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How to invest in Canadian crowdfunded RE

Now that we have identified how to select a crowdfunding platform, we can discuss how to choose w...

Now that we have identified how to select a crowdfunding platform, we can discuss how to choose which real estate assets will result in a high return on your investment.

Based on our market observations and discussions with other professionals in the commercial real estate industry, I have put together five tips to use as a guideline when investing in crowdfunded real estate assets.

1. Invest 20 per cent of your capital in senior debt deals in Alberta for 2016. You do not want to be an equity investor for real estate projects in Alberta (short term) as it will be similar to catching a falling knife – senior debt of up to 75 per cent in Alberta market today on good income producing projects can get you a six per cent coupon on a two- to three-year term.

2. Invest 20% of your capital into hospitality construction in Ontario on a flagged hotel or a repositioning play. This will get you a return of around 12% over a five-year hold period. A low Canadian dollar will give a boost to Ontario economy, which in turn will bring better corporate spending and tourism. Both bode well for the hospitality sector especially on newer, well-located assets in primary or secondary markets. Stay away from no-name hotels, as they simply do not have the scale and size to benefit from current market conditions.

3. For those with a higher level of risk tolerance, the Toronto condo minimum market is still a good place to invest, especially in the lower end of the market and or mid-rise boutique buildings. Invest in products as syndicated mortgages for an approximate 12% return and stay away from equity participation. Keep your capital allocation between 10% and 20%. Make sure you look at the detailed pro formas – some developers are doing projects with very little skin in the game and have loaded appraisal surpluses and fees that come out from Day 1 – stay away!

4. Up to 20% of your capital should be invested in secondary market retail strip centres that have good occupancy, but room to improve with capital expenditure. Look for such stories. Make sureloan to value ratio is no more than 80% and your term is no more than three years. Expect seven to eight per cent coupons. Remember the key here is exit analysis i.e how is the sponsor going to enhance the value of the project to pay you out after your term ends – oftentimes it’s by way of net operating income growth which comes with a) increasing occupancy b) rent growth.

5. The rest of your capital allocation should go into one of the following projects:
a) Industrial in Vancouver;
b) Class-B office in Toronto;
c) Good covenant single-tenant industrial with long-term lease in major markets;
d) Mixed-use in urban areas of Quebec’
e) Long-term lease national tenant retail properties in Eastern Canada;
f) Multi-family or student housing projects in any of the major markets’
g) Multi-tenant industrial buildings that are not too big in size as most of the liquidity often times resides in mid-size boxes.

Equity is a good way to invest into these type of properties, which will often times generate returns of six to eight per cent cash on cash and a total of 12% IRR over a five-year hold period.

Remember real estate is always fixed term/income investment whether done as debt or equity – do not expect liquidity until end of the term!

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