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Pros & Cons of Real Estate Crowdfunding Platforms
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The plusses of a crowdfunding platform are as follows:
# 1 They tell you about an investing opportunity/sponsor/fund you might not have otherwise found out about
# 2 They have theoretically done some of your due diligence for you. It’s not a guarantee that the investment will do well by any means and it doesn’t excuse you from the need to do due diligence
# 3 You often get a lower minimum investment, sometimes just a few thousand dollars. That can be lower than going directly to the sponsor.
# 4 You may also get better terms than you would get going directly to the sponsor.
# 5 The platform may also offer its own products, such as a REIT or Fund that invests in multiple of the deals on the platform.
Naturally, a crowdfunding site has some negatives as well
# 1 They have to get paid too. So there is an additional layer of fees. 1% of the amount invested is pretty typical, but that obviously reduces your return from what it would have been without the platform by 1%.
# 2 These platforms are most attractive to sponsors that have trouble raising money on their own. The platform helps them raise money to do the deal. That means one of two things and sometimes both. Most commonly, it means they are a relatively new sponsor. Established fund managers or syndicators have a lengthy list of prior investors to hit up when they have a new deal. They often don’t need to go through a crowdfunding platform to get more investors. However, it can also mean they’re just not very good at what they do. Sometimes that’s just because they don’t have much experience, but it could be indicative of other problems too. Hopefully, the crowdfunding platform can weed those with prior problems out through their due diligence process, but no guarantees, and any way, you’re still going to be left with relatively newer folks most of the time. The platform has a huge conflict of interest. While their reputation is very important, they don’t make money if they don’t put deals up there. So their incentive is to get as many deals as possible. You’ll notice they also are generally paid whether you make money or not.
# 3 The platform can go out of business. This does happen occasionally. The largest platform out there, RealtyShares, went out of business a few years ago. I had an investment with them. Now all of these platforms have a plan if this happens and RealtyShares did too. The investment completed as planned, but there was definitely some additional hassle and worry.
# 4 Deals are often snapped up instantly, before anyone besides the platform really has time to do any due diligence. That can’t be good to have an entire investment filled by investors who didn’t do due diligence. Sometimes that doesn’t bother the investors since the investment minimums are so low they’re very diversified, but it still isn’t a good thing.
Many investors get started by using these platforms.Those who continue to use them tend to be investing relatively small dollar amounts. If it is hard for you to come up with $50K, $100K, or $200K minimum investments, it’s likely a reasonable option for you. You just have to weigh whether its still worth it while paying the additional layer of fees.
The White Coat Investor has been helping doctors with their money since 2011. Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing medical school loans to physician disability insurance and malpractice insurance. Learn about loan refinancing or consolidation, explore new investment strategies, and discover loan programs for specifically aimed at helping doctors. If you're a high-income professional and ready to get a "fair shake" on Wall Street, The White Coat Investor channel is for you!
00:00 Pros - Real Estate Crowdfunding Platforms
00:37 Cons - Real Estate Crowdfunding Platforms
# 1 They tell you about an investing opportunity/sponsor/fund you might not have otherwise found out about
# 2 They have theoretically done some of your due diligence for you. It’s not a guarantee that the investment will do well by any means and it doesn’t excuse you from the need to do due diligence
# 3 You often get a lower minimum investment, sometimes just a few thousand dollars. That can be lower than going directly to the sponsor.
# 4 You may also get better terms than you would get going directly to the sponsor.
# 5 The platform may also offer its own products, such as a REIT or Fund that invests in multiple of the deals on the platform.
Naturally, a crowdfunding site has some negatives as well
# 1 They have to get paid too. So there is an additional layer of fees. 1% of the amount invested is pretty typical, but that obviously reduces your return from what it would have been without the platform by 1%.
# 2 These platforms are most attractive to sponsors that have trouble raising money on their own. The platform helps them raise money to do the deal. That means one of two things and sometimes both. Most commonly, it means they are a relatively new sponsor. Established fund managers or syndicators have a lengthy list of prior investors to hit up when they have a new deal. They often don’t need to go through a crowdfunding platform to get more investors. However, it can also mean they’re just not very good at what they do. Sometimes that’s just because they don’t have much experience, but it could be indicative of other problems too. Hopefully, the crowdfunding platform can weed those with prior problems out through their due diligence process, but no guarantees, and any way, you’re still going to be left with relatively newer folks most of the time. The platform has a huge conflict of interest. While their reputation is very important, they don’t make money if they don’t put deals up there. So their incentive is to get as many deals as possible. You’ll notice they also are generally paid whether you make money or not.
# 3 The platform can go out of business. This does happen occasionally. The largest platform out there, RealtyShares, went out of business a few years ago. I had an investment with them. Now all of these platforms have a plan if this happens and RealtyShares did too. The investment completed as planned, but there was definitely some additional hassle and worry.
# 4 Deals are often snapped up instantly, before anyone besides the platform really has time to do any due diligence. That can’t be good to have an entire investment filled by investors who didn’t do due diligence. Sometimes that doesn’t bother the investors since the investment minimums are so low they’re very diversified, but it still isn’t a good thing.
Many investors get started by using these platforms.Those who continue to use them tend to be investing relatively small dollar amounts. If it is hard for you to come up with $50K, $100K, or $200K minimum investments, it’s likely a reasonable option for you. You just have to weigh whether its still worth it while paying the additional layer of fees.
The White Coat Investor has been helping doctors with their money since 2011. Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing medical school loans to physician disability insurance and malpractice insurance. Learn about loan refinancing or consolidation, explore new investment strategies, and discover loan programs for specifically aimed at helping doctors. If you're a high-income professional and ready to get a "fair shake" on Wall Street, The White Coat Investor channel is for you!
00:00 Pros - Real Estate Crowdfunding Platforms
00:37 Cons - Real Estate Crowdfunding Platforms
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