Six Signs You’re Investing in Real Estate with the Wrong Crowd

It’s every parent’s worst nightmare. Your child falls in with the wrong crowd, and all of a sudden her mood darkens, her grades suffer and you worry her physical health may be in jeopardy. The wrong crowd can have that effect.

You run the same risks with crowdfunded real estate investments. Not every real estate crowdfunding platform or crowd of investors has your best interest in mind, or is structured to provide the highest investment returns based on your desired level of risk.

How do you tell the right crowd from the wrong one? Here are six signs you’re investing with the wrong real estate crowd:

1 - Your investment is payment dependent or borrower dependent.

1. In other words, return of your invested capital is entirely dependent on a third party fulfilling a promissory note that may not be secured. This structure can be highly risky depending on the offering, the sponsor and the platform. 
2. If you’re investing with a crowdfunding platform structured as an intermediary, check whether the contracts refer to the loan between the platform and the real estate sponsor versus the investment from you into the offering on the platform. Read all documents carefully and make sure you understand how your investment is secured.

2 - You are paying fees that significantly erode your investment return.

1. Just like with mutual funds that charge loads, some real estate crowdfunding platforms impose an asset management fee. A 1% or 2% management fee can reduce your annual cash return by 15-25%.
2. Do your homework to understand up front what the fees are all in, and how they are likely to impact your potential returns.

3 - The offerings are structured to reward the crowdfunding platform, not the investor.

1. The sponsor of the real estate offering should be incentivized to produce a favorable return for you, the investor, not the middleman. The crowdfunding platform shouldn’t get a promotional fee simply for providing access to the investment because they have little or nothing to do with the outcome of the property. Crowdfunding platforms that get rewarded ahead of individual investors are literally stealing money from your pocket.

4 - The operator of the investment properties has a nonexistent or poor track record.

1. A reputable real estate sponsor is a trusted fiduciary who has experience managing investments through fluctuating market cycles. Past performance is no guarantee of future investment success, but it’s the best indicator available. Always look at the sponsor’s track record to assess their fiduciary capacity before investing in an offering.

5 - You are investing alongside investors with different interests than yours.

1. For example, if you are an accredited investor and another investor — perhaps a non-accredited investor who is less patient -- sues the entity, it could trigger redemptions for the sponsor. That could blow up the deal for everyone (the sponsor and other investors) by forcing repayment of principal before the business plan has been executed. You want to be in a pool with like-minded investors with similar interests and goals. Identify those interests before you invest.

6 - The risk-return profile of the investment offerings doesn’t match your investment strategy or risk tolerance in terms of timing and return of invested capital.

1. If the promise seems too good to be true, it probably is.

Crowdfunding is transforming real estate investment by opening access to a wider audience. But as with other investments, be diligent to understand the terms and to identify investments that are appropriate for your level of risk tolerance.

As “Indiana Jones” was told in the movie, “Choose wisely.” Don’t fall in with the wrong crowd.

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Adam Hooper
Founder and CEO, RealCrowd
www.realcrowd.com