Written by Ben Miller, CEO & Co-Founder, Fundrise.
For years, investment in real estate has been limited to institutional investors or investors who have the capital, energy, and time to acquire and manage property themselves. The advent of online real estate marketplaces, which give investors online the opportunity to invest passively in real estate, have the potential to change this. In the four years since we started Fundrise, we’ve received hundreds of questions from investors on the real estate crowdfunding industry, how it works, and what members need to know before they invest. Here are eight areas you should investigate before you invest.
1. Vetting standards
Not all real estate crowdfunding sites vet investments. Some platforms have a more open model where almost anyone can post an investment opportunity, leaving the onus for diligence on the user. Other platforms, such as Fundrise, are more restrictive, with similar underwriting standards as an institutional investment fund. Unfortunately, there’s no easy way to easily tell the extent of the underwriting and screening that’s taking place. But a good place to start is looking at the platform’s vetting standards. How extensive is the actual due diligence? How much information are you provided on the process?
2. Crowdfunding platform track record
How many deals has the company invested in? What is their performance on those investments? How many investments have returned principal?
3. Fee structure
How does the platform generate a profit? What sort of fees would you be paying? The higher your fees, the lower your returns.
4. Research the market
If you are looking at a specific deal, dig into the market. Call friends or family in the area and ask about the neighborhood and pricing. Use Google Maps Street View to tour the community. Look at the neighborhood’s ratings on Walk Score. Compare the property to others nearby using online listing services like Redfin, Trulia, or Zillow.
5. Evaluate risk/return profiles
Do the returns adequately compensate for the risk being taken? Remember, high returns typically mean high risk.
6. Understand the regulations for real estate crowdfunding
Know whether or not you are an accredited investor, and follow the laws accordingly.
7. Read the fine print
Every real estate crowdfunding project is unique. It’s important to understand what will happen in the event that something goes wrong. If possible, have a lawyer familiar with real estate review the fine print.
8. And, always take a step back
Does it sound too good to be true? A 25% return in 9 months is great, but how realistic is it? Real estate investing is about generating long-term stable returns.
It’s been exciting to watch online real estate investing grow so quickly over the past couple of years. We look forward to its continued expansion as marketplace lending shifts from an alternative strategy to one used by all individual investors. Learn more about real estate crowdfunding with Fundrise.
Disclaimer: This information is provided for informational purposes only, and should not be viewed or construed as investment advice.