2. Study the quality of their real estate companies.
The more sophisticated online real estate investing platforms are highly selective with their partnerships.
In this stage of your research, you should be looking for those that limit the real estate companies they work with to strong operators who have large portfolios, considerable transaction experience in whatever category of real estate they are attempting to fund, that hold up to aggressive background checks and reporting requirements, and that they have adequate ‘skin in the game’.
Although no real estate investment — or any investment in any asset class — can be entirely secure and safe, investing with a company that demands strict criteria from all of its prospective business partners is one potential way to limit your downside risk. Real estate investing will always carry certain risks including illiquidity and the possible loss of principal.
3. Examine the platform for any evidence of ‘rubber-stamping.’
Another way to investigate the first two clues suggested here — that the real estate investment platform is run by a team of bona fide experts, and that they’re selective with the companies they partner with — is to monitor the platform itself and check on the volume and quality of deals it offers over time.
If the company is listing new investment opportunities at a pace that seems too frequent for the team to be able to conduct sufficient due diligence or the quality of deals are not quite up to par, then you might deduct that the platform may be ‘rubber-stamping’ – approving deals without sufficient analysis or underwriting. This means, of course, that you’ll have less confidence in any new real estate opportunity listed on the platform.
One way of determining whether or not you should be comfortable with a platform’s pace and quality of new deals is to look at the size and experience of its underwriting staff. If that team is larger and with more experience than a greater number of new investment opportunities might be less of a concern — because the company has more resources to vet them properly. But if the company still appears to be in startup mode, with just a small number of junior underwriters, then be wary if new deals appear on the platform too often.
4. Look at how the underwriting team beats up the numbers.
Here you are looking for the online real estate investment platforms that have their own formula for vetting deals — and do not simply accept the numbers reported by their potential business partners.
When you investigate these deals, you should be looking for several criteria from each of them. They represent some of the clues that the underwriting team has done an appropriate job of vetting opportunities before making them available to investors.
Some of the questions you should be asking are:
- What is the real estate investment platform’s process for underwriting deals?
- Are the deal’s projected expenses consistent with historical expenses? (If these numbers are not consistent, does the deal itself offer a sound explanation?)
- Are the property’s rental rate assumptions supported by market research?
- Are the property’s vacancy rate assumptions supported by market research?
- Are assumptions backed up by market research from trusted third party data sources, such as Axiometrics, Costar, or Real Capital Analytics?
- Does the real estate company’s exit cap rate line up logically with the going-in and market cap rates for the deal?
- If the deal is offering a debt-based investment, what are the loan-to-cost, loan-to-value rates? Are these in line with current market rates?
- Do you see any red flags in the deal’s assumptions that might suggest its estimated value has been inflated — either by the investment platform itself or due to the real estate company presenting overly optimistic numbers and the platform’s team failing to catch them?
5. Review the client service team.
Finally, assuming you’ve found an online real estate investing marketplace that meets all of the criteria above, you might also want to check in with the company’s client service team to find out how knowledgeable they are and how easy they are to work with.
These support team members, after all, will be your first contact with the business when you become an investor on their platform and have a question or need help.
RealtyMogul.com has earned positive reviews and accolades from dozens of widely read publications for meeting all of these criteria — an industry-leading management team, high-quality real estate companies on the platform, a well-disciplined underwriting process, and outstanding service. These are just some of the reasons why RealtyMogul.com is now a premier online marketplace for commercial real estate investing.
Learn more now: Become a member.
As always, investors should understand the risks associated with real estate investing and that nothing is guaranteed.