A Closer Look at Due Diligence in Property Crowdfunding
Property crowdfunding continues to gain popularity as an alternative investment option. However, finding success requires a certain amount of knowledge and mindfulness when it comes to mitigating risk. If your aim is to create a profitable portfolio that doesn't leave you disadvantaged by hidden terms, or overexposed to risk, be sure to factor due diligence into your investment strategy.
It would be wrong to assume that all real estate crowdfunding platforms offer the same service. In fact, the many available online platforms offer a mix of management approaches, experience and available deals. Whether you are investing for income or capital growth, it's recommended that all investors carry out due diligence when putting together their investment portfolios. Here's a look at some of the major considerations.
How to choose the right crowdfunding platform?
To start, investors should search for platforms that offer reliable services and transparent deals. When making your initial searches, consider things like the management team behind the company, how long the business has been operating, and their general reputation in the market.
Each platform will have its own way of evaluating its projects and determining risk. So we recommend you to use this as one of your major considerations when deciding which platforms to investment through. For instance, is the personal experience of advisors used to classify risk categories, or is this done by online algorithms?
Potential platform check-list:
How does the platform categorise risk?
Are loans secured by property assets alone or is there additional security?
What is the balance between security and the potential for returns?
Is the platform offering debt or equity-based investment options?
Does the platform have a good reputation in the investment community?
Are investment opportunities sufficiently transparent?
Evaluating investments
Even after you've identified a reliable crowdfunding platform and they have carried out their screening of investment opportunities, it can't hurt to dig a little deeper for an added layer of reassurance.
Checking the developer or landlord online and on social media may highlight something they've missed. Any past or pending litigation, for instance, might be considered a big red flag here.
Track record
If there aren't any issues uncovered in your online search on the sponsor, the next thing to do is to determine the likelihood of the investment delivering the projected yields based on company track records. Remember though, that past performance is not an indicator of future success.
It's of course up to you how much weighting you put on previous projects, but investors looking to limit their risk may want to choose sponsors that have been around for a few years.
Review the market
Understanding your investment within its relevant context can help determine the likeliness of its success, as well as the risks involved. While some passive investors may choose to simply rely on the estimated yields of an asset as determined by the crowdfunding platform, there's nothing stopping you from going a little deeper.
You can do this by assessing the factors likely to influence the success. For instance, how might the property be impacted by local market factors such as population demographics, employment rates, economic landscapes or location?
If these risk factors aren't immediately transparent, or you're unable to source the information you need, you'll be forgiven for declining the offer and continuing your search for other investments where that information is available.
Access to capital
Finally, you should also consider how likely it is that you will receive repayments or dividends. For instance, is the company known for paying returns on time or has capital been tied up for any significant amount of time for previous investors? This applies both to evaluating platforms as well as the individual investment opportunities you choose.
When it comes to the payout structure, equity investments can be much more complex than debt-based investments. Make sure you understand where your investments fit in the capital stack, and at what stage you will be paid.
Confident not complacent
Ultimately, investment in the property crowdfunding world will always come with a certain amount of risk and defining the right balance will depend on your individual needs and your attitude towards risk. Adding your own research and due diligence to the platform's processes is an important part of this process helping to ensure you are investing with a credible platform and accessing investments that are clear and viable.
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