Every investment carries risk. Smart due diligence can mitigate it. An appetite for it leads to higher potential yields. Diversification ensures it doesn't sap your entire nest egg.
But one risk is unacceptable: Gambling with investor protection.
Investor protection is the most important part of a crowdfunded real estate investment transaction. Both real estate investors and crowdfunding platforms must take steps to maximize it.
RealtyMogul.com believes there are three aspects of investor protection any crowdfunded deal needs. Make sure they're a top priority for you—and for the platform you use.
1. A Well-Capitalized Platform
Not all risks in crowdfunded real estate are investment-specific. The industry is new; investors must select the right platform with which to invest.
“What happens to your investment if the crowdfunding platform goes out of business?” Realty Mogul CTO and co-founder Justin Hughes says. “There are many young platforms out there, and it would be wise to look at how well-capitalized the platform is.”
Real estate investment crowdfunding platforms should maintain strong cash positions to maximize investor protection.
2. Understanding That Real Estate Investments Are Illiquid
Real estate investors are better protected when they understand that real estate investments are illiquid. These investments have no secondary market. Once invested, investors receive capital based on the deal's terms. They cannot remove it at will.
“If you anticipate a short-term need for your capital, you may not want to get it locked up in a crowdfunding investment,” Justin says.
Your platform should make this clear, too.
3. Deal Flow and Operator Quality
Protection also comes in the form of high-quality deal flow and operators. Crowdfunding investors can't vet deals in person. They rely on smart curation and rigorous due diligence from the platform.
Look for one that has the talent and technology to curate deal flow. The platform's underwriting criteria should be stringent. For instance, Realty Mogul offers pre-vetted deals with comprehensive information and operator question-and-answer sessions.
Then, make sure your platform performs due diligence on the following operator factors:
Vet experience and track record. Examine past and present portfolio and financial results. Conduct background and criminal checks.
Investigate general investment approach. What investment style and asset preferences does the operator have? Do these preferences align with your own?
Fee structure. Fees add up and impact investor returns. A platform like Realty Mogul vets fees to ensure investors receive the best price.
References. What do people think who have worked with them in the past?
Protection starts with the research investors perform on crowdfunding investments that interest them. But the platform's quality also plays a significant role. Examine both in your quest for greater investor protection.