A Millionaire Real Estate Crowdfunder?

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

There was a really good piece on crowdfunding on CNBC.com recently.

If you’re not yet familiar with the concept, real estate crowdfunding allows the average Joe to access markets previously available only to executives and institutional investors.

Investors can research real estate investment opportunities from home in little time and at minimal cost and connect with developers online — something the developers like because it saves them the time and money previously spent finding and pitching to potential investors.

The piece stated that one of the best parts of real estate crowdfunding is the ability to buy and manage property that's 20 states away from where you live, without ever having to set foot there. That allows investors to make the best investment to suit their needs, regardless of the landscape of their local market or ability to visit properties.

Diversification Is Key

Another is the ability to diversify investments.

The article went on to state that with stocks and bonds, it's fairly simple to achieve diversification, but with real estate it's harder. A traditional real estate investor has access only to local deals and may only have access to a particular type of deal—commercial, residential, single housing or multifamily, etc. So it’s harder for someone to truly diversify what they invest in.

crowdfund Up til now, the only ways to have a truly diversified real estate portfolio was to use real estate investment trusts (REITs) and real estate funds.

But now – with real estate crowdfunding – investors can achieve both geographical and asset type diversification while at the same time allowing an investor to control where their money is being invested specifically.

Try doing that with a REIT or mutual fund.

Critical Steps to Take

The best part of the piece talked about several steps to take beyond traditional real estate due diligence (property assessment, market condition, financial underwriting).

The steps they recommended were:

1.Know your objective: Making money isn't good enough.

Investors should have a clear objective for the transaction. Long-term appreciation, cash-flow yield, real estate financing. There are too many deals, and the more clarity an investor has, the easier it will be to identify the best opportunity.

2. Know where you fit into the deal: Not all investments are created equal.

Developers are still figuring out how to incorporate crowdfunding into their funding mix. Investors should pay attention to what type of shares they are getting and how those shares compare to other sources of funding in the deal. For example:

Is it a debt deal or an equity deal?
What are the rights granted in this investment?
Is it senior or subordinated to any other investor?
Is the real estate proportional to my investment, or do shares of a company own the real estate?

3. Know who is running the deal.

One of the pitfalls of crowdfunding is that you never meet the sponsor or developer face-to-face. Therefore, investors need to make sure they ask all the questions they can about the sponsor and his past experience. Sponsors looking to raise money on crowdfunding are expecting investors to hit them with some tough questions.

givemoney 4. Know the role of the crowdfunding platform.

Part of the success of the investment depends on who controls the money and how they raise it. If a platform participates in the deal or if they only charge a fee, it changes the incentive for the platform and the type of deals you are likely to see.

5. Trust no one.

Just because someone puts a deal on a website does not mean it's legitimate. Investors should require platforms and sponsors to validate claims and experience through third-party verification services that can help investors become more comfortable with deals.

All sound advice. Especially point #5!

I have said before and I’ll say again… I think Crowdfunding will change the way we fund our real estate businesses. But like anything else, it’s going to take some study – and some work.