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One of the fastest-growing investment vehicles over the past few years is crowdfunding. Entrepreneurs have recognized the potential of crowdfunding and its ease of accessibility to investors through a variety of social media networks and platforms.
Real estate crowdfunding portals are a $1.7 billion business in the U.S., Australia, and the U.K. and have recently started growing in popularity in Canada.
Prior to investing in crowdfunded real estate you should consider the following:
Sponsor agnostic:
Invest in a platform that is arm’s length and independent of project owners. Sponsor agnostic platforms that have long-term investor interests in mind compared to the short-term myopic thinking of sponsor-owned portals who raise capital for their own projects. Check for any indirect, dotted-line connections.
Due diligence:
Make sure third-party consultants have vetted the reports independently. Ideally, these reports would be commissioned by the portals and not by the sponsors.
Background of portal team:
Experience. Experience. Experience. Who is in the team? How many years of experience does the team have in the real estate capital business? Is the portal owned by non-real estate tech guys who are “new” to real estate or seasoned professionals from the industry? What’s the outreach and network of such team members? Do they know all the key players in real estate? Do they understand the capital stack? Do they have relationships with senior debt lenders, lawyers, consultants and sponsors alike?
Diversification 101:
If you have $100,000 to invest, put it into four different deals rather than putting it all in one! Make sure you have both debt and preferred equity in your portfolio. Spread your holdings geographically and by asset type. Does your portal have enough critical mass and scope to provide you with steady access to quality deals?
Legals:
Make sure to read the subscription and LP agreement thoroughly. Is it a standard industry document or does it have too many carve-outs that are overly favourable to the sponsor? Ensure it is a balance between investor rights and sponsor rights. Don’t forget to check the past three years of historical financial data against the next three years of projections. For example, if it is a condominium project are the exit sale per square foot numbers realistic or are they just pie in the sky numbers?
Happy investing!
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