What I realized about crowd funded real estate…. (investment, lawyer, contractors)

[ginmqi]

…is that the crowd funding is merely an access way into the specific RE deals and it eliminates a couple of barriers of entry that may not be an all good thing. Usually those are very large projects (to most of us at least) with hundreds of apartment units or SFH in a far away location. Do you really understand what those deals are? Can you run the numbers? How much do you know about the area, the contractors, the people behind the deal, the trend in the city/region, etc. etc.

As I thought about this I realized that traditionally if you wanted to invest in those multi-million dollar deals you had to work your way up. And after years of investing experience you’ve amassed a large capital/net worth AND knowledge AND network of people you trust for leads and advice and you’re probably well versed to analyze deals in ways that beginners and laymen aren’t able to do.

Now with the popularity of crowd funding, it seems that it is MUCH easier for anyone with decent income and decent liquidity, to just plunk down 5-50k and then invest hoping for that sweet 10++% CoC return. You’ve cut out that pesky traditional barrier of entry (years of experience acquiring knowledge and networth) and hence I feel like this is inherently a high level of risk that is not easily apparent to many.

I think one shouldn’t look at it as “Should I invest in crowd funded real estate?” but more as “Should I invest in this Deal XYZ?” and “Should I do it through a crowd funded platform?”

[jackalope48]

It wasn't proving yourself before crowdfunding it was a legal barrier to entry. Prior to crowdfunding legislation, for a developer to take your money for a partnership you had to be a "qualified investor" with either 1 million in net worth(not including your house) or an income over 200k for two years in a row. If you weren't those things or a close family member in order to take your investment a developer would have to follow the full boat of securities laws(like a company on the stock market). With the cost of that paperwork it just was never worth it unless you were on the scale of operating a REIT.

As a result most commercial real estate are closely held family partnerships. It remains to be seen whether crowd funding is effective long term. We've had very low and stable interest rates since these deals were allowed, the big test of them is how the investors in them react when interest rates spike to 7-8% at some point in the future. If they all lawyer up and sue people because they aren't returning what they expected or they don't want to or can't make cash calls then it's going to become a niche platform fast.

[ginmqi]

Ah good point on the legislation part. That is very true. I believe the term is "accredited investor" as well. But yeah lot of crowd funding platforms do require you to be an accredited investor also.

Though I believe my point still stands. While I acknowledge the legal barrier to entry as you stated, one would have had to accumulate wealth/experience and that in itself will lend one to become an accredited investor and be able to access and get into these commercial/larger deals.

We definitely will see how the rising rates will affect these platforms.