$300 billion. That’s the figure experts project will be the value of the real estate crowdfunding industry by 2025 – an industry that’s only been in its current form for five years.
The JOBS (Jumpstart Our Business Startups) Act, signed into law in 2012 by former President Obama, eased federal regulations and allowed firms to openly market private investments to the public, making it possible for multiple individuals to become investors in professional-grade real estate.
Five years later and the industry is continuing an upward trajectory. Though with so much growth, the real estate crowdfunding space has become crowded and noisy – there are over 100 real estate crowdfunding websites battling to secure investors – all promising high rates of returns from projects across the country.
For new investors looking to take a dip into the real estate crowdfunding pond, the choices can be overwhelming – it’s easy to get lost in clever marketing and powerful imagery.
These four basic tips will help new or experienced investors enter this growing industry and discover which platform and asset class suits them best.
1. Do Your Due Diligence Before Selecting a Real Estate Crowdfunding Platform
With so many real estate crowdfunding firms to choose from, it’s important to ask yourself, “Are all of these good options for me?” The answer is no!
While many real estate crowdfunding sites are legitimate, not all of them employ people with proper real estate know-how. Make sure you choose a platform that is run by real estate experts, not just Silicon Valley engineers who can put together a user-friendly platform and visually compelling website.
You wouldn’t chose a doctor based on their website alone, so why would you choose an investment firm that way?
It’s important to read the fine print. Many crowdfunding sites don’t conduct the proper amount of due diligence before offering a project to investors. Research the company’s process and investigate its deal with the sponsor.
Does the company have a stake in the project? Will they be invested in a project through the exit or will they move on from it once the funds are raised?
These are important questions to address before investing your hard-earned money – you want a firm that will stand with you until you receive your returns.
2. Evaluate Your Own Portfolio Before Investing
It’s important to understand how much money you’re willing to invest. While there are some crowdfunding companies that will turn away people who want to invest all of their money in one project, most will not offer you that extra level of consideration.
In order to keep a diversified portfolio, it’s recommended that 10% to 20% of an investor’s portfolio be invested in professional-grade commercial real estate.
Some crowdfunding sites require a minimum investment or are only open to accredited investors (those who have an annual income of $200,000 per year or have a net worth that exceeds $1 million).
3. Understand the Level of Risk You’re Willing to Take On
The level of risk is often associated with the type of property you invest in. As a rule, investors are encouraged to diversity their portfolio in order to minimize risk and maximize potential return, which can be done by understanding the different asset classes in real estate.
While there is nothing wrong with investing in single-family homes, which some crowdfunding sites offer, this asset class carries the highest amount of risk. Multi-family, Class-B properties, and student housing complexes carry the lowest risk, as these assets still see demand in times of contraction.
Which leads to the next tip…
4. Invest in Income-Producing Properties
Income-producing properties are smart investments when the economy is strong and during times when the economy is struggling. In a recession, the first market to take a hit is luxury real estate.
Always think like an investor, not a consumer. A luxury residential tower might be where you want to live, but it shouldn’t necessarily be where you invest.
In times of contraction, buyers and renters will move to Class-B and C properties, making these types of developments steady income producers, even during difficult economic times.
Similarly, when the job market is tight, many people opt to go back to school, creating a constant need for affordable and modern student housing developments.
Real Estate crowdfunding is only going to continue to grow in popularity, especially as more millennials enter the workforce and contribute to the economy.
Experts predict that if people don’t have a grasp on the industry and its complexities before jumping in, disappointment and poor returns could lie ahead.
Keep these four tips in mind as you move forward as an investor, and they’ll help you grow and diversify your real estate portfolio.
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