Ultimate Guide to Real Estate Crowdfunding

Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms I

Advantages,Myths, Tips,

and Platforms.

Crowdfunding:Real Estate

Copyright © 2016 by VerticalRent

All rights reserved. Published in the United States ofAmerica.

DISCLAIMERVerticalRent does not take any credit for creating the images found in this book,these files are acquired from various sources which outwardly claim to be “publicdomain,” and as such no copyrighted images are included with the knowledge of thepublisher of this book. The common sense tips in this e-book should not beconstrued as legal advice. These are guidelines that will help you as a landlord,property manager, or tenant screening provider. Local laws and regulations may differin your area. Be sure to consult with an attorney before rejecting an applicant andensure you are following fair housing laws.

Contents

Introduction............................................................................................................................................................2

T h e A d v a n t a g e s o f R e a l E s t a t e C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

D e b u n k i n g C r o w d f u n d i n g M y t h s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

T a x A d v a n t a g e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Basics of Real Estate Crowdfunding..........................................................................................................6

8 A c t i o n a b l e T i p s f o r I n v e s t i n g i n R e a l E s t a t e C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

4 P r i m a r y A c t i o n s t o R a i s i n g C a p i t a l T h r o u g h C r o w d f u n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

8 P o p u l a r R e a l E s t a t e C r o w d f u n d i n g P l a t f o r m s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

Conclusion..............................................................................................................................................................13

Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms 2

Once the JOBS Act was passed in 2012, the concept of crowdfunding exploded inpopularity, allowing money to be raised for everything from small businesses to realestate developments. What exactly is crowdfunding, and is it a good option for youas an alternative to investing in traditional real estate?

Crowdfunding is the ability to raise money through small contributions from multipleindividuals. The concept of crowdfunding has become more widespread thanks tothe extensive adoption of online usage and social media. Companies such asKickstarter have managed to raise millions of dollars for all types of projects.

Although real estate is relatively new to crowdfunding, the potential in this space ismassive. With crowdfunding, it becomes possible for investors to gain access to awide variety of properties using an online platform. Investors typically invest smallamounts of money, sometimes as little as $1,000, into properties. Ourcomprehensive guide will take you through the evolution of real estatecrowdfunding. From the advantages, to the myths, to the basics of getting started,and practical tips to move in from amateur to expert. First off, let’s focus on the top3 advantages of real estate crowd funding.

Introduction

3Real Estate Crowdfunding: Advantages, Myths, Tips, and Platforms

The Advantages of Real Estate CrowdfundingReal estate crowdfunding offers investors a number of benefits, particularly whencompared to purchasing a rental property or investing in a real estate investmenttrust, also known as a REIT.

1. Greater Transparency

The information regarding an underlying investment can often be limited with a

REIT. This can make it more challenging to determine whether the investment is

sound. Crowdfunding platforms typically research each deal before making it

available so prospective investors have as much information as possible to make

the most educated decisions.

2. More Accessibility

In the past, in order to invest in a real estate deal, an investor would often need

to have tens of thousands of dollars. Crowdfunding has lowered the bar, making

real estate investing far more accessible to the average investor. The minimum

investment for many deals is $5,000 or less.

3. Improved Diversification

Investors have a far greater opportunity to diversify their investments with

crowdfunding because they are exposed to entirely new asset classes.

The advantages of real estate crowdfunding will only continue to grow as the marketmatures. You have to keep in mind that this is a relatively young business practice.Now that we covered some of the advantages, let’s take a deeper dive into themyths around crowdfunding your next real estate deal.


Debunking Crowdfunding MythsMany times, investors are hesitant to becomeinvolved in real estate crowdfunding due to anumber of myths that have been perpetuated.Because of regulatory changes as well as recentdevelopments in technology, it has becomepossible to connect investors to real estatedeals in ways that were never before possible.The entire process is extremely convenient,efficient, and fast. For those who are hesitant toget involved in crowdfunding, it’s important to understand the truth about this newapproach to investing and raising capital.

Ø Myth #1. The Only Deals Available on Crowdfunding PlatformsAre Bad Deals

There is sometimes a misconception that the only deals available on crowdfunding

sites are bad deals because their principals are not able to raise capital anywhere

else. The truth is that the decision to raise capital on a crowdfunding site has no

connection to quality. Many project sponsors choose to raise capital on a

crowdfunding site because it offers faster access to capital.

Ø Myth #2. A Crowdfunding Platform Is Essentially Just a MarketingWebsite

It should always be understood that, as is the case with anything, some

crowdfunding platforms naturally will be better than others are. Some sites simply

will not conduct as much due diligence as they should. Other sites will be quite

diligent about researching deals. This is why it is essential that you take the time

to select the real estate crowdfunding site you will use carefully.


Ø Myth #3. The Best Platforms Offer the Most Deals

The number of deals offered on a site does not indicate the success of the

platform. Simply because one platform offers a large number of deals does not

necessarily mean those deals are of a high quality. This could simply mean that

particular platform conducts less screening. Instead of looking for quantity when

researching a platform, look for quality.

Ø Myth #4. Investors Can Lose Their Money if the Platform GoesOut of Business

A reputable platform will always ensure that a transaction is structured in such a

way that investors are protected. This means that a bankruptcy contingency plan

should always be in place.

Don’t let fear hold you back from dipping your toes into real estate crowdfunding.Sure, there is risk involved in any path you decide to take. It’s risky to hand the bank$40,000 USD of your hard earned money for the 20% deposit they require on thatduplex you’ve been eyeballing as well. What if you can’t find tenants quick enoughto cover the mortgage? What if this, what if that? The key is to take calculated risksand realize that fear mongering is prevalent in every industry. Often times it’s theinvestors making the most money at something such as crowdfunding whom areperpetuating the fear amongst the general investor population. What better way tokeep the competition out than instill fear into the process?


Tax AdvantagesWith real estate crowdfunding, investors are able to take advantage of certain taxbreaks, including depreciation. In the past, these tax benefits were only available ifyou owned an investment property on your own. We suggest that you speak withyour accountant about all of the specific tax advantages. We’re not qualified tospeak about the specifics, but do know that certain tax break exists in this realm.


The Basics of Real EstateCrowdfunding

Now that we covered the primary advantages, the myths, and the fact that you canbenefit from a tax perspective – are you convinced that real estate crowdfundingmight be something to consider? If so, it’s important to understand that there aretwo different approach with real estate crowdfunding.

Ø Approach #1 - Equity Investments

With equity investments, investors are able to make investments in residential or

commercial properties. In exchange, investors receive an equity stake in the

relevant property. Each investor will also share part of the rental income generated

by the property.

Ø Approach #2 - Debt Investments

In this type of investment, investors invest in mortgage loans related to specific

properties. A share of the interest is paid to investors as the loan is repaid.

In determining whether equity investments or debtinvestments are the best option, it’s important tounderstand that equity investments tend toprovide a larger return potential. This is becausethe profitability of debt investments can besomewhat limited due to the interest rate on theloan. Conversely, equity investments do carry agreater amount of risk. It should also beconsidered that equity investments usually have alonger holding period.

Now that the theory is out of the way, let’s talk about actionable tips that will takeinto to the discipline of real estate crowdfunding. Knowledge is Power, but AppliedKnowledge will take you from Point A to B. Our recommendation is to start smalland put these practical tips into action quickly.


8 Actionable Tips for Investing in Real Estate CrowdfundingOnce you have made the decision to participate in real estate crowdfunding, it’simportant to know how to proceed to ensure the best possible experience. In ourresearch, we found 8 actionable tip that will put you on the right track:

1. Research Your Real Estate Crowdfunding Platform

Before choosing a real estate crowdfunding platform, take the time to do some

research. Be aware that real estate crowdfunding platforms can differ. Because

of this, some platforms may be a better fit for your needs than others are. Taking

the time to research different platforms can help you to identify both the strengths

of weaknesses of each.

2. Vet Investments on Your Own

While it is true that most platforms will spend

some time researching investments, it’s also

important that you review them on your own.

Before you make the decision to invest in a deal,

speak to a financial advisor about the specifics of

the deal to help identify any prospective issues.

3. Determine the Liquidity Schedule

Bear in mind that the liquidity schedules for real estate deals can vary from one

property to another. Make sure you understand how long you will be locked into

a prospective deal before you make an investment decision.

4. Diversify Your Risk

Real estate investing can be an excellent way to diversify your investments, but

it’s also important to make your risk is also diversified.


5. Research the Sponsor

Be sure to research the sponsor behind a deal before

making a decision. For instance, what is the sponsor’s

track record? What other types of projects has the

sponsor handled? Does the sponsor have experience

with handling this specific type of project? How long

has the sponsor been in business?

6. Review the Pro Forma

What assumptions are the sponsor and the platform making? Keep in mind that

poorly based assumptions can lead to projections that can be quite unrealistic.

7. Research Relevant Regulations

Make sure you understand whether you are classified as an accredited investor

and the laws that apply to accredited investors. According to the SEC, an

accredited investor is an individual with an annual income of at least $200,000

during each of the last two years or who has a joint income with a spouse of more

than $300,000 during those years. An accredited investor may also be defined

as someone who has a net worth or joint net worth with a spouse greater than

$1 million, not including the primary residence.

8. Review the Fine Print of the Deal

All projects are unique; therefore, it’s vital that you understand what will take

place in the event something should go wrong. When possible, try to have an

attorney who is familiar with real estate investments review the details of the deal.

The aforementioned actionable tips will help guide you, but what about raisingcapital quickly? How can you raise money for that next apartment complex deal?Here’s how:


4 Primary Actions to Raising Capital Through CrowdfundingWhile real estate crowdfunding offers an array ofbenefits for investors, it can also be advantageousfor borrowers. For borrowers who need to raisecapital for development projects, crowdfundingoffers the opportunity to gain access to capital withfewer challenges and within a shorter amount oftime. Additionally, crowdfunding also provides thebenefit of lower overhead costs, particularly whencompared to borrowing from a traditional bank. Here are 4 primary actions that youshould take initially:

1. Select a Platform

With the number of crowdfunding platforms increasing at such a rapid rate, it’s

important to take your time and choose a platform that is right for your needs.

Among some of the most popular platforms include RealtyMogul, RealtyShares,

Patch of Land, and iFunding.

2. Submit Your Application

Once you have selected a platform, the next step is to provide as much

information as you can about your project. This is done using an online application

form, which allows prospective investors to review your opportunity.

3. Gain Approval

Once your application is approved, you will need to provide additional information

regarding your project. In addition, all principals on the project will need to submit

to a credit check and background check.

4. Market to Investors

The next step is to present your opportunity to accredited investors.


Every investment opportunity is different, so you should expect it to take the timeto complete the funding process. While it’s not uncommon for debt investments tobe funded quickly, sometimes in a day or less, equity investments can take longerto fully fund.

8 Popular Real Estate Crowdfunding Platforms

Experience is critical when choosing a prospective real estate crowdfundingplatform. Below are some of the more popular real estate crowdfunding platforms.

1. RealtyShares

This tech-savvy platform provides investors with a minimum investment

opportunity of only $5,000. Accredited investors are able to browse through

multiple pre-screened commercial, residential, mixed-use, and retail properties.

Since projects are presented to investors via the platform, borrowers can benefit

from a fast-tracked process for raising capital.

2. RealtyMogul

This platform is known for connecting accredited and institutional investors with

an extensive selection of equity and debt real estate investments. In addition, this

platform offers a choice of equity and debt financing for borrowers. The minimum

investment on RealtyMogul is $5,000.

3. Patch of Land

This peer-to-peer real estate lending platform matches institutional and accreditedinvestors who are looking for short-term, high-yield investments to borrowersseeking funding sources for rehabbing real estate properties.

4. iFunding

This platform provides single-family residential projects and commercial retailprojects. The minimum investment is $5,000.


5. RealCrowd

This platform has proven to be particularly successful, largely because it was

designed by a combination of tech gurus and real estate professionals.

Investments through this platform tend to be professionally managed commercial

projects.

6. Prodigy Network

This is one of the largest crowdfunding platforms in the world today, and it is also

extremely popular. Prospective investors should know that this platform tends to

focus on larger commercial projects. Compared to most other crowdfunding

platforms, Prodigy Network offers a higher minimum investment level.

7. Fundrise

Investors searching for an entry-level platform will find Fundrise to be a good

option. This is largely due to the lower minimum investment level, which allows

investors to begin with as little as $100. Many of the projects handled through

this platform are smaller in scope compared to projects available through other

platforms due to the minimum required investment. Even so, investors who are

just getting started may find the small-scale projects to be quite rewarding.

8. PeerStreet

Among peer-to-peer lenders, PeerStreet is one of the most well-known platforms.

Using a data-driven approach, this platform is able to focus solely on debt

financing. The lowest investment level on PeerStreet is $1,000.


Real estate crowdfunding has become known for revolutionizing the way in whichindividuals invest in real estate as well as how borrowers raise capital for projects.With the ability to remove some of the most challenging hurdles to real estateinvesting while also introducing cutting-edge technology, crowdfunding is breakingnew ground for investors as well as borrowers.

Conclusion