Today we're talking about real estate crowdfunding, this is really for beginners so I hope you liked today's article. Let's talk a bit about the way that real estate is traditionally funded or financed. So traditionally the way that it worked archaically before technology came along you would have a real estate opportunity or a real estate deal. So that could be something that's commercial that could be something less residential for the sake of this.
Let's just say it's a multi-family deal or something really-really big or you would have multiple investors with the old way of doing things. You would have a handful of investors then maybe one, two, maybe five putting their money into this real estate deal. So they'd be putting a lot of their money into this real estate deal so you sort of think of it as a seesaw.
You would have a small number of people putting a lot of money in order to finance this deal. Now technology comes around and like it does with everything it's changed the way that real estate investing worked. So now it's not just happening with a few people it's happening with a lot of people. So taking that same example you have a multi-family you have commercial real estate you have a deal and in New York City or another major metropolitan area.
Rather than having three four or five people put up the money instead you're having an entire crowd of people who are all basically backing this real estate deal. This could be you know hundreds of people putting it anywhere of $500 you know from five hundred to ten thousand dollars in order to acquire or to improve and to develop this actual property. So you're having a lot of people put in a little bit of money in order to finance this deal and that's sort of the basis of real estate crowdfunding. Nowadays you can literally do this all from the internet.
You can join a bunch of other investors out there put your money into this deal get it funded. And start reaping those rewards or having regular monthly payments and appreciation in the actual real estate so this is how real estate crowdfunding works. it's all done via the internet it's all done via online portals. I think that's a great way to do it if you're a beginning investor.
If you have a little more capital, a little more patience, a little more risk tolerance, there's certainly the private markets. which really has opened up real estate investing opportunities for everyday investors. That means, I'm talking about places like Starbucks, or nice, high-end restaurant concepts downtown, design shops downtown. There's a lot of potential there. A lot of big companies are looking, actually, for spaces just like that as their brick and mortar solution to customers. But then also, what you said, there's going to be a whole redistribution of a lot of property that's out there. I read the other day that one of Simon Property Group's old malls is being converted into an e-sports arena.
That's anecdotal, but that is happening. A lot of these former retail spaces are being turned into either game places, service places. They're just being re-engineered to serve a different purpose nowadays. That's going to happen. So, retail square footage in good locations, it's going to do just fine.
if you are more of a long-term investor and you're looking to diversify outside of the stock market, personally I have found it to be a very interesting investment and I have been very happy so far. Now, as far as the portfolios go here guys you have basically four different options. Number one, you have the starter portfolio with a $500 minimum or you have the advanced portfolios that have a $1,000 minimum. And then you have a growth-oriented portfolio, an income-oriented portfolio, and then the balanced one which is right in the middle.
Investing with Fundrise Platform
That is the one I am invested in. And in every portfolio you have these different projects, and Fundrise will be sending you updates via email on these projects when ones are completed or whatever happens, or if there's any sales involved. And you can click on every single project and learn about what is going on, what is the money being used for as well as the risk rating, how much money is invested, is this debt or equity, and then your projected annual return. And you can get a lot of information on each one of these projects. It all depends on how deep you want to go with this investment.
If you want to be totally passive you can just set it and forget it and give Fundrise your money for them to invest on your behalf, or you can scour through each one of these projects just to understand what your money is invested in. Now, that being said the only option through Fundrise is to invest in portfolios, meaning you can't pick and choose individual real estate projects to invest in.
One of the main reasons for that is because if they were allowing people to pick and choose individual projects that would be considered a private placement and you would have to be an accredited investor. Because of the portfolio-based investing you do not need to be an accredited investor to invest with Fundrise.
Now, the last thing I want to talk about here is the fees associated with Fundrise. They have a very transparent fee structure which is all in 1% per year based on the value of your account, or a 1% annual asset management fee. A lot of these different sites out there for crowdfunded real estate have different structures, and a lot of them are not very transparent about the fees they are charging.
So, I really like Fundrise because they tell you flat out what your fees are, and they're also not burying it in the fifth page of some document. Right on the homepage of your portfolio you can see your returns to date, and down here it shows you what you've earned from dividends, what you've earned from asset appreciation, and exactly how much money you paid in advisory fees. So, they're very transparent about that fee structure.
this gets brought up a lot fundrise real estate investing with some pretty substantial returns so what do I think about it is it legit is it a good way to invest in real estate or is it just an overly simplified website full of buzzwords to get you hyped on giving them your money well let's find out.
Fundrise is a real estate investing service that allows you to access private market real estate deals that they say should deliver superior risk-adjusted returns over time versus a portfolio of publicly traded stocks they even suggest that you could be getting a 12 point 3 percent annualized return. In real estate we produce value through intelligent zoning development and leasing building new urban housing renovating rundown apartments and renting vacant buildings again I don't disagree with that one bit.
Do Your Own Research
investing in real estate crowdfunding is easy enough to do but do you know how to do it right. By the end of this article you'll have the five criteria I use to analyze real estate investments as a commercial property analyst we're talking property crowdfunding.
Real estate crowdfunding has the potential to be among your best investments. You can't take someone else's recommendation as your sole reason to invest just flipping the channel to CNBC and investing in the first 5 stocks you hear about. It's gonna have half of your money going to fees and the other half lost to bad investments. It's the same way with real estate crowdfunding you have to know what to look for in these deals and how to find the best opportunities.
Smart Criteria To Pick Crowdfunded Properties
just as risky as traditional real estate if you don't use some of these smart criteria to pick those good investments. That's why I wanted to share my five criteria my five-point checklist for what I look for what I'm looking to invest my money in real estate crowdfunding. Some of these are from the same criteria I used to analyze traditional commercial properties.
Assess the platform and the underwriters
First here and this is specific to real estate crowdfunding is that you need to assess the platform and the underwriters. There's hundreds of property crowdfunding websites but only a few have the staff with the necessary experience. That's going to vet these deals properly this is important because developers submit their deals to the platforms and it's the underwriters and analysts on that platform that have that first level of due diligence.
to protect investors the platform is going to look into the developers history into the property and the financial documents of the projects. To make sure it's a legitimate deal on good platforms the number of submitted deals that makes it in front of investors is usually less than one in twenty. That's just five percent of the deals that get approved that helps protect investors from those bad deals the bad investments and the outright scams this is something you'll only have to do once looking at the experience of those.
Running the platform but it's something you can't neglect look at how long the founders have been in real estate. Especially if they were active in investment management before crowdfunding it also helps if the company has outside advisors that can help guide the platform with their own experience.
Next is developer history now that's the person or company that's running the individual property project. I'm not saying that someone with their first project on a crowdfunding site can't be successful.
But I like to see developers with at least a few years and a few deals under their belt now. Some of this is going to be done for you by the platform when it runs that due diligence. I rarely see projects on legit platforms where the developer doesn't have at least a few years experience.
But it does happen besides just experience and real estate watch for developers that have specific experience in the property type or the region relevant to the project after the developers history.
ownership changed hands
I like to look at the property itself how many times has the ownership changed hands in the last decade. Who are the tenants and what's the turnover been you also want to look at the surrounding market and things like population growth, economic growth, or rents for comparable properties.
Now this is one of the more difficult criteria because you'll have to do your own homework. Most of these deals are going to spell out all of this but you really need to verify it on your own. The county assessors website is going to have a lot of that information and you can search commercial real estate sites like loop Netcom for sales history.
Now our fourth real estate investing criteria is that you have to look at the financial projections in. This doesn't mean you have to become a full-time analyst or a numbers nerd like myself you just need to do a sanity check on the numbers provided. This means checking the assumptions like rent growth and cash flow projections against comparable properties in the area.
There's a very important concept in investing in fact it's one of the key parts of the curriculum and the Chartered Financial Analysts designation and it's the concept of conservatism. Conservatism just means that estimates used on an investment should be reasonable and not optimistic.
Check on the exit valuation and cap rate
For those criteria I used to analyze real estate crowdfunding deals is a check on the exit valuation and cap rate for the property. Now this is similar to that last criteria looking at the conservatism of the estimates but since the sales price estimate is so important to your returns it really deserves its own check.
Now there are two ways to double-check the developers estimate on what they think the property will go for in a sell. The cap rate and those comparable properties that cap rate is an important number in commercial real estate. It's the net operating income divided by the sales price.
Now net operating income or NOI is just the cash flow from the property so the rents minus expenses and interest on the debt. So if you take that NOI over someone would pay for the property you get an annual return.
Now cap rates are going to differ by property type and by region generally for commercial property. You can expect to cap rate between six and twelve percent. But you need to check this the developer is going to estimate how much they can get for the property in three to five years by estimating that cap rate and the net operating income.