Crowdfunding is becoming increasingly mainstream, so it is no surprise that property investment is a rapidly growing sector in the crowdfunding world. Real estate is seemingly made for crowdfunding, offering significant benefits when compared to traditional investment methods, typically:
But with new technologies, come new risks, some of which investors may not be aware of nor prepared for. Sadly, with the lack of regulation in emerging sectors, there is always room for people to exploit the system and take advantage of unsuspecting users.
This is the biggest risk to any real estate investment in our opinion. The success and longevity of property investing are rooted in the “bricks and mortar” nature of owning a physical asset. If the stock market plummets and the economy takes a beating, at least you have buildings in your portfolio when you’re a property investor. Take this out of the equation and you lose one of the main advantages of investing in real estate.
Sadly, some platforms promise property-related returns but without actually securing an underlying asset. Investors may feel that they are protected by the “bricks and mortar” nature of real estate whereas, in reality, these benefits do not apply. Having an asset isn’t enough, either. The asset also needs to be of sufficient value to cover investors in case of a failed project.
Always make sure that the investment is secured by a physical asset, and that the investment amount represents a good proportion of the asset value. So, if anything should go wrong, the property can be sold for at least the amount of total investment in the property or project, as well as any fees incurred by liquidating it.
Always ask yourself; “Is my money fully covered if this project fails?”
One of the main advantages of investing via online crowdfunding platforms is the reduction in fees in comparison to traditional investing. Unfortunately, some platforms may hide fees that are payable later on in the investment process, or upon failure of the project.
Avoiding this comes down to reading the small print, and asking fundraisers difficult questions. Similarly, platforms that have a track record, existing investors and good reviews are less likely to have tricks up their sleeves.
Be realistic; if the fees on a platform appear to be too low, they probably are. Crowdfunding platforms need to make some money too, so they have to charge fees. If they are promising no fees or ridiculously low fees, the chances are you will pay the price down the line, with interest!
Always ensure the fees are clearly indicated on the platform and in the investment documents!
Generally speaking, the longer an investment’s lock-in period is, the greater the returns that are achievable from it. Investors with the luxury of being able to lock in their capital for long periods are in a great position, but there are always unexpected circumstances in life that require one to release some capital and a level of flexibility in an investment product is always a desirable.
The liquidity problem doesn’t just apply to crowdfunded projects, but all real estate projects to a certain extent. However, properties that are being sold to a group of investors may be more difficult to liquidate as it would require the cooperation or agreement of all parties to sell the property. However, if the investment is attractive and popular, others may be willing to buy your proportion of the project, thereby making it more liquid. Buying real estate investments as security tokens can resolve this issue, provided they can be traded.
Always check what the lock-in period is for a given investment and whether there is an emergency exit strategy. Find out if you can resell your part in the crowdfunded project and the time and cost involved in doing so. Only commit to a time period that you are comfortable with, and to a liquidity level that you are able to afford.
Crowdfunding platforms are designed to make the investor’s life easier, partly by reducing busy work and performing background checks on behalf of all the platform’s users.
Whenever due diligence is performed by a third party, there is a risk of it being incomplete, badly performed and ever fraudulent. If you are going to trust a third party’s checks, make sure that either the proof is made readily available or that you wholeheartedly trust the body performing the checks.
Always ensure the Due Diligence documents are readily available.
Max Crowdfund is an international real estate crowdfunding platform developed by property professionals, since 2017. Platform security measures include blockchain technology, asset-backed investment policy, a third-party administrator to sign off on all projects and transparent due diligence procedure.
*Whilst the world is on lockdown and the real estate sector is on ice, we have a moment to reflect on the nature of things, and to assess what it is that makes investors vulnerable to the pitfalls of real estate investments available on crowdfunding platforms.