We were at first, too!
There isn’t a single dominant site, unlike other forms of crowdfunding, where you can easily invest in every kind of real estate investment you need to diversify a portfolio. Only a few available investments are present on the average site. And no single website addresses all investment forms (equity, debt, commercial, residential, specialty, core, core plus, value-added, opportunistic). So, to properly fund your portfolio, you must use multiple websites.
However, which ones?
Requiring Diligence:
Random selection is not a good idea. There are a few excellent sites, a few passable ones, and many more subpar ones. You risk making a costly error if you don’t consider all your options.
However, most websites require much nagging before they reveal their flaws. As a result, my assistant and I took action. We reviewed each website in-depth for months. We registered for each, read the site information, and spoke with account representatives, administrators, and principals. We combed through reams of court records and investment agreements. We also spoke with real investors.
Several websites were really useful. Others lacked interest. A few were downright aggressive, while others were recklessly evasive. The rankings, reviews, and/or feature comparison matrix disclose all of the critical information we discovered, flaws and all. Visit this page to see the outcome.
Methodology:
A website needed to satisfy the following criteria to be considered a top site:
- Functional site: A fully functional website is open for business (versus in beta). A website cannot appear amateurish or unprofessional.
- Functional sign-up: The site requires a password for registration and verifies the email address. May successfully create a user account.
- Specializes in real estate crowdfunding only, rather than attempting to handle various forms of crowdfunding in the same way as a “jack of all trades” website (meaning that it does real estate poorly).
- Real internet crowdsourcing as opposed to brokers. Real means that the website lists all the online investments available and offers all of the information required to make an online investment (including all due diligence documents, such as leases, appraisals etc.). Some or all of the aforementioned items are absent from broker sites. They frequently involve dealing with a salesperson who will try to persuade you to make their recommended investments.
- Location: All investments must be based in the United States. (For investors residing in the U.S., foreign real estate is more unpredictable, riskier, and challenging to evaluate. It is much less likely to replicate past U.S. returns, and it is harder to assess the right level of diversification, etc.).
- Availability: Available to investors in all states of the United States.
- Not a zombie: Has at least one genuine, active investment and none that contain false or sample data.
- Transparency: enables sharing and critiquing of information about investments by investors. Does not “lawyer up” to stop the sharing of investment-related information.
- Minimum selection: three or more options per month for investing.
Extra Points:
A site rose in the ranks thanks to the following characteristics. It dropped because it lacked the feature.
- Volume: A website can be excellent in every regard, but if it doesn’t have enough traffic, an investor won’t be able to use it. This is a crucial factor.
- Bankruptcy protection: outlined investor protection in the event that the website files for bankruptcy. To view the complete definition, click here.
- Positive comments from investors. A website was penalized for negative comments.
- Strong administration and customer service: how the business treats investors after the transaction, including managing investments, processing tax returns, etc.
- Fees charged to investors are competitive; the lower the fee, the more opportunity there is for error in the investment. Obviously, the investor keeps more money when the fee is lower.
- Average to low investor minimums: As was covered in this essay on portfolio diversity, excessive minimums make it difficult for most investors to achieve adequate diversification. No website in the sector accomplishes this well enough, but even among all the underperformers, there is a range. The site was punished if investment minimums rose to an average of $10,000 for some or all investments.
- True skin in the game involves taking a financial hit if an investment loses money and partaking in success.
- Pre-funding: Compared to non-pre-funded sites, pre-funded sites might have several advantages. To view the complete definition, click here.
Moving forward
Because I am an investor, the rankings are based on the websites I believe are the most useful for other investors. You can see the raw data in the feature-by-feature comparison matrix and decide which sites suit you the best if you disagree with my technique or terminology. You may use the same matrix to evaluate sponsor costs and choose the ideal site for your needs if you’re a sponsor (trying to raise money for real estate).
Definitions:
Pre-funding:
Most websites wait until all the investors have filled the offering before giving the money to the sponsor (and may never give the money if too few investors are interested). Pre-funding websites immediately provide the funds to the sponsor before making them available to the investors. Because they will own some or all of the investment if insufficient investors purchase it, the website is forced to be extra certain about the investment. Consequently, the market has more “skin in the game.”
Pre-funding has the additional benefit of putting your money to use immediately after the deposit. You must wait until the deal is successfully sold to every investor on non-pre-funding websites. This lowers your return and, in the worst scenario (when there aren’t enough buyers in the market), means that you won’t even be able to invest after waiting. Pre-funding websites stay clear of each of these issues.
Finally, because pre-funding gets sponsors their money faster and with more assurance, they also appreciate how convenient it is. Providing them access to a bigger, more diverse pool of investments also benefits investors.
Bankruptcy Protection:
Some websites will inevitably fail due to the intense industry competition. You can feel really uncomfortable if you invest and the website fails. Without a manager, the investment cannot carry out fundamental tasks and, at the absolute least, prevents you from receiving your money when you anticipate. A bankruptcy court may also decide that the finances must remain restricted for further months or years while the company is being wound down. And in the worst-case scenario, the court can determine that your money should be seized and applied to the company’s debts. These are all terrible consequences.
Thankfully, many websites handle this by establishing procedures to safeguard investors in the event of insolvency (although only a few do it fully). Most websites keep the legal company for the investment separate from the investment marketplace, preventing a bankruptcy court from combining them to cover the parent marketplace’s debts. This pertains to both the organization’s structure and management. For instance, they wouldn’t exchange financial accounts.
Although this is a solid start, it is still insufficient. There must be a means to keep the investment operating even in the event of bankruptcy. The finest websites contain contract provisions that make this possible.
Few websites currently permit investors to choose a new administrator if the website declares bankruptcy. Both of these take time to implement, even though this is significantly better than letting the investment dangle in the air for what could be an eternity. Therefore, the status may remain unknown for a few months or more.
The top security websites take it a step further and pre-configure the backup administrator. The changeover for your investment should be seamless in this case.
Non-Accredited Versus Accredited Investors:
Some platforms only allow accredited investors to participate. Others permit almost any investor (non-accredited). A qualified investor is one of the following:
1. Earned $300,000 if married or $200,000 if single in the previous two years.
OR
2. Is at least $1 million in net worth, excluding major residence.
How do you rate and rank your investment platform? What kind of criteria are important to you?
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.