Waiting for baby to grow

 

Real estate crowdfunding, is a brand-new industry that just started in 2013. Many of the sites are even newer, and only started in 2014 + 2015. The industry will grow and improve rapidly over the next several years and investing will get easier, safer, and more profitable.

 

But in the immediate present, most sites have significant limitations, which potential investors need to be aware of.

 

7 current limitations

 

Before starting, I should point out that all real estate crowdfunding sites inherit the limitations of the underlying direct real estate (lack of liquidity, etc.). If you're not already familiar with them, you can see them (along with the advantages) in the article: Why invest in direct real estate?

This pair of articles talks about the limitations that the sites themselves currently have, that are above and beyond those.

 

In part one, we talk about the limitations that can be overcome with effort or tools:

 

• Extreme investment fragmentation

• Onerous education requirements

• Sky high due diligence requirements

The following will require the sites themselves to fix, and the industry to mature. They will be talked about in part 2:

 

• Not enough overall investments to diversify

• Not enough core investments to diversify

• Too high minimums

• Limited to accredited investors only

 

Let's take a look at the limitations that can be overcome with effort or tools.

 

Extreme investment fragmentation

 

You need at least 100+ properties to diversify your portfolio against geographic, regional, tenant and property risk (and arguably hundreds).

 

In other crowdfunding industries (like consumer loans) you can visit one site, and fully diversify your investment in a single day. In today's real estate crowdfunding world, most sites have only a handful of open investments, and many have none.

Update April 26, 2018: thankfully, the situation has improved a lot since this article was originally written. Many sites now offer funds that have multiple properties, which makes proper diversification much easier. For example, with one investment, you might be able to access the fund that invests in 12, 25 or more properties. However, since there are still plenty of single property funds out there, I'm leaving the rest of this section here.

 

Thankfully, you can use multiple sites to get a lot more investment candidates. Currently, there are 42 open investments right now in the U.S. (see our newest investments feed for the most up-to-date list). But getting to them isn't easy.

 

First you have to sign up for every one of the 85+ sites. Many put new investors in a 30 day "cooling-off" period, so you have to wait to even view the investments. After going through this, you'll find a number of sites that still have no investments.

 

Once you've done that, you quickly realize that the sites vary widely in quality, investor protection, and fees. This information is crucial to protecting your portfolio, but few sites post the most important details publicly. So vetting them is both necessary and very time-consuming. It requires interviewing staff and poking into contracts to tease out the details.

 

Then once you've determined the best sites, managing 30+ emails from different sites, is cumbersome and difficult. Many sites send their alert emails from a different email address every time, and end up in spam so  you never see them. And many send marketing emails, which will quickly clutter up your inbox. Trying to locate the best investments feels like drinking from a fire hose.

 

The solution to fragmentation

 

One solution is to just bite the bullet and do all the above work yourself. If you like to do things on your own, this might be your solution.

 

An easier way is to lean on the work done by others. Since I've run into all of the above problems, and thought it was a ridiculous amount of work, I've shared the tools that solved these problems for me. This way, other investors don't have to suffer through the same ordeal that I did. 

 

1. Here are the results of my deep-dive site vetting of all the sites. My assistant and I spent weeks interviewing sites, analyzing contracts, and interviewing other investors to produce these. You can use this to quickly sign-up only on the sites that match what you're looking for.
    

2. Join an investment club, where other investors will also bring interesting deals to your attention for you.

 

Onerous education requirements

 

If you don't already have a real estate background, you'll find that investing in real estate crowdfunding requires a lot of background education.

 

For example, with consumer loan crowdfunding, a complete novice can get up to speed in an evening, and be ready to safely invest the next day.

 

However, in real estate, there are numerous different types of investments, each with their own advantages and pitfalls. If you don't fully understand each investment, you can easily lose a lot of money. 

 

And just becoming competent in a single type (say residential debt), can easily take days or weeks for a novice to research and feel competent.

 

I suspect that when many investors are confronted with numerous sites, each specializing in their own types of real estate investments, they feel completely overwhelmed. I would not be surprised if many investors simply "throw a dart at a board" without understanding the investment, or simply give up at the enormity of the task and look for another investment.

 

The solution to onerous education requirements

 

Again, you can solve this by simply deciding to do all the research on your own.

 

Or, you can lean on others.  I've spent months researching and pulling together the real estate knowledge necessary to educate myself on investments. (and I'm still doing this every day, and will continue for years, no doubt). I've compiled the most important information into the investment tutorials section of the site. I hope it saves you considerable time and effort. (If it's useful, do remember to sign up to be notified of new additions via the mailing list, below.)

 

I believe a third solution to this problem will eventually evolve too. Once a trusted, objective, third-party starts providing ratings on the investments, it will greatly reduce the amount of education investors have to go through. I'll talk about this more below.

 

 

Sky high due diligence for each investment

 

Investing in a new investment on a consumer loan crowdfunding site, requires no due diligence. Every investment comes with a risk rating. So, my investments with The Lendingclub are on full auto pilot, using automated tools that always keep my risk/reward ratio optimized, and maximize my profits. You can scale these investments from $10,000 to $1 million, with no additional effort. (Recently, the first $1 billion investment was recorded.)

 

Real estate crowdfunding is currently very different. There are no standardized risk ratings, and each new investment require hours of due diligence. Each one might take 45 minutes to an hour just to review the documents. If you have your attorney and/or real estate investment advisor review them further (which is a really good idea), it will take more time and money. And you have to go through many candidates to find the best investments for you.

 

This is a huge amount of work and severely limits the investor's ability to scale the investment to the 100+ property level required to safely diversify.

 

The solution to skyhigh due diligence

 

Ultimately, I think this problem will solve itself, once an objective, neutral, third-party starts providing in-depth analysis and ratings of each investment.

 

Investors used to have the same problem with investing in bonds, until bond rating agencies sorted out the numerous details into something easily digestible and usable. Mutual funds also used to have this problem, until informational services like MorningStar, filled the gap. I believe the same thing will inevitably happen in this industry.

 

However, in the meantime what do you do?  

 

Again, you can do the hard work yourself. This is ideal for someone who wants to feel in control of the process.

 

Or you can lean on others. You can join an investor club, where you can share the burdens of due diligence with others, as well as learn new tips and tricks on how to do it well.
 

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Part 2

 

In part two of this article, we'll discuss the limitations, that the sites themselves must solve: not enough core investments, not enough overall investments, too high minimums and limiting investment to accredited investors only. These limitations currently prevent you from scaling and diversifying your investments. They force investments to be speculative investments from the smallest part of your portfolio, rather than core real estate investments from the largest part.

 

Click here to read part 2.