7 Things to Consider before Investing in a Real Estate Crowdfunding Project

7 Things to Consider before Investing in a Real Estate Crowdfunding Project


Over the past few years, crowdfunding has grown to become an important part of selling products and creating new businesses. Its impact on the real estate industry has also been profound as investors now have a new means to fund their interests.

Related Articles: 6 biggest challenges of real estate crowdfundingWhat is Real Estate Crowdfunding?

Screen Shot 2015-12-15 at 3.01.32 PMThanks to new SEC regulations, far more people can use crowdfunding to now get involved in real estate investing. When it comes to diversifying portfolios and collecting high returns, crowdfunding is a new, powerful source for real estate investing that has demonstrated considerable potential.

But even with all of the attributes of crowdfunding, there are still some questions that potential investors will need to answer before making the commitment to use this form of investing. This is because you will want to be fully informed of both the pros and cons, depending on your circumstances when making this investment choice.

1) Debt or Equity?

You will need to know which crowdfunding platform will work best for your needs and that means knowing the answers to basic questions before making the commitment.

  • How long is it in the market?
  • How many projects were already finished?
  • How much money was already invested using the platform?
  • What’s the feedback that older investors give about it?
  • Does the platform itself invest in real estate options?

You will want to speak to investors who have used the crowdfunding platform for their needs to see if it worked for them. This is particularly true if the projects that they used the crowdfunding platform were similar to the one that you are currently engaged.

2) In what geographic area has it been used?

Screen Shot 2015-12-15 at 9.30.57 AMThe old real estate phrase, “Location, Location, Location!” applies when it comes to investing in areas that you are comfortable with making. For example, you may feel more comfortable when it comes to investing in areas near where you live thanks to your familiarity with the community and knowledge of the market itself.

However, there are others who prefer to invest in markets where they see considerable potential, even if it is farther away from where they live. While the profit potential may be far greater, there is less concern over having the close, intimate knowledge of the particular project.

In either case, you will want to make your selection carefully and with as much knowledge as possible. If you are still not comfortable, then it would pay to either not participate or only invest an amount that you are comfortable with losing in case the project goes bust.

3) Who is the developer?

Certainly a very important consideration is the developer of the project itself. You’ll want the answer to a few questions first before taking the next step.

  • What is the developer’s track record?
  • How much has the developer or their company invested in the project?
  • Are they financially stable?

A financially stable developer with a good track record who has already made a considerable investment is an important part of any investment that you will make in the same project.

4) Is this a residential or commercial investment?

Screen Shot 2015-12-15 at 9.43.10 AMThere are substantial differences between each type of investment in terms of profitability. You will need to be well versed on each type of investing before making a commitment.

Residential properties with an eye towards cash flow make for an excellent long term investment. For example, earning a percentage of the rents each and every month over the course of 10 to 15 years can add up to a tidy sum that makes your initial investment worthwhile. However, there are complications with running cash flow properties that you will need to consider before making the investment.

Commercial properties arguably offer a greater profit potential considering the investment, but they are also considerably more complicated in terms of taxes, renting the property, and so forth. This means that you will need to investigate the risks and rewards of making such an investment.

5) How much money to invest?

There are some crowdfunding platforms that demand as little as $5,000 for a minimum investment, while others go up to $100,000. If you are not comfortable with the minimum investment required for a project, then this can be an “easy out,” so that you don’t make a decision that is beyond your financial means.

You will want to decide whether you prefer to invest in several projects/platforms that spread out your money, but offer more security if one or two fail. Or you might want to go ahead and put all of your eggs in one basket which maximizes your profit potential. The risk worth taking is the one that you are comfortable with.

6) What is the investment horizon?

Screen Shot 2015-12-15 at 9.38.37 AMMany real estate projects will last for about a year, while others can take more than three years depending on a number of factors. You will certainly want to know the length of time that the project will take as you will most likely not be able to use most of the money that you have invested. This is because real estate projects in general are not typically liquid investments where you can pull out some, most, or all of your money like you can when you invest in the stock market.

The time element is a very important factor when it comes to investing your money in a real estate crowdfunding project as you will see comments from others who may get antsy about making a profit. However, if you have done your homework, investigated all of the reasonable possibilities, and checked out the project and who is behind it, then you can rest assured about the decision that was made.

Real estate crowdfunding projects offer a wonderful opportunity for you to invest in several smaller projects or perhaps a single, larger one that otherwise would not be possible. However, with all the attributes that crowdfunding offers, it still pays to cover the bases and make sure that your investment is as safe as possible before committing the funds.

7) Which is the right crowdfunding platform?

Choosing the right crowdfunding platform could be the biggest factor when determining the success or failure of a project/investment. Some of the most important things to consider are a platform’s diversity, transparency, helpfulness, accuracy, and reliability.

It is important that whichever crowdfunding platform you use is broad enough and diverse enough to offer numerous investment opportunities. You also need to make sure that the company has a good track record with its projects so you can have faith you will earn the returns that have been advertised. In addition to the platform’s track record, you should try to get feedback with those who have already invested with the company so you can assess first-hand experience.

The crowdfunding platform you choose should always be helpful when you ask question, and most importantly, you should trust it. Once your criteria have been met, you can make the decision to invest!

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