At the end of 2021, the global real estate crowdfunding market was valued at nearly $11 billion according to Polaris Market Research. And Polaris is expecting extreme growth in this investment strategy, projecting the market value to reach over $250 billion by the end of the decade. Yes, you read that right; and no it’s not a typo. From 2022 through 2030, Polaris is estimating a CAGR (compound annual growth rate) of 45.6 percent!
Real estate investors are naturally curious to learn more about this growing opportunity with immense potential. Whether you’re in the starting phase, wondering what is real estate crowdfunding, or you’ve already started testing the waters with crowdfunding platforms, the real estate experts here at Gatsby Investment have several tips to help you make the most of your crowdfunding investments.
We’ll show you what to look for in real estate crowdfunding companies and what to watch out for. We’ll also give you an industry insider’s look at a similar concept called real estate syndication. Like crowdfunding, syndication pools funds from multiple investors to finance a real estate project. But unlike crowdfunding, real estate syndication offers a stable legal structure in which investors become partners in the ownership entity, which is managed by a syndicate sponsor.
With real estate crowdfunding platforms and real estate syndicates sharing similar investment models, the information in this article can apply to both. So whether you’re exploring crowdfunding or syndication, here are the factors to consider before investing.
What to Look For
Here’s what you should look for when considering a crowdfunding platform or real estate syndication company.
1. A trustworthy team
Real people are behind each crowdfunding platform or syndication company; when deciding to invest, you want to have confidence in the people managing your investments. And there are a few indicators of a trustworthy team.
First, do the founders and/or managers have an online presence? Bio information on their website and social media sites is a good sign because these professionals are willing to associate their names with the platform and stake their reputations on them. You also want to see that much of the work is handled by the in-house team and their regular partners, compared to how much work is farmed out to the lowest bidder. Trustworthy teams have employees to manage investments and strong partnerships with elite companies to handle large-scale projects like architectural design and building.
2. A proven track record
How many years has the fund or syndication been in business? The longer, the better. How many real estate deals have been completed and paid out? This will tell you if the group has been active over their time in business. Furthermore, how well capitalized is the platform? A well-funded platform offers social proof that other investors have been confident enough to invest.
While past financial returns aren’t necessarily indicative of future performance, projects that perform well can indicate competent management, which can indicate future success. Have investors seen competitive returns given recent real estate market conditions? That’s a good sign. You can also look at the number of deals that underperformed their projections. The fewer underperformers you have, the better.
Is the performance information readily available? Trustworthy companies publish their figures. Even for underperforming projects, the information will be available, along with an explanation for the deviation from the expectation.
You should also confirm that the company clearly differentiates between ROI and annualized returns. A given ROI means very little without the context of the timeframe it took to achieve the ROI.
4. Solid communication
How will you be notified of developments or changes to your investment(s)? Prompt emails are a good start. And some platforms even offer online monitoring of your investment so you can see the performance at any given time.
What if you have questions or concerns during your investment period? Can you contact someone directly? Having someone from the platform or company available to speak with you is a good sign.
5. A clear fee structure
Fees are a normal cost of investing with a crowdfunding platform or syndicate. These fees cover the expenses incurred by the manager or sponsor and, in many cases, are well worth it for the time and money investors save managing the asset themselves. Investors are also generally happy to pay for the expertise that reputable managers and sponsors bring to the deal, which improves the potential profitability.
The important thing is that the platform or syndication company clearly outlines the fees and avoids potential “hidden” fees.
6. Strong performance of rental properties held
If the platform or firm you’re considering invests in long-term rental properties, how are those properties performing? Are the levels of appreciation and depreciation in line with local area comps? Does the rental income constitute a solid ROI?
7. Adequate legal regulation and investor protection
How is your chosen platform legally regulated? Ideally, you’d want to choose a company registered with the SEC (Securities and Exchange Commission). For your own protection, you also want to choose a platform/company that offers a solid ownership structure, like an LLC or Trust. And you want to make sure you get proof of your ownership rights.
What to Watch Out for
On the flip side, there are several things to watch out for as you complete your due diligence before investing in real estate investment platforms. These are all potential red flags that require further review:
- Very little information about the people behind the project. How can you trust them if you can’t find any information about them?
- No track record of success. One of the biggest potential downsides listed on our real estate crowdfunding pros and cons list is that crowdfunding, in its current iteration, hasn’t been around long enough to have decades of performance data like, for example, the stock market. Since public real estate crowdfunding only became available with the JOBS Act of 2012, don’t be surprised if you only see 5-10 years of performance data. But less than that could indicate additional risk due to limited experience.
- Lack of transparency. When information isn’t readily available, it could be a sign that the platform or company has something to hide.
- Poor communication. If the company won’t communicate with you clearly and promptly when trying to earn your investment, how likely are they to communicate once you’re invested?
- Hidden fees. If the fee structure is only available in the fine print, the company might be trying to sneak them by you.
- Poor rental performance. If appreciation or rental rates of the projects aren’t keeping pace with the local real estate market, the problem could be with management.
- Lack of financial oversight. Oversight is critical for financial accountability. If the fund isn’t registered with the SEC, you may want to go elsewhere.
- Flimsy legal ownership structure. How confident can you be in an investment in which you can’t prove that you’re a legal owner?
Some considerations are more about preferences than being an indicator of a “good” real estate crowdfunding platform vs. a “bad” platform. Here are five considerations that fall into this category.
- Investing in debt vs investing in equity. Investing in debt without any ownership claim to the property is a perfectly legitimate investment strategy. But many investors prefer a platform that allows them to invest in equity, with ownership rights to the underlying real estate.
- Deal-by-deal vs fund. Fund investing comes with automatic diversification as your investment is spread across a portfolio of properties. But some investors prefer the control of choosing each individual property in which to invest.
- Investment minimums. Some real estate investment platforms come with a minimum investment of as little as $10, others require $50,000 or more.
- Time frames. How long are you willing and able to keep your funds in the investment? Some projects take only a few months (like single-family house flips, for example) while others can take years (particularly if you invest in long-term rental properties).
- Niche. Some investors like to invest in a specific niche. Maybe you prefer a certain type of real estate (like multi-family developments), or maybe you prefer a specific geographic market (like Los Angeles). Finding an investment platform to match your preferences is important.
- Investor type. Some platforms are open to all investors, and others are reserved for accredited investors.
- Ease of Use. Some real estate investment platforms are easier to use than others.
How Gatsby Investment Stacks Up
Gatsby Investment is a real estate syndication firm based in Los Angeles. Our innovative online platform is the most convenient way to grow your net worth through real estate. And we are proud to be among the most reliable real estate investment platforms in the market.
Here’s how Gatsby stacks up, based on the key factors we’ve discussed:
- Trustworthiness. Our executive team, led by Dan Gatsby, is committed to our investors. We have long-standing relationships with award-winning architects, respected builders, elite designers, and experienced property managers to ensure top-quality offerings.
- Track record. In 2021, Gatsby provided average annualized returns of 26.5%. Over 4,200 investors have trusted Gatsby with over $60 million.
- Transparency. We publish our financials on each investment so you can see exactly how each asset performed.
- Communication. Investors can check the status of their investment(s) 24/7 through our online platform. And if you ever have questions, we make it easy to contact us via email, phone, or by meeting at our Beverly Hills headquarters.
- Clear fee structure. Anyone with a free Gatsby account can log in to see our clear fee structure for each investment offering (fees vary by project because some projects require more active management than others).
- Rental properties. If you’re interested in investing in rental property, Gatsby now offers long-term opportunities for ongoing rentals.
- Legal regulation. We are proudly registered with the SEC (CIK#0001833897).
- Investor ownership protection. Investors become members of the LLC that owns the underlying real estate. Members can easily download their certificates to confirm their ownership stake in each investment.
- Equity investing. Gatsby offers true ownership of the underlying real estate (as opposed to debt investing, in which investors don’t own any equity in the property).
- Deal-by-deal control. With Gatsby, you get to choose which individual property (or properties) you want to invest in. You can even see the physical address of each property before investing.
- Favorable investment minimums. Investment minimums range from around $10,000 to around $25,000, allowing you to invest in real estate without the traditional high upfront cost of a down payment. With these low minimums, many investors choose to spread their investment capital among multiple properties to build a real estate portfolio instantly.
- Flexible time frames. Our investment projects range from about six months for a house flip to five years for an ongoing rental.
- A desirable niche. We specialize in the in-demand Los Angeles residential market.
- Investor status. We offer investment deals to accredited investors all over the world.
- Easy-to-use platform. Investing in real estate is fun and easy with our user-friendly online platform.
If you’re looking to invest in real estate, consider Gatsby Investment. Get started today by signing up with Gatsby Investment.