A large number of people have asked me how I plan to choose which real estate crowdsourcing investment to participate in since there are plenty to choose from. Here are my real estate crowdfunding investment guidelines to help you generate potentially higher returns.
Given we all don't have the time or the money to fly around the country to check out every attractive sounding commercial or residential deal there is, I've come up with a framework for every real estate crowdfunding investor to follow.
My goal is to build a $1,000,000 real estate crowdsourcing portfolio by 2021 that generates between a 8% – 12% annual return in a low risk manner. 8% seems reasonable given historical annual returns have been between 9% – 16%.
I've been investing in real estate since 2003 and I believe it is one of the best asset classes to build long term wealth. The key is to make proper risk adjusted returns that are not overly leveraged. You want to be able to ride out any downturns and ultimately flourish when things recover.
Real Estate Crowdfunding Investment Guidelines
There are obviously no guarantees when it comes to investing in real estate. However, by following my real estate crowdfunding investment guidelines, our chances for making money should be higher.
1) Invest with the largest and strongest platforms real estate platforms.
There are over 200 real estate crowdsourcing platforms today. Thus, the task of choosing the best real estate crowdsourcing platform can be daunting. The largest platforms are Fundrise (open to all) and CrowdStreet (mostly for accredited investors).
As an investor, you want to choose the strongest real estate crowdsourcing platform that lets in only the best operators with the strongest track record, has the most amount of funding with the best team and the best number of deals.
Fundrise's platform is great because it is innovative and has created eFunds to help investors better diversify their real estate investments. Fundrise allows investors to choose how their funds are managed by size first and then by investment style.
2) Invest in states and cities that are favored by the federal government.
Whoever is in office, focus on the states and cities that supported his campaign. There should be favorable funding and regulations.
Look more towards the heartland of America, and not expensive coastal city markets. There will be a large demographic shift towards lower-density, lower-cost of living cities due to COVID-19 and the rapid adoption of working from home.
As a result, I would invest in cities with lower valuations and higher cap rats. Here are my best cities to buy real estate today. To be more surgical in your real estate investing approach, you can go onto CrowdStreet's platform to see what type of specific commercial real estate deals they offer.
The great thing about CrowdStreet is that it focuses on the more up and coming 18-hour cities such as Charleston, Memphis, Dallas, and so forth. CrowdStreet is also free to sign up and explore.
3) Focus on deals in cities and states that have the strongest expected income growth.
Income growth is the strongest variable in determining property price appreciation. So many people think San Francisco is egregiously expensive. But when you have thousands of 22 year olds making $120,000 with an additional $50,000 in equity grants that vest over four years, San Francisco is actually quite reasonable.
Pay particular attention to real estate and income rankings and cross check the winners with criteria 1 and 2. Below are cities with the strongest expected income growth along with each city's median sales price.
As you can see from the chart, most of the cities are in red states. I'm particularly interested in Salt Lake City, Nashville, Raleigh, Columbus and San Antonio due to growth in the startup, banking, and energy space. For folks who live in these cities or any city in the Top 20 list, feel free to chime in!
Rounding out the top 20 cities include:
#1 Dallas, TX
#2 Jacksonville, FL
#3 Orlando, FL
#4 Seattle, WA (Although a blue city, growth is huge here due to Amazon, Starbucks, Nike, etc, and people fleeing the SF Bay Area)
#5 West Palm Beach, FL
#6 Salt Lake City, UT
#7 Tampa – St. Petersburg, FL
#8 Nashville, TN
#9 Forth Worth, TX
#10 Grand Rapids, MI
#11 Sacramento, CA (Although blue, it should see a spillover effect from expensive SF Bay Area real estate)
#12 Charlotte, NC
#13 Raleigh, NC
#14 San Diego, CA (Blue city and questionable due to lots of condo construction and already expensive prices)
#15 Las Vegas, NV (Red city, but went through massive boom and bust, so I'll be staying away)
#16 Boston, MA (Blue city, but it has good healthcare industry growth)
#17 Columbus, OH
#18 Atlanta, GA
#19 Phoenix, AZ
#20 San Antonio, Texas.
As we know, each state has different mandates and guidelines for doing things. Here are my top states to buy real estate from a tax and housing valuation perspective.
It's a good idea to start your real estate analysis from the top down.
4) Do extensive bottoms up research.
Once you've identified a deal that fits all three criteria, do research by looking at the deal information provided on the respective crowdsourcing platforms e.g. pro forma statement of cash flows, exit strategy, background of the operator, etc. In addition, do independent research on the web and speak to people who are more familiar with the location of the investment.
It's important not to take the research provided on each platform at face value. Look at everything you read with a critical eye. The sponsor's goal is to make everything seem as peachy as possible. But as we all know, investments can and will lose money, otherwise we'd all be rich.
Some critical things I look out for include: 1) how much equity the sponsor is putting into the deal (skin in the game), 2) their bankruptcy history if any, 3) the number of deals they've done in the past (minimum 10), 4) how many years they've been around (minimum since 2007 so they've had experience in the past down cycle), and 5) management experience and background.
Bottoms up research is probably one of the most important real estate crowdfunding investment guidelines. Therefore, spend as much time as possible researching the sponsor and the deal you are considering.
5) Allocate capital in a risk adjusted manner.
Real estate crowdsourcing is considered an alternative investment that is not as liquid as public equity and fixed income. A common real estate allocation percentage by private wealth managers and large university endowments ranges between 10% – 25% of investable assets.
I recommend investing no more than 10% – 20% of your net worth in alternative investments, which can include real estate crowdfunding, or be made up entirely of real estate crowdfunding.
If you already own physical real estate, you should include real estate funding as part of your overall real estate portfolio. One growing strategy, which I am personally employing is diversifying my SF Bay Area real estate portfolio by selling one home and reinvesting the proceeds in a real estate crowdfunding fund, which invests all over the country.
I sold my home in June 2017 for $2,740,000, and have reinvested $500,000 of the proceeds into a fund which has investments in Dallas, Austin, Seattle, Las Vegas, Hayward, Miami, and Virginia.
My hope is that by only having two properties in San Francisco, one property in Lake Tahoe, and position in a REC fund, I'll be able to increase income, decrease capital loss, and sleep better at night.
Although real estate is a regular asset, I consider real estate crowdfunding to be an alternative one. Therefore, my goal is to limit my real estate crowdfunding exposure to around $1 million.
Here's my article I wrote for CNBC on how much I lost in my overall investments in 1Q2020. I just want to make sure everyone knows there is risk involved with investing. Luckily, I've made most everything back as of 2H2020.
6) Decide between equity or debt.
If you are more risk-averse, focus more on real estate debt investments that pay you fixed return each year. If you want to take more risk, then invest in more equity real estate investments that allow to to participate more fully in the upside. Just know that equity is the first type of capital to get wiped out of a deal goes wrong.
To learn more about investing in either debt or equity, please read this post. In general, I like making equity investments to earn a higher internal rate of return.
Invest In Real Estate Crowdfunding
I hope this article provides you with a rational framework on how to choose your next real estate crowdsourcing investment. My real estate crowdfunding investment guidelines should help you make better investments.
Make sure you follow a disciplined approach to building your real estate crowdsourcing portfolio over time.
My goal is to generate as much passive income as possible so I can spend more time with family now that I have a newborn.
For those who have more interest and time, I'm confident that if you follow my six main real estate crowdfunding investment guidelines you'll do better than someone who does not. The key to real estate investing really is job growth. If job growth in a particular area is strong, real estate prices will likely follow.
Check out Fundrise for free. It's one of the original platforms founded in 2012, and it's available for non-accredited investors.
It's also free to check out CrowdStreet, founded in 2014, with more focus on accredited investors and 18-hour cities. Both platforms are free to sign up and explore.
I've invested $810,000 in real estate crowdfunding so far to earn more income passively. I believe heartland real estate is where there is the most opportunity. Valuations are lower, yields are higher, and growth rates are higher due to positive demographic trends.
About the Author:Â
Sam worked in finance for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
Sam started Financial Samurai in 2009 and has grown it to be one of the largest independently owned personal finance sites in the world.Â
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