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. 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 2020 that generates a 8% annual return in a low risk manner. 8% seems reasonable given historical annual returns have been between 9% – 16%. I much prefer real estate crowdsourcing over P2P lending because I cannot stand it when borrowers default on their loans and often disappear without a trace, and there is little recourse. At least with real estate crowdsourcing, there’s an asset behind the investment that can provide at least a partial return on investment if things go wrong.
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 Crowdsourcing Investment Framework
1) Invest with the largest and strongest 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, Patch of Land, Rich Uncles and Lending Home. 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.
I’m partial to Fundrise’s platform because it is large and offers a robust number of deals, utilizes a vetting system that lets in only 5% of the real estate operators who apply, has on-hand a significant amount of funding, is based in Washington DC, and was founded in 2012.
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. If Trump does not get impeached for his divisiveness, then a real estate investor should look more towards the heartland of America, and not expensive coastal city markets. Trump is currently attacking the 40+ sanctuary cities by threatening the removal of federal funding. Below is a map of “Trump’s America.”
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 $100,000 with an additional $50,000 in equity grants that vest over four years, San Francisco is actually quite reasonable. I will be paying particular attention to real estate and income rankings and cross check the winners with criteria 1 and 2.
As you can see from the top 5 chart, all but Seattle fit my second criteria of being a Trump city. Therefore, I will now check Fundrise to see if there are any live deals in Dallas, Jacksonville, Orlando, and West Palm beach. If there aren’t, I’ll patiently keep my eye out for them.
In the meantime, I’ll look at the rest of the top 20 list and do the same search. 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 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.
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.
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 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.
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. 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 five main points 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.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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