In mid-2016 legislation was enacted to allow for looser investment regulations pertaining to alternative investments. Specifically, this allows “non-accredited” investors to participate in riskier investments such as angel investing, real estate crowdfunding, and peer-to-peer lending.
While platforms such as WeFunder have made the angel investing aspect of this legislation prominent and LendingTree has popularized peer-to-peer lending, few have acknowledged the potential of the real estate section of this bill.
Previously, real estate investment trusts or REITs offered high-net-worth individuals the ability to pool real estate investments and have an expert manage a larger portfolio of investments. These typically have a focus such as commercial real estate skyscrapers, single-family homes, multi-family housing, etc.
REITs then pass all of the profits from rent each month onto the shareholders, offering consistent income and typically great returns on investment. The problem is you needed to rich in order to access this asset class.
Real estate crowdfunding under the new legislation changed this situation so now anyone with a minimum investment amount (typically about $5,000) can participate in a REIT-like set-up. Forbes cites this industry at a market size of $3.5B and on track to hit over $300B by 2025.
After sitting down with the founders of DiversyFund, one of the leading real estate crowdfunding platforms, these are the top tips for people to get involved in the real estate crowdfunding market and begin earning consistent returns.
1. Choose the right platform.
There are a few platforms for real estate crowdfunding but not all of them are made equal. The key components to look for in any of these platforms are: investment minimums, regions of focus, types of offerings, track record of success, and fees. Depending on your investment preferences and discretionary income some platforms will have higher or lower minimums, will take more or less in fees, and have varied levels of average annual returns.
Overall the most important quality is disclosure. If you are unable to see the past properties, how they were managed, what the results were, and what the current property offerings are then you can never be sure what you are investing in.
2. Understand the investments.
Real estate can be broken down into a variety of categories. Firstly, there are growth and income investments. Growth is likely to see larger increases in value but not necessarily give as great consistent income, whereas income is just the opposite in that the asset will likely hold its value, but give consistent income.
Next, there are large, medium, and low scale investments. Large being those typically more than $5M and are either large multi-family housing buildings or commercial real estate, medium being about $1-5M and are slightly smaller multi-family or commercial buildings, and finally small being less than $1M and can be anything from single-family to small multi-family to small commercial (but usually is single-family).
Finally, there are three grades of properties: economy, midscale, and luxury. Economy are your bare-minimum units, midscale has a few more amenities, and luxury offers many more perks.
Overall, investments can choose any variety of these categories, they might ought to fix-and-flip economy low-scale growth single-family homes in Detroit or fund luxury large-scale income condos in Manhattan. While investment options might say the same projected return, understanding what you are investing in is key to protect yourself.
3. Identify superstar cities.
While many believe real estate never goes down in value, this is not true. Look to Detroit over the past few decades or Las Vegas after this last housing bust for the clearest examples. Certain regions do better than others and the regions that do the best are dubbed “Superstar Cities.”
These areas such as San Francisco, Los Angeles, Seattle, San Diego, and New York have such great amenity sets that the property values consistently appreciate in value since the land is scarce and highly desirable.
Superstar Cities come about from a variety of factors including housing regulation (is it easy to add more units), the climate and general amenity set (do people enjoy living there), and jobs available (are the best employers hiring in that city).
While there is much debate on how to properly identify Superstar Cities on the rise, it is pretty clear which regions are currently booming. If you begin to look at potential investments based on the trends for that individual region, you can increase your likelihood of seeing larger returns on your crowdfunded investments.
While angel investing and peer-to-peer lending may seem prominent in the world currently, they come with much more risk and longer investment timelines. Real estate crowdfunding can offer immediate and consistent returns and with the new regulations the investment minimum and risk is much lower than private real estate investing. Using these tips from DiversyFund you can add real estate crowdfunding to your perso