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Real estate crowdfunding has become an exciting and relatively new way for investors to capitalize on large-scale real estate projects. Similar to publicly-traded REITs, platforms such as Fundrise and RealtyMogul allow participants the chance to earn income and appreciation on investment properties they could never afford on their own such as apartment complexes and warehouses.
It also enables them to be passive investors with no active duties or responsibilities on these projects other than simply providing financial support.
However, unlike stocks or REITs (real estate investment trusts), the products offered by real estate crowdfunding platforms are sold privately and not in the public market. On top of this, some platforms require you to become a member before they’ll even disclose which products or projects they have to offer. With all of this ambiguity, how are potential investors supposed to differentiate these companies and know which one to pick?
The best way for an investor to evaluate online real estate investing platforms is to systematically compare them by priority qualities. These might be traits such as who they serve, the investments offered, the fees involved, and how much they can reasonably expect to earn.
In this post, we’ll explore nine important questions investors can ask when analyzing which real estate crowdfunding platform they’d like to work with. We’ll also look at how these qualities can impact an investor's decision and ultimately shape the way they approach investing in the real estate market.
How to Evaluate Online Real Estate Investing Platforms
When visiting the website of a real estate crowdfunding platform for the first time, there’s a lot to take in. Unlike most brokerages where information about investments has become more or less standardized, the real estate industry will exercise some liberties in this area. Some data about their investment products may be easy to find whereas others may not be available unless you’re accepted by the platform as a member.
Additionally, some of these real estate crowdfunding platforms have been around for over a decade now and worked hard to earn a positive reputation. However, as this industry continues to flourish, more competitors will also enter the arena. Without a proven track record, it will be difficult to know if these newcomers are as qualified as the incumbents.
To help you better evaluate these online real estate investing platforms, we’ve laid out nine important questions an investor should ask themselves while considering a potential partner.
1. What Type of Investor Do They Service?
The first thing a potential investor needs to find out about a real estate crowdfunding platform is whether or not they need to be considered an accredited investor. This is an extremely important question because if the platform only works with accredited investors and you don’t qualify, then you won’t be able to participate.
Being “accredited” is something that's defined in Rule 501 of Regulation D by the U.S. Securities and Exchange Commission (SEC). To summarize, an accredited investor is someone who either:
- Earns a minimum of $200,000 as a single-filer ($300,000 for joint filers) for two or more years, and they reasonably expect to earn the same amount in the current year.
- Has a net worth greater than $1 million not including the value of their primary residence.
The logic behind this requirement is that people who have obtained this high level of financial status will most likely already have experience or at least an understanding of how real estate investing works and the potential risks involved. Depending on the types of investment products or opportunities, the platform may be required by the SEC or prefer to work exclusively with only accredited investors.
2. What Kinds Of Investments Are Offered?
After filtering out which platforms work with, either accredited or non-accredited investors, the next thing to look at is the types of investment products offered. Unlike a brokerage that may only offer publicly-traded REITs and ETFs (exchange-traded funds), real estate crowdfunding platforms will have two main types of funds:
Private REITs – These are REITs that can only be bought and sold on the platform exclusively. Usually, non-accredited investors will be placed into REITs. For example, Fundrise puts all new investors with less than $5,000 of capital into their Flagship Real Estate Fund, an eREIT that contributes to dozens of various projects across the platform.
As investors have more money to invest, they may get the opportunity to be placed into more exclusive eREITs. These are more niche types of funds that will specialize in certain types of real estate by income potential, growth opportunity, and geography. For instance, Fundrise has eREITs that are specific to properties on the East Coast, West Coast, and Heartland.
Private Investments – These are specific investment opportunities where participants can contribute directly to specific projects. This would be an arrangement that is more like working with a private equity company. Given the higher stakes, investors will have the chance to make substantially higher returns, but it can also require taking on a lot more risk.
For instance, RealtyMogul offers investors over a dozen different projects that they can contribute to directly if they’re accredited. Participating in one of these projects effectively makes the investor a partner of the business venture.
3. What Is The Minimum Investment Amount Required?
The amount of money an investor has to contribute can also make or break which real estate crowdfunding platforms they might use. Some ask for just a few dollars whereas others have a minimum investment requirement of $25,000 or higher.
The platform with the lowest initial required investment is Fundrise. They will let new members get started with as little as $10. The company with the next lowest minimum investment ($2,500) is YieldStreet.
Note that new investors with less than $5,000 will often be put into the platform’s general REIT. Fundrise has their Flagship Real Estate Fund and YieldStreet has their YieldStreet Prism Fund. These types of REITs typically invest in dozens of projects across the platform.
For more exclusive investment products, participants will need to invest more capital ranging from $5,000 to $10,000. For example, here are the member tiers for Fundrise comparing account status by minimum investment.
4. What Is The Return On Investment?
No matter how many investment products a platform has, it will be important to know what they can expect for their contributions. Since we can’t see into the future, the best data available is to look back at the historical performance of these products and or to rely on the fund’s estimated predictions.
For private REITs, this won’t be much different than how investors compare stocks, mutual funds, ETFs, or publicly-traded REITs. Most funds will provide investors with two key figures:
- Distributions – These are the payments the REIT will make to shareholders. They may also generically be referred to as dividends and will be expressed as an annual yield. For instance, the RealtyMogul REIT shown below has an annual distribution yield of 7.4%.
- Total Returns – This is the total return the investor will make when considering both distributions and appreciation of the share value. It will be expressed as an annualized percentage and may also be called the change in NAV (net asset value). For instance, the RealtyMogul REIT shown below has a total return of 14.9% when combining both distributions and share price appreciation.
For more exclusive partnerships, projects will often have an IRR (Internal Rate of Return). This is the annualized rate of earnings on an investment expressed as a percentage. Sometimes this value will be expressed as a “target” meaning that it’s what the project hopes to earn over the next 3 to 5 years.
For example, Yahoo Finance featured a project on CrowdStreet to turn a vacant office building into a Class A multifamily community in downtown Washington D.C. The project boasts a highly attractive IRR of 22.6%.
5. How Diverse Are The Investments?
Amongst the real estate crowdfunding platforms, the REITs and individual investment opportunities may include any of the following:
- Single-unit rental homes
- Apartment complexes
- Vacation properties
- Warehouses and other commercial real estate
Depending on your investment strategy and goals, it will be important to find those funds and opportunities that have the types of properties you believe are going to provide the greatest return on investment.
For instance, taking our earlier example of Fundrise funds catering to the east coast, west coast, and heartland, an investor might wish to invest in one of these funds and be diverse in a particular region. Or they could invest in one of Fundrise’s Growth funds which will contain projects from all three regions but have a business focus on overall growth.
6. What Are The Fees Associated With Each Account?
The service provided by these real estate crowdfunding platforms won’t be free, and participants need to be aware of what fees will be involved.
Generally speaking, the lower the fees, the greater the overall net return. However, this should be taken into consideration with the potential returns and opportunities that the platform can offer.
Fundrise has a very straightforward fee structure charging a combined 1.0 percent no matter which account tier the investor qualifies for. Some of the other platforms have chosen to use a variable fee structure where costs range anywhere from 0.5 to 2.5 percent depending on how you’re invested.
7. How Transparent Is The Platform?
Unlike publicly-traded REITs where an investor is never really 100 percent sure what investment properties are held, one of the big advantages of real estate crowdfunding is that information about the individual projects is provided. Most of the more seasoned platforms like Fundrise will do a very good job of providing investors with such critical details as:
- Photos and physical location of the property
- A summary of the investment property
- Business goals of the sponsorship
- Financial data
- Progress reports
When comparing the platforms against one another, it will be important to make sure that you find one that has a level of transparency that makes you comfortable.
8. What Are The Risks Involved With This Platform?
Even though real estate crowdfunding is a relatively new way to invest, some platforms will naturally be more seasoned and have better reviews than others. It will be a good exercise for investors to do their due diligence online by checking reviews and making sure the company is legit before committing any capital.
Additionally, investors will want to be aware of the terms of other potential risks such as early redemption risks. For example, Fundrise charges a straight 1.0 percent fee for the redemption of any shares held for less than 5 years. After this 5-year period, shares are available for redemption without penalty.
Additionally, some platforms may reserve the right to suspend the redemption of shares during periods of market decline. This is so they can help insulate the capital they’ve raised and protect the sponsors as well as the other investors. Fundrise explicitly states this on their website.
9. How Will The Platform Help Me With Taxes?
Although taxes are usually the last thing on an investor’s mind, they will be extremely important once the year completes and it's time to file your federal return.
Generally speaking, non-accredited investors who have contributed to REITs can expect to receive 1099 packages from the real estate crowdfunding platforms. Similar to a brokerage, these documents will contain capital gains, losses, dividends, and interest income.
For more exclusive investments such as direct contributions with sponsorships, these investors will need Schedule K-1s. Since investors are basically considered to be “partners” with the sponsorship, they will have to bear a portion of the tax activity for the project. The sponsorship will prepare this Schedule K-1 document and tally the gains, losses, and other income generated from the partnership.
Some platforms such as RealtyMogul go the mile for their members by collecting these K-1s, reviewing them for errors, and then consolidating them for the investors. This is a big relief because it makes filing taxes much easier. It will be helpful to check the platform, see how they handle these tax documents, and then see if they provide you with any advantage.
Comparing Real Estate Crowdfunding Platforms
Real estate crowdfunding has emerged as a relatively new way for investors to capitalize on large-scale real estate projects that they would never have access to otherwise. However, with so many new companies getting into this space, investors need to be careful about who they choose to work with. The best way to do this is to systematically compare each platform for the qualities that matter the most to you.
For starters, some platforms will only work with accredited investors. If you don't meet the qualifications to be considered accredited, then you'll want to look for platforms that also accept non-accredited investors.
The type of investor you are will determine which products you can invest in such as private REITs and more exclusive deals like direct partnerships. There will also be minimum investment requirements for each type that have to be met.
For each product or opportunity, investors will want to look at the potential returns they can expect to earn. This may come from the distributions they'll receive or the total return from both distributions and share value appreciation.
Some platforms will have more diversity than others, and it will be a good idea for investors to create a portfolio with a range of different property types. They'll also want to understand the fees associated with each type of investment and the platform itself.
Finally, investors should compare the rules that each platform has for early redemption penalties and potential freezes during market downturns. They’ll also want to check into how the platform will assist them in preparing the tax documents they'll need for their federal return.
While not every crowdfunding platform will excel in each of these topics, what's important is that you find one with the points that are a priority to you. After all, it’s your money and you need to feel comfortable with whoever you choose to help you grow it over the long term.