Which real estate crowdfunding fund should I pick?
Updated: Apr 22, 2020
A step-by-step guide for the every-day, non-accredited investor.
(Usual disclaimer: I'm an investor and not a registered financial advisor or attorney. Consult your own financial professional before making any financial decisions. Everything on this site is my personal opinion only. Code of Ethics: We do not receive any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves above what we negotiate for the benefit of members.) IMPORTANT COVID-19 UPDATE: this info was posted before anyone knew we would be facing a global pandemic in the spring of 2020. So it may be missing crucial information necessary to making an effective investment today. Some of the information in it may be dated, no longer accurate and/or irrelevant. For information on analyzing investments in this new era, see: "How will Covid-19 / Coronavirus Affect my Alternative Investment Portfolio?"
It can be confusing for a new investor to figure out what real estate crowdfunding investment is best for them. With 14 different funds listed in the 2017-2018 Fund Awards and Reviews, there's an awful lot to process and choose from. So I wrote this newbie guide to show you my way of sorting through the noise and coming up with a good investment strategy. (If you're an accredited investor, you have access to many more and better options than the vast majority of these funds. Check out the accredited investor guide to picking deals.)
No cash, no play.
First, let's take a step back. Do you have 3 months worth of salary stashed away in cash equivalents for emergencies? If you don't, then please STOP and don't even think about investing in real estate until you do. I don't want to be responsible for you not having money to eat, when the next big downturn comes! Okay, you do have a cash reserve? Great, let's look at the next thing.
Take a look at everything else you have to invest. That's your portfolio. So how much to put in real estate? Traditional advice says that only 10 to 25% should be in real estate (maximum). That's what virtually every older study concludes and what virtually all institutional investors (like Yale and Harvard endowments) do. But recently, a bombshell study came out that suggests this might be too low. The study went all the way back to 1870, and found something shocking: real-estate has had a higher risk-adjusted return than even the stock market! So the 10-25% may have been way too conservative. But before you deploy your entire portfolio into real estate, do realize that the study only looked at un-leveraged residential real estate. So while a 100% allocation to this no longer seems completely crazy, most non-accredited offerings aren't like this. Adding leverage and/or going with commercial real estate will both probably increase the risk. They haven't done a follow-up study on those, so no one knows exactly how much. But a prudent idea is to allocate less if you are tilting your portfolio to something riskier. And the amount that's best for one person is going to be completely different than someone else because it also depends on your tolerance for risk. And that depends on your personal financial situation (are you retired, working, etc.). So it's best to consult with a financial advisor familiar with alternative investments to find out the best percentage for you. I've bumped my own allocation