In our articles Crowdfunded Real Estate Investing: An Overview and How Investing in Real Estate Online is Unique, we explored the basics of real estate crowdfunding, including active and passive investors, debt investments vs. equity investments, REITs, and more.
Now that you're familiar with the benefits, risks, and logistics of investing in real estate online, let's explore if it's right for you and your portfolio.
Many platforms offer the ability to invest in real estate online to investors who qualify as accredited. Accredited investors are individuals and business entities who are entitled to trade securities that may not be registered with the SEC.
The official definition of an accredited investor is an individual who:
Institutional entities may also qualify as accredited when they can show:
The official accredited investor definition was updated by the SEC in August 2020.
If you meet the criteria for an accredited investor, the next step is to ask yourself, "Is investing in real estate right for me and my portfolio?" Here are a few things to keep in mind when building your real estate investment strategy.
Modern portfolio theory suggests the best way to earn consistent returns is to diversify across investments and asset classes. Recommendations readily found online suggest that depending on risk, return, and hold period, it makes sense for many investors to hold anywhere between 5% and 20% of their portfolio in real estate. In fact, many platforms allow you to start building a real estate portfolio with as little as $5,000, allowing you the freedom to experiment with your risk appetite and the types of projects you want to invest in.
Additionally, consider how to diversify your real estate investments. A diverse real estate portfolio may help hedge against massive losses on an individual deal, as well as increase the probability of higher long-term returns of the portfolio. You can ensure you have a diverse real estate portfolio by investing in deals with different borrowers, geographic locations, and time to maturity.
When investing in real estate, you can invest in mobile home parks, fix-and-flip residential properties, commercial offices, hotels, new developments, and more. To make educated investments, you need to have a solid understanding of the investment fundamentals of each of these asset classes. Just like it’s impossible to intelligently invest in every industry sector for publicly traded stocks, it’s very difficult to make educated investment decisions across multiple real estate asset classes. We suggest starting with one or two asset classes you understand. This is one of the reasons we like residential fix-and-flip loans. Most investors have a baseline understanding of this asset class from being homeowners.
Finally, consider that real estate investing is relatively illiquid. Hold or maturity periods on some real estate investing platforms are between six and 12 months. Other platforms offer investments that may have five- to seven-year hold periods. Most of these private investments aren’t freely traded, and if they are, may have restrictions that could impact your return.
With this in mind, you’ll want to be strategic with your investments to ensure the maturity periods give you some liquidity. For example, you could make two investments per month. One investment will have a six-month maturity while the other has a 12-month. The next month you repeat this investment strategy until you are fully allocated. With this plan, after six months you’ll have at least one investment mature, giving you some liquidity. Depending on your liquidity needs, you can re-invest this capital or take it off the table if your allocation strategy has changed.
Having an investment strategy allows you to review deals quickly and focus your diligence efforts on the deals that best fit your risk and return goals. This is important as investors often need to act quickly to invest in the best deals or the deals they find very attractive. Additionally, following a strategy will give you a better return on your time when considering the size of your allocation for each investment.
Like any strategy, you should revisit and recalibrate based on your experience and relative performance. As you gain more experience, you can grow your strategy to increase your allocation, asset type, and investment type — all while refining your criteria for success.
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