Real estate crowdfunding and tokenization have become increasingly popular as a way for investors to access real estate investments with relatively low minimums and without the need for extensive knowledge of the market or property management. While this can be a great way to build wealth without too much effort, it is important for you to approach these platforms with caution and ask a few key questions before investing. Understanding the regulatory compliance of the platform, the quality of the assets being offered, and the experience of the sponsor or platform operator can all help you make informed decisions and minimize risks. By taking the time to ask these questions, you can make the most of the opportunities presented by real estate crowdfunding and tokenization which is a fascinating industry.
Here are some questions you should consider asking before investing in real estate crowdfunding or tokenization:
What is the platform's track record and experience with real estate crowdfunding/tokenization?
How long have they been in business, and what is their success rate with previous offerings?
What is the investment minimum, and what is the projected return on investment?
Is there a lockup period or other restrictions on the investment?
What is the platform's due diligence process for selecting and underwriting deals? How do they ensure the safety and quality of the investments they offer?
How do they measure returns, are their IRRs and ROIs net of the investor's costs?
What fees does the platform charge, and what is the breakdown of these fees? Are there any hidden or additional fees?
What is the platform's policy for exiting investments early or selling tokens on the secondary market? Are there any restrictions on the sale of tokens, and what is the liquidity of the investment?
What type of real estate projects does the platform specialize in, and what is the geographical focus? How do they select and underwrite properties to invest in?
Who is going to manage the property itself and how do I make sure my interest, yours, and the property management company are all aligned?
What type of legal structure is used for the investment, and how is the investment protected under this structure? Who is responsible for managing the investment
How does the platform handle taxes and provide tax documents to investors?
How does the platform ensure regulatory compliance, and what is their relationship with relevant regulatory bodies?
What is the platform's policy for managing risk and handling defaults or foreclosures? How do they ensure that investors are protected in the event of an investment loss?
What is the process for reviewing and approving potential investors? What are the investor qualification criteria and accreditation requirements?What are the reviews and feedback from previous investors, and what is the overall reputation of the platform in the industry?
Let's deep dive into some of those questions!!
What is the platform's track record and experience with real estate crowdfunding/tokenization? How long have they been in business, and what is their success rate with previous offerings?
What I am worried about is that the property is located in a parallel universe and my investment will disappear into a black hole.
This question is crucial as it provides insight into the platform's level of experience and success in the industry as well as credibility and legitimacy. It's essential to know the track record of a real estate crowdfunding platform before investing as it gives you, the investor, a sense of the platform's reliability, trustworthiness, credibility, and ability to deliver returns. Platforms with a proven track record are more likely to have successful investments, reducing the risk of loss for investors. Unless you know the people behind the platform, or the platform is partnering with a strong sponsor (or facilitating the crowdfunding of the sponsor), you might want to think twice before investing in such a platform if they are brand new, or at least, as further questions found below to assess them. On the other hand, if a platform has been in business for many years, has a history of successful investments, and can provide evidence of high returns for their investors, you will feel more confident in their investment.
Is there a lockup period or other restrictions on the investment?
What is the investment minimum, and what is the projected return on investment?
I don't want to wait to sell until I am sitting in a rockign chair in a retirement home, I want to sell soon enough and buy a lambo... or at least a kayak I can use around the Palm Island.
This question is important as it helps investors understand the investment's potential profitability and the amount of money they need to invest. It also provides clarity on whether there are any restrictions on withdrawing funds, such as a lock-up period, which is the period where investors cannot withdraw their funds.
Why are there lock-up periods when you invest in Property Crowdfunding?
In most cases, lock-up periods are mandated by regulations for couple of reasons:
Lock-up periods can help reduce speculation: in general crowdfunding investments including real estate crowdfunding enforce lock-up periods to discourage investors from investing solely for short-term gains. Speculation involves buying and selling an asset in the short term, usually in response to market fluctuations, rather than investing for the long term based on the asset's intrinsic value.
Lock-up periods can discourage speculation because they require investors to commit to holding onto their investment for a specified period, typically ranging from a few months to several years. This commitment can make investors think more carefully about their investment decision and encourage them to focus on the investment's long-term potential rather than short-term market fluctuations.
Furthermore, lock-up periods may also reduce the possibility of sudden, large-scale withdrawals that can destabilize the investment opportunity.
Additionally, though they are not specifically designed to reduce money laundering, lock-up periods may indirectly help prevent it. Lock-up periods may discourage money launderers from using crowdfunding investments because they require longer waiting period before the funds can be accessed. This waiting period may make it more challenging for money launderers to move their funds quickly through the investment, making the process less attractive to them.
As an investor however, you should be aware of any lock-up periods or other restrictions that may prevent you from withdrawing your funds.
What is the platform's due diligence process for selecting and underwriting property deals? How do you ensure the safety and quality of the investments you offer?
My concern is that I'll invest all my savings in one of your DIFC real estate deals, and then I'll end up living in a cardboard box under Business Bay bridge. And let's be real, cardboard isn't even a durable enough material to withstand harsh weather conditions and can’t even keep cooled AC air inside.
This question is crucial as it helps you understand the platform's investment selection process, which directly affects the quality and safety of the investments. A thorough due diligence process is necessary for selecting profitable and low-risk investments.
Financial analysis is a critical component of the underwriting process in real estate investing. It involves a comprehensive review and analysis of the financial statements and projections related to the property being considered for investment. This analysis helps investors understand the potential risks and rewards associated with the investment and make informed decisions.
It's important for the financial analysis to be unbiased and based on factual data to ensure that investors base their crowdfunding investment decision on facts and not dreams. For example, if the financial analysis exaggerates the appreciation of the property on exit to inflate the internal rate of return (IRR), it could be misleading for investors. This is because you may base your investment decision on this inflated IRR, which could lead to disappointment if the actual returns are lower than expected, which may end up with you living under a bridge.
A reliable financial analysis should consider a range of factors that could impact the investment, such as the local market conditions, property location, property type, rental income, operating expenses, capital expenditures, financing costs, and potential risks. It should also take into account historical data and market trends to make realistic projections.
Does the platform’s team have real estate experts and professionals with prior experience in property investment and asset management?
My concern is that the platform's team might be made up of a group of real estate enthusiasts who only know how to binge-watch "House Hunters" on HGTV.
Real estate is an industry that requires a high level of knowledge and expertise to successfully underwrite and manage deals. Having real estate specific experienced professionals on the platform's team can help ensure that the due diligence process for selecting and underwriting deals is thorough and accurate.
For example, a real estate expert with experience in property valuation and market analysis can provide valuable insight into the potential risks and opportunities of a particular investment. They can also help identify any red flags that may not be apparent to someone without that level of expertise.
Additionally and more importantly, while valuation can be done by third parties, strategies and ongoing investment ideally should be in-house. Experienced investment and asset managers can ensure that the platform's investment strategy is sound and aligned with your investment. They can help to monitor and manage risk, as well as identify opportunities for value-add or repositioning strategies.
What fees does the real estate crowdfunding platform charge, and what is the breakdown of these fees? Are there any hidden or additional fees?
because who doesn't love a little surprise hidden fee or two? It's like finding an unexpected spider in your bed - just adds a little excitement to your day!
It's essential to remember that while investing in real estate crowdfunding can be exciting, it's important not to let the fees become a horror show. So be sure to ask about the fees upfront and understand the breakdown, so you don't end up with a scary surprise later on!
These fees can significantly impact your return on investment, and it's crucial to know the breakdown of fees to make informed investment decisions.
Typically, real estate crowdfunding platforms charge two types of fees: upfront fees and ongoing fees (and sometimes exit fees i.e. a fee for selling the property / investment). The upfront fees are charged at the beginning of the investment and usually cover expenses related to the platform’s own revenue, underwriting, due diligence, legal and administrative expenses. The ongoing fees cover the management and maintenance of the property over time.
The platform's fee structure can vary depending on the platform, and it's essential to understand the fee breakdown before investing. Some platforms charge a flat fee, while others charge a percentage of the investment amount. Some may charge a hybrid of both.
It's also important to ask about any hidden or additional fees that may not be included in the fee breakdown. These fees may include fees for early withdrawals or additional investment opportunities.
Are all fees included in the ROI, Cash-on-Cash and IRR analyses? are your return analysis net to the investors or are these project IRRs and hence investors returns are lower due to costs?
It is important for you to know this because it helps clarify the true return on your investment after all fees have been taken into account. Sometimes, platforms may present project IRRs without taking into account all the fees, making the projected investment returns seem more attractive than they actually are, at least when being compared to other platforms that do take out the fees when calculating returns included IRRs and Cash-on-Cash etc…. It is important to know whether the return analysis is presented as Net or Pre-Costs. There is nothing wrong with looking at Project IRRs (pre-your-cost), but you gotta be aware of the cost and if you are comparing investments, compare shawarmas to shawarmas.
Who makes major decisions regarding the property/investment and how do I know your platform is aligned with me and my investment goals?
My concern is that you really don't care about my investment goals and retuns, you just care about printing money from upfront fees then you disappear into nothingness after leaving your car at the airport's terminal 3 parking...
In real estate crowdfunding and tokenization, decisions regarding the investment are typically made by the platform's management team in consultation with the investors. These decisions can include major ones, such as the sale of an asset or changes to the investment strategy. Don't worry, they are not going to call you to ask if they should change a light bulb, this is precisely not why you are investing in crowdfunding real estate, because you don't want the headache. However, like many of us, you may want to cherry pick and be part of the major decisions.
To ensure that investors are aligned with the platform's decisions, some platforms may require that major decisions be put to a vote among the investor community. Other platforms may have a more centralized decision-making process, where the platform's management team has the final say on major decisions.
Ultimately, the decision-making process will vary depending on the platform and the specific investment. However, it's important for investors to understand the decision-making process and have a clear understanding of how their interests are being represented in these major decisions.
For additional alignments of interest, some platforms/sponsors may even go the extra mile by having skin in the game. There are some platforms that co-invest with you and the remaining investors, in part to prove true alignment of interest, credibility and hence attract investors, in other to make money themeselves on their investment. This is known as a "co-investment" model, where the platform invests alongside investors in each project. By co-investing, the platform or sponsor aligns its interests with the investors, as it has a financial stake in the success of the project. We really like those co-investment models, they immediately infer true alingment of itnerest.
Some sponsors / platforms also offer "preferred equity" or "preferred return" structures, where the sponsor or platform receives a lower return than you until a certain level of return is achieved, but then perhaps they get a bigger upside. This ensures that the platform is incentivized to focus on the long-term success of the project, rather than just collecting fees upfront.
What is the platform's policy for exiting the investments early or selling tokens on the secondary market? Are there any restrictions on the sale of tokens, and what is the liquidity of the investment?
Because I don't want to be stuck holding a tokenized hot potato. I need to make sure I can sell my tokens like hotcakes whenever I want, otherwise it's like trying to sell ice in the North Pole in an abandoned igloo market.
When investing in real estate crowdfunding or tokenization, it's important to consider the platform's policy for exiting investments early or selling tokens on the secondary market. This is because unforeseen circumstances can arise, and you may need to sell your investment before the end of the investment term.
A secondary market allows investors to buy and sell their investment to other investors, providing liquidity and flexibility. If a platform does not have a secondary market, you may be forced to hold onto your investment for the entire term, even if you need to access the funds for unforeseen circumstances, or sell early to use your funds to buy another great opportunity.
In addition, it's important to understand any restrictions on the sale of tokens, such as lock-up periods or limits on the number of tokens that can be sold at one time. These restrictions can impact the liquidity of the investment and the ease of selling it. (see lock-up concern above)
You should definitely consider the liquidity of the real estate investment when making your crowdfunding, tokenized, fractionalized or any kind of digitized real estate investment decision. Liquidity refers to how easily an investment can be bought or sold in the market without significantly affecting the price. If an investment is illiquid, it may be difficult to sell or exit the investment, which can be problematic in the event of unforeseen circumstances.
All in all, understanding the tokenization or real estate platform's policy for exiting investments and the liquidity of the investment is crucial in making an informed investment decision. As they say, "liquidity is like oxygen for a business, without it, it's difficult to breathe." So, it's important to ensure that there is a clear and effective policy in place to manage these aspects of the investment.
What type of real estate projects does the platform specialize in, and what is the geographical focus? How do they select and underwrite properties to invest in?
When it comes to real estate, you gotta have the street smarts of a New Yorker and the vision of AlAbbar. You know what they say, location, location, location! So it's important to make sure the platform you're investing with has a deep understanding of the local market. Don't want to end up with a fancy “penthouse:” in International City that's you paid more than the price of a 3-bedroom apartment in DIFC or City Walk in Dubai!
When investing in real estate, it's crucial to understand the local market and have expertise in the area where the property is located. Real estate values, rental rates, and other factors can vary significantly from one location to another, and what might be a good investment in one area could be a poor choice in another.
Platforms specializing in specific types of real estate projects, such as commercial or residential, may have more in-depth knowledge and expertise in those specific areas. Additionally, understanding the platform's geographical focus is essential, as it can indicate the platform's experience and relationships in that specific market. A platform with a narrow geographical focus may have more local knowledge and connections to source deals, which could lead to better investment opportunities.
Don’t forget to inquire about the platform's process for selecting and underwriting properties (see above).
What is the platform's policy for managing risk and handling defaults or foreclosures? How do they ensure that investors are protected in the event of an investment loss?
If the real estate crowdfunded is purchased 100% with equity, you don’t need to worry about loan defaults and foreclosures. However, if you are interested in some leverage and adventurous to have a higher levered IRR, then you may want to ask this question.
Investing in real estate, like any other investment, comes with a certain degree of risk. The risk can come from various sources such as market fluctuations, changes in interest rates, or the failure of the investment itself. Therefore, it is crucial for real estate crowdfunding platforms to have a clear and effective risk management policy in place to protect investors' interests.
Well, as they say, "Investing is like a game of bridge. If you don't have a good partner, you better have a good hand." So, it's important to make sure the platform is a good partner with a solid risk management policy, otherwise, you might end up playing with a deck of cards missing a few aces!
The platform's policy for managing risk and handling defaults or foreclosures should cover various aspects such as how they identify and mitigate potential risks, how they deal with defaults, and how they manage foreclosures. Additionally, the policy should outline how investors' interests will be protected in the event of an investment loss.
What type of legal structure is used for the investment, and how is the investment protected under this structure? Who is responsible for managing the investment?
There are some specific ways to setup legal structures for the purpose of crowdfunding real estate, and often depends on the jurisdiction the real estate and or investments are present, but more so the real estate itself. Understanding the legal structure used for the investment is crucial. The legal structure used can impact how the investment is managed, who is responsible for managing it, and how investors are protected.
Different platforms may use different legal structures, they normally set up Special Purpose Vehicles (SPVs) such as Limited Liability Companies (LLCs), Limited Partnerships (LPs), or Real Estate Investment Trusts (REITs). Each structure has its own unique features, benefits, and drawbacks, and it's important to understand the specific legal structure used by the platform and inquire how your investment is protected under this legal structure. For glossary terms click here.
How does the platform ensure regulatory compliance, and what is their relationship with relevant regulatory bodies?
My concern is that your platform might be secretly plotting to overthrow the regulatory bodies and establish yourselves as the supreme rulers of the real estate investment world.
Regulatory compliance is crucial when it comes to real estate investments. The platform must abide by local laws and regulations governing real estate crowdfunding or tokenization to ensure that investors' interests are protected. Therefore, you may want to inquire about the platform's regulatory compliance policies and its relationship with relevant regulatory bodies.
The platform should have a clear understanding of the regulatory environment and should have taken measures to ensure that they are compliant with applicable laws and regulations. This includes having the necessary licenses and certifications to operate, complying with anti-money laundering (AML) and know your customer (KYC) regulations, and ensuring that all investments are registered with the appropriate regulatory bodies.
In short, regulatory compliance is an important consideration for investors when investing in real estate crowdfunding or tokenization. By ensuring that the platform is compliant with local laws and regulations and has a good relationship with relevant regulatory bodies, you can minimize their risks and maximize their returns.
In summary, asking these questions before investing in real estate crowdfunding or tokenization can provide valuable insight into the platform's reliability, expertise, investment opportunities, and risk management policies. Understanding these factors is critical to making informed investment decisions that will provide the best returns while minimizing risk.