Brunswick, Georgia-based Dr. Kenyon Meadows remembers the first real estate crowdfunding deal he did. He plunked down $10,000 to be a part of a $1 million deal to buy a single family home in the Los Angeles area. He was very pleased with the steady returns he received and got him started in the world of joining in on big real-estate deals as an investor. ”I remember being fascinated with being able to participate in the same types of transactions as the bigger guys, but with much smaller sums of money” he says.
He’s not alone in believing real estate crowdfunding is a viable and serious investment strategy. According to a recent study by Massolution, a search and advisory firm for crowdfunding industries, this industry is expected to grow to more than $2.5 billion in 2015 alone. Real estate crowdfunding shows no signs of stopping, with 118 platforms and counting this year. 2016 will see more growth, with predictions that it will surpass the venture capital market, with investing topped $48 million back in 2014.
Real estate crowdfunding allows investors to use technology to vet deals more efficiently. In turn, real estate crowdfunding platforms are very transparent with their transactions, and they’re able to share more profits with their investors due to less costs associated with capital and overhead operations.
“Another one of my first investments was a fix and flip project in a revitalizing neighborhood outside of downtown Charlotte,” Dr Meadows says. “I invested another $10,000 at 12% interest as a loan, and received monthly interest-only payments until the project was completed and sold 11 months later, returning my original capital. I liked the information provided on the crowdfunding site including comparable sales, which strongly supported the proposed selling price for the project.”
The JOBS act signed in 2012 helped to move things forward by allowing businesses to solicit investments from everyday citizens. Investors such as Dr. Meadows started getting interested in real estate crowdfunding because of the ability to get in on deals that otherwise required larger sums of money. “I saw Jilliene Helman, CEO of Realty Mogul on TV,” Dr. Meadows says. “I had some traditional private lending for house flipping, and I remember being intrigued about the possibility of being able to participate in similar deals for much less money via real estate crowdfunding.”
Winter Park, Florida based doctor Dr. Alexander Jungreis also saw crowdfunding as a unique opportunity to invest in larger real estate projects. “I first heard about it on Wharton Business Radio, then reached out to William Skelley [CEO of real estate crowdfunding platform iFunding].” he says. “Several weeks later I bought into the company.”
Investor Lawrence Black was first exposed to real estate crowdfunding through Fundrise. “These platforms have taught me an awful lot, and when I first started I didn’t know anything about this investment vehicle,” he says.
To give you an idea of how serious investors are about real estate crowdfunding, Dr. Meadows has put in $250,000 so far into various platforms with an average of 10% ROI, and Dr. Jungreis invested $3 million, with intentions to add more. Lawrence Black put more than $500,000 in Fundrise, and has about $2 million in other platforms, which he is involved with actively.
With real estate crowdfunding finally opening up non-accredited investors (thanks to Title III of the JOBs act that passed in October), more competitors will crop up to compete for investors. So if you’re looking to replicate the success of these investors, it’s easy to get started.
Do Your Homework
First, make sure you know what you are getting into. Black, Jungreis and Meadows all recommend that investors do their due diligence. As more platforms are cropping up, many companies are trying to differentiate themselves to stand out from the crowd. Some examples include companies that only deal with certain geographic regions, types of properties, and even only working with debt deals.
Just because many crowdfunding platforms are transparent about their offerings, doesn’t mean that investors should go blindly into any deal. Make sure to look at the underwriting very carefully and understand things like expected projected ROI, how long your money is tied up for, and projected risk for each property. For Dr. Meadows, he chose to participate in debt deals that were short term because he felt they were more secure, and didn’t tie up his capital for three to five years, which is a typical time frame for equity.
Take it One Step at a Time
If you’re new to the game, start slowly.
“I was very cautious during an initial period where I was only investing a few thousand dollars per month,” Dr. Meadows says. “I do tend to stick with the required investment minimums on any one individual project.”
If you do start slowly, you can do what Dr. Meadows did and invest in required minimums to help offset risk. Dr. Jungreis didn’t, but it was because he had built a relationship with the CEO and invested in the company itself. If you have these sorts of connections, by all means go ahead. But if you don’t, decide how slowly you want to start, particularly if you’ve never invested in real estate before. There are many tools out there to help you, including third party appraisal and inspection reports.
Spread Your Risk
As with all investments, it’s not a good idea to put all your money into one type, especially ones that are potentially high risk. Dr. Jungreis understands that so far real estate crowdfunding is profitable for him, but it isn’t a huge part of his portfolio with only 10% in this type of investment.
For Dr. Meadows, he has about 20% of his portfolio in real estate crowdfunding. “It’s all too new in my opinion, but I do think some small allocation is reasonable,” he says. “Either way, it’s a great way to diversify away from stocks and bonds.”
If you do plan on diversifying, think about investing in more than one crowdfunding platform and even across a number of different projects. When investing in different projects, you can even think about investing in different properties, such as single family homes and retail outlets.
These three investors are just stories among millions that have found success with real estate crowdfunding. Take the advice they’ve given into account, you too may be able to achieve the same level of success they did.