Nowadays, the economy is plagued by all the discussions surrounding the term crowdfunding. It refers to the collective efforts of different people to fund an enterprise conducted by another entity, either a person or an organization. In general, the concept of crowdfunding has long been used in cases such as political campaigns, post-disaster relief efforts, and scientific research, among others.

Now the ideals of crowdfunding have been aptly applied to the principles of real estate. A company raises the funds it needs by allowing many investors to raise small amounts of equity. The real estate crowdfunding method has received a lot of attention since the United States’ Jumpstart Our Business Startups (JOBS) Act was amended to apply it. The term Emerging Growth Companies (EGC) is used to denote the companies looking to leverage white label real estate crowdfunding software. Legislation has changed the restrictions on investors. Back then, only accredited investors with high net worth and income — at least $250,000 — could make an investment. Currently, the companies are also allowed to solicit non-accredited investors to buy their shares. This allows a company to raise capital more effectively.

With all the excitement about it lately, even those not quite business savvy are quickly becoming involved in real estate crowdfunding. They participate in real estate such as shopping centers and company buildings within the scope of their possibilities. Apparently, they even have the benefit of not having to deal with the hassles that come with buying an entire property. Without having to worry about the ongoing administration of the estate, they share in the profits.

When it comes to distributing profits from crowdfunding investments, the timing is different. Essentially, it depends on the type of property being invested in. Another factor will be crowdfunding portal policies. Some offer quick tasks, while others focus on developing from the ground up. In the case of the latter, the waiting period is a maximum of 24 months before an investor can expect his distributions. The former, on the other hand, are cash flow-intensive, so monthly payouts can be expected.

The concept of real estate crowdfunding may cause confusion because of its similarities to a real estate investment trust (REIT), but the two can be easily distinguished from one another.

Private real estate investments do not have to be crowdfunding

Private real estate investments get a lot of press. The idea has merit as CD yields are falling and the ebb and flow of stock markets is causing unease. As crowdfunding is still in its infancy, with limited rules, it’s confusing, it might even be a scary world to believe in. There are alternatives. The 2012 Employment Act allowed publicly advertised investments to be privately available. These are currently “restricted” to “sophisticated” investors, subject to the SEC’s wealth requirements under Section “D” of the 506(C) Rules. Investments are recognized by the SEC but not supported. However, a clearer offer is presented with a Private Placement Memorandum (PPM). This is not a business plan but a clear approach with risks including a complete loss of investment. Investors are used to it, with very little guarantees on the investment as a whole.

What are the reasons for considering this “New Deal” funding program for the average investor? The investor receives a solid overview of the investment and not the old-fashioned platitudes of the multinational corporation or its appointed salespeople. Instead of receiving the diluted return margin after commissions and overheads, the investor is matched with the customer(s), borrower(s) and the service provider that originates, formulates and services the loan. A streamlined, cost-effective process. The return can exceed CD rates and hedge funds. The service provider can be the key, after all, private investments are not always the same as private investments. As a retail investor, you must take responsibility for underwriting and holding accountable your service provider AND their offerings.

Items to watch out for. How much of your investment capital goes directly into the project? There is a lot of leeway when it comes to organizational costs and development costs. If you expect a good return, starting with a significant portion of your capital that will initially be used to fund expenses and commissions is not a good start! If all of your funds arrive intact, you have a much greater chance of a return on investment and a return on investment directly on the project.

What is your security? With a debt obligation, the equity value of the borrower, considered the skin in the game, is a crucial issue. For example, the idea that outside investment, not necessarily ownership of the project, is safer, coupled with an appropriate loan-to-value ratio and sufficient leverage, ensures the security-to-return ratio. With banks currently on hold and pulling out of high street lending, this presents a great opportunity for very high quality lending through a debt investment focused on a comprehensive first mortgage and security arrangement with credit restrictions and protection.

In the old-fashioned way of thinking, “If it quacks like a duck, it must be a duck!” So if it doesn’t make sense, leave it! The most important thing is always, how do you get it back? A balanced cash flow and an adequate monthly debt ratio are a solid starting point. Personally, I don’t want to “assume” or predict the future or engage in “if it comes” scenarios. I want to be reassured by the fact that what happened is likely to happen again given the current management and economic climate. We CANNOT go on a crusade, reinvent the wheel and turn a pig’s ear into a silk pouch. This is a big red flag and would inevitably increase risk.

Finally: what is the exit strategy? Once involved, you need to find out how and what procedures are available for an exit strategy. Assuming the loan matures in a short time frame and that time frame matches your investment, it may be a ‘held to maturity’ investment. Other options are longer term with interest rate reset periods to keep your investment timely and inflation proof. For 506(C) assets, there is a requirement to hold the asset for one year. This is not the place for day traders. After one year, the investment is a “safe haven” that can be sold publicly, but fundraisingscript not on the registered exchanges. There is no guarantee that a buyer will be out there with a suitable offer! Internal transactions with the service provider and other shareholders who can increase their holdings might be the best market.

Proceed carefully. I would suggest a personal underwriting philosophy that evaluates the qualities of the investment. On an equal footing with investors and borrowers. We can call this synergy. In my opinion, the borrower cannot be successful without the investor’s funds, the investor’s value and profit requires the success of the borrower’s vision and management. I would be very aware that 100% of the value of your investment capital would be fully invested in the debt investment backed by a first home mortgage, a bankruptcy free structure, limited outside borrowing and a proven internal cash flow with a fixed monthly rate yield . Remember that no investment is suitable for all investors. However, knowledge is always an investor’s best friend.