By Dr. Peter Kim of Passive Income MD, WCI Network Partner
The first real estate investment I ever made was done through a real estate crowdfunding platform back in 2014. I invested $5,000 in a debt deal that was lending out money with an 11% interest rate, but because of additional fees to investors, I made a total of $687.07 on my investment, which amounted to a 14.3% annualized return on investment.
I was hooked.
I found myself actively trying to find other opportunities in the crowdfunding world, and I discovered that there were a ton of crowdfunding platforms—each with different types of deals.
The deal I had selected for my first investment was a debt deal. In my search, however, I also found syndications, debt, and equity funds. It took me a while to figure out what they were and what platforms presented which type of deal.
Since that time, I’ve learned that crowdfunding is really all about access. Different platforms offer different types of deals. You just have to know what kind of deal you’re looking for beforehand.
That sounds easy enough, but selecting the right deal can be a little intimidating. It helps to know when you go to which store and what to expect.
Let’s start with the opportunities you might see.
With debt deals, you act as the bank. You agree to lend the borrower (often a fix-and-flipper) money at a set rate of interest. You will be paid back at a predetermined rate—usually on a monthly basis—and paid interest owed.
At the very end of the term, you’re paid back the principal (the original amount of money) you invested. These types of deals are easy to understand, because you’ve likely dealt with something very similar when buying a car or house.
Income from a debt deal is taxed as ordinary income. You don’t participate in any upside, but you are paid back first before any other investors are paid back.
More information here:
An equity means that you participate in the upside, that you’re essentially a part owner in the property. There are a few types of equity deals.
With a single syndication deal, you’re investing in a single property.
There are a couple of different ways you might get paid depending on the type of deal.
If it's a classic apartment deal, the sponsor (the ones running the deal) uses investor capital to purchase an existing apartment building, renovate it, and improve current rental income. The sponsors of the deal agree to pay you a certain preferred return before they participate in any profit. After hitting that return, then they'll likely return your capital and start to split profits.
If it's a syndication deal involving new construction—like the development of an apartment, office, or retail space—the payment structure will likely be completely different. In this case, you often just get your capital back at the end of the deal, plus a portion of the profits.
Though not as common as the previous examples, you might find funds on these platforms. These funds may have been created by outside entities or, in some cases, by the platforms themselves.
The way I think about funds is that if syndications are like owning a single type of stock, funds are more like mutual funds. As an investor, by participating in a real estate fund, you'll own shares of multiple properties.
The benefit here is that you get instant diversification by investing in multiple properties at once.
Since this involves more management and administration, there might be another layer of fees, but again you’re getting access to multiple properties as well as the sponsor's collective knowledge and management skills.
REITs (Real Estate Investment Trusts)
A REIT is a company that makes investments in and owns income-generating real estate properties. As an investor, you buy shares of the REIT. The REIT earns income from the properties and makes distributions to investors.
You'll find these types of deals on many platforms as well, and they're often created by the platforms themselves vs. some outside party.
Just thought I'd make a quick mention about fees since people are always curious about them. Fees are part of the investing world, and crowdfunding platforms are no exception.
These fees vary wildly according to platform and type of deal. When selecting a platform/deal, it should be easy to see what the returns are net of fees.
Ultimately fees are necessary, because they provide incentive for the sponsors to continue to keep active in the deal. No one works for free, and so fees will always be a part of these types of deals. It's just important for you to understand what they are and whether you're happy with the end result net of fees.
More information here:
Should I Invest in a Real Estate Syndication or Fund?
Examples of Platforms and Different Types of Deals
Here are some great examples of platforms, along with what kind of deals you can expect to find there:
Alpha Investing: Single deals, Debt funds, Their own fund
Crowdstreet: Real Estate Funds, Their own fund
EquityMultiple: Single syndication deals
RealtyMogul: Syndications, REITs
How Do You Choose?
You have to decide whether you want to invest in equity or debt and what kind of returns you’re looking for. That takes time to learn the differences between debt and equity deals, to learn the numbers behind deals, and to determine what kind of tax implications each of them has.
It also matters if you’re an accredited investor—if you’re not, you will likely only be able to invest in some of the previously mentioned platforms with REITs.
More information here:
The Case for Private Real Estate
How to Build a Portfolio Using the Different Platforms
All of the platforms go through a rigorous vetting process before allowing deals onto their platform. Even though they might not be running the deal themselves, they understand that if anyone finds a deal on their platform and it doesn’t do well, it’ll look poorly on them.
Every platform will eventually have some poor deals that end up on their sites. That’s inevitable. That’s why it’s on you to do your own due diligence as well, and the key is to diversify.
Personally, I’ve invested across multiple deals in different areas to get wide exposure.
Plus, it allows me to build a real estate crowdfunding ladder where different deals are exiting at different times. This helps ease the issue of liquidity that usually comes with real estate investing.
Ultimately, crowdfunding platforms can be a great way to test the waters. More than that, though, they can help build your portfolio and be great sources of passive income. That is, if you know what you’re getting into.
The best thing you can do is research each platform, and use this post as a place to start.
Whatever you decide, the key is to get right into it. As I found with my first investment, it doesn’t take a huge amount of money to kickstart a long-term strategy.
Although the Financial Freedom Through Real Estate conference has already begun, there's still time to sign up for it virtually. PIMDCON is a one-of-a-kind conference that will challenge, inspire, and give you the blueprint you need to take your next best step to real estate investing!
How do you invest in real estate? What made you decide to invest in a syndication instead of funds or vice versa? How has your experience been with crowdfunding platforms? Comment below!