Essential Factors to Consider Before Investing in Real Estate Through Crowdfunding

By The ArborCrowd Team
Jan 9, 2020

Real estate crowdfunding has grown into a multibillion-dollar industry since the passing of the Jumpstart Our Business Startups Act in 2012, opening up previously inaccessible investments to a new class of investors.

This new investment vehicle introduced institutional real estate to retail investors, who ultimately want to invest with a company they can trust to grow their wealth. Determining who is trustworthy, however, can be challenging. Most retail investors focus almost entirely on a deal’s projected internal rate of return (IRR) or projected equity multiple, while ignoring important items such as the sponsor’s track record and the platform’s expertise in weeding out troubled offerings.

This article explores the key factors that investors should consider when vetting a potential crowdfunding investment.

The Platform

Not every platform was created equal. Understanding the real estate expertise of a platform’s leadership is crucial to ensuring that the focus of the platform is on the underlying product – the real estate. Unfortunately, many platforms were founded by technology entrepreneurs who focus first on tech, with real estate taking a backseat.

Additionally, knowing how a platform is funded may reveal some of its priorities. Many early entrants to this emerging industry were venture capital (VC) backed. Typically, this means a company is pressured to show rapid growth and returns, so they may prioritize the quantity of transactions over the quality of those deals. This model can lead to a lapse in judgement when underwriting deals, resulting to bad transactions being offered to investors.

Another important factor is transparency of fees. Is the platform forthcoming with their fees or do they try to bury them in hard to find places hoping that investors will not understand their full impact? This obviously means the interests of the investor and the platform are not aligned and the investor may not truly be able to determine what they can expect to earn on the investment.

As part of The Arbor Family of Companies, ArborCrowd was the first crowdfunding company to be launched by a real estate institution and is not backed by venture capital. ArborCrowd believes in transparency and always clearly highlights its fees in the robust offering materials it publishes for each transaction. To learn more about ArborCrowd’s leadership and The Arbor Family of Companies, click here.

The Sponsor

A deal is only as strong as the sponsor that is tasked with finding, securing, managing and ultimately exiting the real estate transaction. It’s critical to know the sponsor’s track record and looking at past deals is a great place to start in determining how successful the sponsor has been and what type of real estate projects they have completed.

Another way to examine their track record is by learning who the sponsor’s leadership is, and their real estate background. As the market is cyclical, it’s especially important to know how those individuals performed in various market environments.

ArborCrowd is a member of The Arbor Family of Companies, which is led by real estate experts with more than three decades of experience who have survived and thrived in various market cycles. ArborCrowd works with experienced sponsors with proven track records.

The Investment

If the platform seems trustworthy and the sponsor has a good track record, investors need to ask themselves whether the deal’s business plan makes sense by thoroughly reviewing it and the dynamics of the location of the property.

Additionally, investors should ensure that a rigorous underwriting was performed, which is paramount in ensuring high-quality deals are offered. Investors can see the level of scrutiny a crowdfunding platform takes through the offering materials.

ArborCrowd has access to high-quality sponsors with successful track records in its proprietary network of relationships as part of The Arbor Family. ArborCrowd hand-selects only the deals that meet its rigorous underwriting standards. See more about ArborCrowd’s rigorous underwriting process.

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