Accredited investors have more access to a variety of real estate investments than ever before. Now with the click of a mouse you can be an investor in a commercial property or be part of a lending group financing a residential fix-and-flip project. From land to multifamily property investments, there are many different types of real estate crowdfunding opportunities available.
When it comes to real estate crowdfunding, deals are typically either equity or debt. In an equity deal, you typically share in the profits, earning an annualized return paid out each month or quarter as well as a lump sum when the property is sold. Debt investments don’t share in the profits and earn interest that is typically paid monthly. The duration of the deal is another important aspect of real estate projects available on crowdfunding platforms. Some real estate investment opportunities have short durations lasting on average from three to 18 months, while other deals have much longer durations with the projected exit date three to ten years out. Residential flips usually have shorter durations while commercial deals often have longer durations. Longer duration deals tend to generate income but other factors may need to be considered such as a potential rising interest rate environment in the greater economy.
The following are some of the more common property types that can be found on real estate crowdfunding platforms:
Residential Fix-and-Flip
Investors can make money in the real estate market by purchasing a home at a below-market or market price, fixing it up and selling it for a profit. These deals can be structured as loans or equity investments and typically have shorter durations of three to 18 months. The property typically does not generate income from operations since there are no tenants in the house during the renovation. After the renovation is complete, the home is most often put on the market and sold to an end buyer, but there are cases where the flipper may transfer the house into a rental portfolio. Like for all types of property investments, the flipper’s track record, the property‘s location, and the condition of the property are important factors in the investment.
Multifamily Properties
From townhouses to apartment complexes, multifamily investments encompass any property or properties that hold multiple living quarters with separate rents. These investments typically have a duration of three to ten years and generate income for the investors during that period. Multifamily properties tend to have short leases, often no longer than one year, and some properties have seasonality in their leasing patterns. Job center proximity and transportation access are two important factors when considering multifamily investments.
Retail Properties
Retail real estate comes in all sorts of flavors from a neighborhood center with small mom-and-pop tenants to a large shopping mall with national brand name stores. These investments tend to have longer durations, typically in the three to ten year range and the tenant lease length can vary considerably as well. Many retail centers contain an “anchor” tenant, which is the main draw of the property. The other stores are referred to as “in line” tenants. New retail tenants are often provided a “Tenant Improvement” allowance by the landlord to help build out their space. Generally, retail leases may contain special provisions such as percentage rent collections based on store sales or “go dark” rights to allow the tenant to vacate if certain other tenants vacate. Population density in the trade area and traffic counts are important to consider with retail investments.
Office Properties
Companies small and large need office space and often rent it instead of purchasing their own land and building. Like retail and multifamily crowdfunding investments, the duration for office property investments is typically three to ten years. And like with retail properties, new office tenants are often provided a Tenant Improvement allowance to help build out their space. Office leases can vary in length, but landlords strike 5, 7 or 10 year leases or longer if they can. Office space with better views and light typically commands higher rents than other space. One major trend in office space is creating open floor plans and doing away with employee cubes—these open layouts are more efficient and require less office space per employee.
Industrial Properties
Industrial properties may consist of warehouse space, some combination of warehouse and office space, or R&D space. The more modern industrial properties have higher ceiling heights and drive-up loading docks at a convenient height. Some existing industrial buildings are obsolete, given that they don’t meet the criteria that tenants are looking for in industrial space today, and so the obsolete space needs to be demolished and rebuilt with more modern attributes to be rentable. Industrial leases usually last three to ten years, though triple net (NNN) leases may last 15 or 20 years.
Land
Investors interested in land deals should understand whether the land is entitled or not. “Entitled” means the pre-development processes have been completed, including obtaining permits and land use approval. Entitlements are the legal rights to develop the property and entitlements can be a major factor in the ultimate use, viability, and value of the property. Entitled land can potentially be leased as-is or developed and subdivided to be sold for a profit. Unentitled land deals are more risky because the leg work hasn’t been done to obtain the permits or the land use approval.
Some land investors speculatively hold land without altering it in hopes that it will be worth more at a later date purely resulting from surrounding development like the construction of a new highway or a nearby large-scale building project.
Other Property Types
While residential fix-and-flip, commercial property, and land deals are common on real estate crowdfunding platforms, there are also a handful of niche investment types that investors may come across, including self-storage facilities, mobile homes, student housing or assisted living facilities. These deals can be structured as equity or debt and tend to have longer durations.
With a number of different types of investment opportunities that are available to review online, it’s no wonder real estate crowdfunding is gaining steam. But at the end of the day, the investor must understand aspects of the investment such as the legal structure, the economic terms, and the fundamentals of the underlying asset. Knowing the difference between property types is a step in the right direction toward making educated real estate investment decisions.
Source: Realty Shares.com
