The Risks of Real Estate Crowdfunding and How to Protect Your Investments

This week, I’ve spent time covering popular real estate crowdfunding websites and the history behind their current popularity. While there is a lot to be excited about when it comes to crowdfunding, it’s important to remember investing is never completely risk free. I’ll cover some of the bigger concerns here and what you can do to protect your money.

Risks of Real Estate Crowdfunding:

Questionable Due Diligence

One of the risks of real estate crowdfunding is treating the portals as investment advisers. While brokers like myself dive deep into the data before suggesting anything to our clients, these websites’ research is done to conclude whether the property will be built like the developer says it will and to ensure they are not committing any fraud.

The portals are not promising that the property, or you, will make money off your investment. What they are promising, is that what the developer advertised is within the realm of possibility.

So far, reputable portals have avoided any major cases of fraud, but that doesn’t mean you should excuse yourself from doing your own research on top of theirs.

Unsecured Investments

Most of the investments you will make with a crowdfunding portal currently are unsecured, meaning, if the website goes under, so does your money. This may be about to change though as a couple portals, like Patch of Land Inc, respond to investor concerns. The website recently partnered with a bank to directly secure future loans in order to protect their clients against unfortunate events.

patch of land crowdfunding

Falling Victim to Crowd Mentality

Be careful about trusting “the wisdom of the crowd.” There’s a tendency to pile-on when we see many other people doing the same thing—whether it’s the intelligent thing to do or not. Be aware of this next time you see a popular commercial property on a crowdfunding site. Don’t just invest because everyone else is, invest because you’ve done your own research and feel confident it’s a strong proposal.

Protecting Yourself:

Do Your Homework

As I mentioned above a handful of times, do your own research! Study the property for yourself and really understand what you’re getting into.

Study the type of the commercial real estate you’re investing in. Are retail properties a wise investment with the current market? Why is an industrial building being built so far away from any transportation routes?

Learn more about the area it’s being built in. Is it a good location? What do the locals think?

Crowdfunding portals have an incentive to get their predictions correct, but that doesn’t mean you should trust them blindly. Make sure you understand personally what you are investing in.

Use Local Portals

Some portals, like saundersdailey.com, only support local investments opportunities. Properties listed on local-focused portals are often safer bets, as the brokers know the region and therefore have in-depth, regional knowledge that may be missing from a website operating a national scale.

Saunders Dailey crowdfunding

Those who research developer projects for these websites are more likely to know if a building is going up in a bad part of town. Or if a retail center is further out of the way than most locals are willing to travel. These smaller portals offer a much more focused view on properties than their larger competitors.

Pay Attention to a Website’s ‘Type’

Many crowdfunding portals specialize in a particular type of commercial real estate. Where one website may be an expert in office buildings, another may know everything about multi-family units. Be wary if you see a property listed that doesn’t match what you’ve come to expect from that website.

While it’s possible there’s nothing wrong with their research, there’s also a chance they’ve missed a small, but crucial, detail for a property type they’re unfamiliar with. If you notice a portal listing a property that falls outside of their usual M.O, go over their methods with a fine-tooth comb and make sure they’ve researched everything they should have.

Stress Test

In the worst case scenario, how would your investment in this property fare? Crunch some numbers and figure out what the investment would look like if the market dipped 10%. What if it went as low as 25%, what would your returns look like then? Some crowdfunding portals like Estateguru.co work to protect their investors as best they can against such market fluctations, but make a habit of knowing how your investments will respond under negative pressure.

Real Estate Guru crowdfunding

This is an exciting time to be an investor! But before you hand over your money, be aware of the risks of real estate crowdfunding and how to protect yourself.

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