The past twelve months has seen widespread emergence of platforms offering access to investment in private real estate transactions, often referred to as “crowdfunded” real estate investment (though we prefer “real estate marketplace finance”). Depending on your definition, there are now over 100 online platforms offering such investment opportunities, expected to raise over $2.5 billion by year’s end. That number seems large at first glance but represents only a fraction of the potential for real estate marketplace finance.
For investors, there is reason for both optimism and caution. On the one hand, the advent of real estate marketplace finance 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 the quality of offerings may be obscured in some cases as relatively unproven players enter the market.
Here are some key factors we believe every investor should consider when evaluating real estate investment platforms and their constituent offerings:
Platform Experience – 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 online marketplace finance 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 access to a strong network of sponsors. 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 a broad set of skills and experience. Be cognisant of their legal approach and personnel – while it was a loosening in regulatory restrictions that fueled the proliferation of platforms, companies in the investment space remain heavily regulated by the SEC and FINRA. For the right team, these regulations are easily navigable and provide a framework for protecting investors but, for the uninitiated, can represent a series of potential landmines.
Beyond your first investment with a platform, consider whether the platform is being communicative enough. Do you have the tools to evaluate performance of your existing investments, and other investment opportunities, on an ongoing basis? Are you being asked for feedback? Is the platform evolving to meet your needs and provide more value? Your relationship with a real estate marketplace finance platform should be a two-way street.
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 may be in serious 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 operation 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. High fees not tied to the success of the offerings should raise a red flag, as should a no fee model where the platform has no real obligation to investors and may not be required to provide ongoing deal reporting.
Sponsor – 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.
Deal Diligence – due diligence and transparency are paramount. A platform should be forthcoming with the details around how deals are originated and pre-vetted. Is the platform providing fulsome info about the deal? If there are gaps, are they being responsive. Again, communication is key – a platform should be willing and able to lay bare all key attributes of the deals they present.
Risk vs reward of deal -This balance depends on a variety of factors that vary by deal – location, type of project, hold period, leverage, assumptions made in underwriting, and a variety of other factors that deserve their own article. As you look at individual deals and platforms, consider whether you are being given sufficient information to evaluate the relative risk and potential returns of deals, and align them to your portfolio strategy. 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.