Investing in a real estate deal can be highly rewarding but at the same time, highly risky. When you invest in a crowdfunding deal, you are buying into a property and becoming a shareholder. So here’s a rundown of the key points to consider when before investing:
Real estate investments are usually less volatile than other asset classes. It is very important to dive into the risk of the project. Ground-up development of a new project is riskier than a renovation project but most crowdfunding deals are new developments. Here the credibility of the sponsor is very crucial. You would want to invest in someone who has experience. Also, it’s good to know how much equity is provided by the sponsor.
The Investment Type
There are mainly two types of investment deals: Equity and Debt. When you invest in an equity-based project, you receive returns based on property rental income or earn a share of the property’s appraised value in case it is sold. Debt-based funding has been more popular as investors receive a fixed interest rate appropriate to the amount that you have invested.
The sponsor is the individual or the company that identifies the investment opportunity, manages the property and responsible for the returns. Deal sponsors usually have contributed to the project fund themselves and bring their expertise in managing an asset of this class. Although most crowdfunding platforms vet the sponsor and conduct a background check, we recommend that you one by yourself.
The Target Return
Crowdfunding deals generally state an internal rate of return (IRR) for their investors. The return metric combines expected rental income from the asset and the expected profits for the eventual sale of the property.
The Holding Period
With crowdfunding deals, there is a holding period for the investment. Typically real estate investments have an exit strategy – a profitable sale of the asset after a certain period of time. The holding period is important to include in your analysis as real estate investments are highly illiquid and you should assume for a sale after the holding period.
The Fee Structure
There are mainly two ways a sponsor gets paid. Firstly, there is an acquisition fee once an asset is purchased. Acquisition fees range from 1-2% is standard. The sponsor also gets a certain percentage of the deal’s profit. This typically only happens after investors get a certain amount of profit first.
The Legal Stuff
Before investing in a crowdfunded deal, understand how the deal is structured. In most cases. your investment goes into a separate legal entity that acquires the property. All the terms should be spelt out on paper before the investment is made.
Real Estate Crowdfunding can be a great way to boost income. However, make sure to do research first.