Safer Way to Invest in Real Estate

By Matthew Milner, on Wednesday, September 30, 2015

Pop Quiz:  When a company is about to go public, why does it lobby so ferociously to get a top-tier bank like Goldman Sachs or JP Morgan to manage its IPO?

Depending on how much you know about IPOs, the answer might surprise you:

It’s not just that these banks have the firepower to sell the company’s shares to the public (and potentially put a lot of capital in the company’s bank account)…

It’s that they can guarantee the company will get the capital it needs.

You see, by the time a bank like Goldman signs up to manage an IPO, it’s done so much research on the company—and it’s so confident in its prospects—that if it’s unable to sell the company’s shares to the public, it’ll step up and buy the shares itself.

For a company that’s about to go public, that’s a major selling point…

And for folks like us who are thinking about buying the company’s shares, the fact that Goldman is risking its own capital is a huge vote of confidence.

So when we discovered a similar guarantee in the private market, we knew we had to tell you about it.

Crowdfunding for Real Estate

At Crowdability, we usually show you how to invest in private start-ups to earn big capital gains.

But we also like to introduce you to private market opportunities where you can earn current income—for example, in private real estate deals.

You see, on special funding portals that specialize in real estate, folks like you can get access to private residential and commercial investment opportunities.

From a financial standpoint, these private opportunities can be more appealing than REITs, and more attractive than investing in real estate directly:

Minimum investments are relatively low—sometimes as low as $5,000…

And yields can range anywhere from 10% to 15%.

These financial benefits might help explain why private real estate investing has quickly turned into a massive industry:

In 2014, ordinary investors just like you put about $1 billion into these high-yielding investments—and this year, that number is set to reach $2.5 billion.

But here’s the thing:

Not all private real estate is created equal…

And if you don’t know exactly what you’re investing in, you’re putting yourself at financial risk.

Thankfully, there’s an easy way to ensure you’re looking at only the highest-quality deals.

“Pre-Funded” Real Estate Deals

You see, just like some IPOs have the “guarantee” of a bank like Goldman or JP Morgan, certain real estate deals have the guarantee of a funding portal.

The official term for deals of this nature is “pre-funded.”

In a pre-funded deal, a portal puts up 100% of the capital for a project before offering the investment to folks like you.

If the deal doesn’t get sold, the portal will end up owning the real estate itself.

And since it has skin in the game, you’d better believe it’s going to do some serious due diligence before committing.

But not all investment opportunities are pre-funded…

Some are sold on what’s called a “best efforts” basis.

With a best efforts deal, the portal makes money when it helps sell a deal, but it’s not on the hook for any unsold shares. Basically, it just acts as a middleman.

Generally speaking, since it’s not risking any of its own capital with a best efforts deal, the portal won’t be as incentivized to undertake a painstaking vetting process.

I don’t know about you, but all things being equal, I’d prefer to invest in deals that are pre-funded—deals where I know the portal has done its homework.

It’s a safer way to invest.

Pre-Funders

There are dozens of real estate portals—from RealtyMogul and RealCrowd to Prodigy.net.

Many of these portals occasionally offer a pre-funded deal…

But three of them—Patch of Land, Fundrise, and Acquire Real Estate—provide pre-funding for every investment.

Why don’t all the portals do pre-funding?

Because it’s incredibly expensive and time-consuming.

Let’s look at just one example of what’s required…

Before Pre-Funding Happens

As an example of the in-depth research a portal will undertake prior to pre-funding a deal, here’s the official due diligence process for Fundrise:

  • 150 hours of due diligence
  • 100-page underwriting memo
  • 10-person committee review
  • 2 in-person site visits

It even does a “flyover” of each property with a drone, to ensure that it has an understanding of the property’s exterior and surrounding areas.

Now that’s diligence.

Winning Strategy For All

Pre-funding is a winning strategy:

For you, it provides access to safer investments.

And for the portals, it gives them access to the best deals.

So as you’re dipping your toe into real estate crowdfunding, for a safer way to invest, remember to stick with pre-funded opportunities.

Best Regards,
Matthew Milner

Founder
Crowdability.com

Comments

If you enjoyed this article, subscribe to updates:

Sign-up today and you'll receive our daily insights on early-stage investing, as well as our FREE "Equity Crowdfunding Action Kit" – where you'll learn:

  • The Ins & Outs of Equity Crowdfunding
  • A step-by-step path to get started
  • Tips from dozens of Venture Capitalists
subscribe to updates

Thank you for subscribing!

Tags: Real Estate Crowdfunding REITs Fundrise

Share This:
comments powered by Disqus