With so many real estate crowdfunding platforms in the marketplace, the average investor may (understandably) feel overwhelmed with options and confused by the differences from site to site. We are here to help. Brelion has compiled five easy steps so you can clearly navigate these platforms—from conducting initial research on a platform to completing projects with real estate companies—and choose the one that best matches your investment goals.
Step 1: Do A Little Research
Before signing up on a real estate crowdfunding platform, find out all there is to know about it. Start by answering the following questions:
· What is the minimum amount I can invest?
· How long is the investment?
· What are the potential returns on my investments?
· Does this platform do cash-on-cash returns? Do projects incur preferred interest?
· Does the platform do IRR?
· Where are these investments located?
· Does the platform perform diligence on companies?
· What kind of reporting are companies required to do?
Through your initial research, you’ll discover that most platforms resemble one another superficially—they have About Us pages, FAQ and blogs across the board. Read carefully, though, and you’ll discover significant differences between individual platforms in areas such as the minimum investment amount, the types of projects you may invest in, etc.
Some platforms set minimum investments at about $1,000, and tend toward smaller residential projects. Other platforms offer minimum investments closer to $25,000, and feature larger commercial projects. Decide which specific type and size of investment is right for you before signing up.
Step 2: Create an Account
Next, create an account on the site or sites that match your needs. Normally this process is free and relatively simple—you only need to provide basic information to physically create an account. Having an account should enable you to review projects in-depth. However, you will not be able to invest until you’ve been accredited.
Step 3: Get Accredited
Certain investors who use crowdfunding platforms that have applied for the SEC’s Title III crowdfunding exemption—which takes effect on May 16, 2016—do not have to be accredited by the platform. Those whose annual income or net worth is less than $100,000 may invest the greater of:
· $2,000 or
· 5 percent of the lesser of annual income or net worth.
Those with an annual income and net worth equal to or more than $100,000 may invest 10 percent of the lesser of annual income or net worth.
Investors who use crowdfunding platforms that have not applied for the Title III exemption will have to be accredited. Accredited investors must meet one of the following SEC criteria:
· have an individual annual income of $200,000 for the past two years with an expectation that it will continue
· have had a household annual income of $300,000 for the past two years with an expectation that it will continue, or
· have a net worth of at least $1 million, excluding a primary residence
Before you start the accreditation process, review the SEC guidelines for accredited investors (http://www.sec.gov/investor/alerts/ib_accreditedinvestors.pdf). Furthermore, platforms often institute a “cooling off” or “cool down” period, by SEC recommendation, to get to know new investors. This “cooling off” period may take several weeks, during which time investors who are not yet accredited cannot invest. The platform ought to take this time to send you emails or documents, make calls, or otherwise communicate with you.
The accreditation process itself entails an exhaustive analysis of your finances, personal income, and net worth, in addition to other pertinent material. Some platforms find it most efficient to perform accreditation themselves. Other platforms outsource accreditation to a third-party; in this case, the third-party and/or the platform should contact you so that you are aware of the transfer. While the questions asked and the information you are required to provide may seem daunting, each step of the process should be clearly laid out. Be sure to contact the platform with any concerns; they want the process to go as smoothly as possible so that you can invest with them.
Once you’re successfully accredited, you should receive notification thereof from the platform. At some point in these initial stages, you’ll also have to provide the platform your bank account info, in order to make money transfers later. You can usually do this either before or after accreditation, but make sure it is done—failing to provide banking info in a timely manner may cause you to lose an investment to someone who has done so.
Platforms want investors to use their site, and therefore would prefer to accept, rather than reject, a potential investor. However, if your submission to become accredited is rejected, the platform ought to formally explain—either via email or phone call—why they cannot accredit you at this time. Furthermore, a platform may work with you so you may be accredited on their site in the future, or will explain alternative ways that you may still invest or participate in their services (i.e they may operate another platform for non-accredited investors).
One further note on accreditation: although platforms would prefer not to burden you with excessive documentation, they must normally re-accredit investors every ninety days. As a returning investor, you should expect re-accreditation to be more simple than your initial signup.
Step 4: Choose the Right Project and Invest
After being accredited, if necessary, you’ve now gained the liberty to invest. Understand before doing so, however, that real estate crowdfunding platforms do not and will not recommend projects. Some sites may provide models for crowd investors to estimate risk and returns, but these are only estimates—nothing is ever guaranteed. The projects you choose to invest in are entirely up to you and your financial advisory.
When you find a project that you believe to be a good fit, you can click “invest” or a synonymous link to be transferred to a confirmation page (in some cases, a platform may ask you to “pledge” your investment before actually transferring funds; you can find out about this in the site’s FAQs). After confirming your investment amount and banking info, your funds should be wired to a secure escrow account, where they will reside while the project awaits full-funding. Platforms try to finance projects in the shortest possible amount of time, often within two weeks. If the project is not funded within a sufficient amount of time, your money should be refunded. Again, check the FAQs and read carefully to make sure this is the case.
Step 5: Time Frame, Reporting and Distributions
If a project achieves full-funding, you’ll be notified, and thereafter receive updates on project progress from both the platform and the real estate company. This reporting is an essential part of real estate crowdfunding, and may include photographs and reviews from third-party visits to sites, among other activities. Reporting keeps you in the loop and helps you understand how your money is being used.
Debt investments pay out interest—typically monthly and/or quarterly distributions from the real estate company. If your investment involves equity with waterfall distribution, the principle on the project will be paid in-full when the company exits. Projects may last anywhere from one year or less to a few years or more. Both individual projects and the wider market may experience ups and downs over this span of time. Always be aware of the risks that come with investing; the possibility of losing the entirety of your investment is very real.
A Recap and Recommendation
Before you sign up, read, read, and read some more. Do not limit yourself to FAQ, platform blogs, and About pages, although these are all essential. Read aggregate news sites on real estate and crowdfunding, such as Crowdfundinsider, CrowdFundBeat, and TheNewsFunnel. Some companies offer professional investment advice and forums, such as BiggerPockets and Institutional Real Estate, Inc. The internet has made knowledge on all industries much more available and accessible—take advantage of resources available to you as a conscientious investor.
Contact your platform if you have questions. Each site executes projects slightly differently, and therefore you should understand what most platforms have in common, and what may be unique to each: the services provided, the accreditation process, the investment process, time frame, reporting, and distributions. Crowdfunding has dramatically evolved real estate investment. Equip yourself with the proper knowledge to evolve with it.
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