Secrets to Success in Crowdfunding Real Estate
With crowdfunding expected to raise over $6 billion in 2014, many savvy investors are trying to learn the ins and outs of online crowd investing of commercial real estate. As Executive Chairman of Realty Mogul, the United States’ largest online marketplace for real estate investing, I’d like to share six secrets to successfully crowdfunding real estate.
#1 Access to Deal Flow
Probably the greatest potential for crowdfunding is the promise of giving the individual investor access to real estate deal flow that was previously only available to the big boys. Hedge funds, private equity groups, and other financial institutions have teams of high-paid executives looking for properties to invest in. Many of these companies provide funds that consumers can participate in, but there is a catch. Most have hidden in their paperwork multiple fees that all get charged before the investor sees a return. Realty Mogul’s mission is to reduce load (those fees) and pass that upside onto our investors.
The power of crowdfunding is that it attracts real estate sponsors looking for new sources of capital to a “one-stop shop” so that they can spend more time running their businesses instead of fund raising. We also handle all of the distributions and tax reporting back to our investors thereby reducing their overhead costs. Crowdfunding is rapidly growing because it removes cost and friction from the investment process.
#2 Regulations are Important
Crowdfunding real estate is not really new. It is just a digital version of people pooling their funds together to purchase property. Real estate has been purchased this way for ages. What is new is the speed and ease that crowdfunding sites provide. With consumers now able to invest thousands or millions of dollars with just a few clicks of a mouse, it’s important to make sure that the site being utilized is a good one. Make sure the site you are investing with is well financed and follows all of the Security and Exchange Commission’s rules and regulations. Until the final regulations of the JOBS Act are finalized, only accredited investors should be investing in crowdfunded real estate unless the securities have been registered. The regulations regarding broker dealer laws, disclosures and how funds are handled are there to protect the consumer, but it is up to the consumer to do the diligence and make sure the site you are dealing with is compliant. At Realty Mogul, for example, we had our Chief Technology Officer and General Counsel both get their securities’ licenses just to make sure that the entire company understood the regulations.
#3 Underwriting is Important
As with any other form of real estate investing, the projected returns are only as good as the underwriting on the property. All investing has risks and the more transparency the investor has to the specifics of the transaction, the more informed and educated they will become. It’s important to underwrite both the real estate sponsor and the property. When thinking about the sponsor, appropriate questions to ask include:
-- How long have they been in business?
-- How many millions of dollars worth of properties and other assets do they have under management?
-- Do they have an expertise in the same category of property as the one being funded?
For property level diligence, it’s important to stress test the projections, as well as inquire further into the local market area and the asset class. At Realty Mogul, we also require all sponsors to hold an online webinar where potential investors can ask them directly any unanswered questions about the property. Make sure to attend the webinars as those present a great opportunity to “crowd source” real estate knowledge from fellow investors.
#4 Read the Fine Print
Every real estate sponsor has their own specific operating agreement that covers your investment in both good times and bad. It is important to understand the fine print on what happens if the property needs capital or if the property management company needs to be replaced. Realty Mogul has a policy of complete transparency and strives to educate our thousands of investors. If you have a question, just call. In general, a good financial rule of thumb – regardless of the industry – is to pay very close attention to the levels of consumer protection written into any document asking for your signature. And if you don’t like what you’re reading, don’t sign.
#5 Diversification is Important to Investing
While having real estate as part of your investment portfolio is a great way to diversify, having a variety of types and locations of real estate further diversifies your portfolio. Instead of just chasing the highest yield on equity, investors would be wise to divide their capital among a variety of real estate such as multi-family, commercial shopping centers, mobile home parks, public storage, hospitality, and office buildings. And just as there are many types of cash-flowing properties, there are a wide variety of regional markets. Some areas of America are showing steady growth, while others offer less heady potential returns. Realty Mogul’s user dashboard allows even the most diverse investor to keep track of all their properties with one clear and concise interface.
#6 Debt and Equity Behave Differently
Crowdfunding can be used for both investing in short-term debt and long-term equity. Short-term debt, which usually is three years or less, may not provide the potential for investors to earn money when the properties appreciate in value, but they generally provide a stable monthly income stream. Equity investing, on the other hand, allows for the investor to benefit from depreciation while having the possibility for significant upside when the property is sold in the future. As with all investing, check with your financial advisor or tax professional to see what mix of debt and equity investing best suits your individual needs.
Whether you are an experienced real estate investor who has purchased millions of dollars’ worth of commercial properties or a first-timer looking to invest a few thousand dollars, crowdfunding provides greater opportunities for you to build the type of diversified portfolio that meets your unique needs. Realty Mogul acts as a 21st century bridge connecting vetted opportunities with accredited investors wanting to participate in a process that even just a few years ago was difficult to access. From 1031 exchanges to twelve-month debt, Realty Mogul’s mission is to facilitate commercial real estate transactions in a safe, transparent and secure manner.