We first published this article in December of 2015. Since then, real estate crowdfunding has grown in both transaction volume, and in the esteem of many investors. The fledgling industry again grew substantially in 2016, posting 40% YoY growth to an estimated $3.5 billion nationwide¹. While this number is likely to grow by leaps and bounds again in 2017, it still represents a small fraction of the $2 trillion+ overall U.S. commercial real estate market. After an initial gold rush, some early entrants to the space have dropped out, unable to sustain quality deal flow or build an adequate network of investors. Others have surged ahead, seizing on growing investor enthusiasm for more accessible, transparent real estate investing.
For investors, there is reason for both optimism and caution. On the one hand, the advent of real estate “crowdfunding” brings unprecedented access, diversification options and far greater ability to self-direct real estate investment decisions. On the other hand, the attractive yields in real estate carry attendant risk, and not all of these platforms have the experience behind them necessary to evaluate these risks (or even claim to). As of Q2, 2017, economic indicators remain strong, with nationwide unemployment falling to its lowest rate since before the Great Recession. However, political volatility and uncertainty have begun to temper investor optimism, while many – including Fed Chairperson Janet Yellen² – have expressed concern over frothiness in commercial real estate markets. How well real estate investing platforms weather a market correction, and to what extent they can continue finding attractive risk-adjusted returns for investors across market cycles, will be huge storylines as the industry matures over the coming months and years.
While the method of investment is new, the foundation of sound investing remains the same – experience, analysis and clear and open communication remain essential. Here are some key factors we believe everyone should consider when getting started in crowdfunded real estate investing and evaluating platforms:
This is the best place to start but, in some ways, the hardest thing to evaluate. What is the experience level of the team? While these new companies will tend toward younger leadership across the board, all successful platforms will have a requisite level of real estate expertise, legal acumen and technological experience, as well as a strong network within the broader real estate industry. The team behind your platform of choice does not need to be old, and it does not need to be large, but it should reflect real experience and a broad set of skills.
In the year-and-a-half since this article first appeared, the track record of companies since inception has grown in importance (as opposed to the career track records of founding members). Some companies have flagged or closed their doors entirely, while others continue to build on early successes and present quality deal flow to investors, improving their product along the way. You can find details on our track record in this recorded Quarterly Update Webinar with CEO Charles Clinton
Deal Diligence & Transparency
As always in real estate, due diligence and transparency are paramount. Is the platform pre-vetting each deal or posting everything that comes their way? Is there enough information being provided for you to properly evaluate each investment? If there are gaps, are there knowledgeable people available to answer questions? Is the platform soliciting your feedback and evolving to meet your needs? Your relationship with your real estate investment platform should be a two-way street. Again, communication is key – a platform should be willing and able to lay bare all key attributes of the deals they present.
Platform Backing & Pricing
These are long term investments, will the platform be around years down the road? Keep in mind that, should a platform go under, your investments could be in peril. Many nascent platforms are not positioned for long-term survival – lacking robust funding, the backing of an established real estate company with a longer operational track record, or both. Also consider how the platform makes money. There is no standardized pricing model in the industry, with some platforms imposing a burdensome fee load and others claiming no fees at all. When it comes to the world of investing, the best pricing model is the one that aligns incentives correctly – ideally, the platform will only make money when investors make money.
Sponsors and Lenders
What is the experience of the real estate company behind the deal? If the company is relatively new, do the principles have the necessary experience? Take a look at past transactions carried out by the sponsor or inquire with the platform. With respect to the platform, make sure they have strong sponsor relationships and established standards for vetting sponsor partners. Also ensure that the platform provides a channel for communicating with the sponsor.
At the end of the day, you as an investor need to know who you’re investing with. Any opacity around the background of a sponsor or lender, and the details of their business plan, should be regarded as a red flag.
Risk vs Reward of Deal
This balance depends on a variety of factors that vary by deal – location, type of project, hold period, deal structure, leverage, assumptions made in underwriting, and a variety of other factors that deserve their own article. Platforms that aggressively trumpet sky-high returns on their deals should be viewed cautiously – you want to invest with platforms that operate realistically when it comes to presenting the risk and potential reward of offerings. Remember that the fundamentals of good investing don’t change just because it’s taking place on the internet.
With real estate markets in gateway cities potentially overheating, and the potential for prolonged inflation, it’s more critical than ever that platforms have a robust nationwide network to source deals in markets that project attractive risk-adjusted returns amid volatility at the national level.
Diversification & Investment Minimums
The best platforms will enable investors to easily create a diversified portfolio of real estate investment, much like E*Trade did in the 1990s. This means that investment minimums should be low and there should be a range of project types to invest in.
At EquityMultiple, we’re focused on bringing investors pre-vetted investment opportunities that offer attractive risk-adjusted returns. Like E-Trade did for stocks and Betterment is doing for wealth management, EQUITYMULTIPLE makes it easy for individual investors to create and manage their own portfolio of pre-vetted commercial real estate. Create an account to view the opportunities currently live on our platform, with plenty more on the way. Investments start at $5,000.