10 Questions & Answers Critical to Real Estate Crowdfunding Success

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What if you could know more about real estate crowdfunding than 90% of the investors jumping into the niche, all within the timespan it takes to read a single blog post?

Well, kids, if you pay attention closely to what I’m about to share with you, that’s exactly what will happen.

In this post, I’m reviewing the 1o most common real estate crowdfunding questions, and—it gets better—I’m answering them for you.

Real estate crowdfunding can be an incredible arena to invest in as long as you keep what you have learned in this guide in mind. As you invest, your knowledge will grow.

Let’s get right into it. These questions will be broken up into four sections, starting with…

Personal Investment, Fees, and Exit Strategy

Here are some of the hardest questions asked by investors and the responses that you are supposed to get from your operator or deal promoter.

Question 1: How much is the operator (deal manager) investing personally?

You need to know where the money is coming from.

Is it theirs, from their family, or from friends? When the operator has their own money in the deal, it says that they have an alignment of interest with you as an investor.

Financially speaking, if you get hurt, they should also get hurt.  Otherwise, there is no alignment, and the risk is too high.

Never take advice from someone that does not have their own money in the game and does not have to live with the consequences. You will lose every time.

Question 2: Is there a huge upfront fee or load?

Funds and deals that use this model are set up to make their promoters and operators rich, not their investors.

They are in it for the fees, not the performance of the fund, and they do not have an alignment of interest with you.

Question 3: How will you get taken out? What is the exit strategy?

Many operators do not keep this essential knowledge in mind. In commercial real estate, there are only two exit strategies: a sale or refinance.

Is your operator financially qualified enough to get refinanced out of the deal? How long before you would be taken out of your deal and would get your money back?

This is an important one to ask.

Smaller Investors, Money, and Operator’s Experience

Question 4: How many smaller investors do they have?

This is an indication that the operator may have dropped his minimum investment in a desperate attempt to raise funds.

Generally, if there are more smaller investors, which is always made apparent by the smaller minimum investments of less than $5,000 or $10,000, then it may mean that you are joining a throng of unsophisticated investors that do not understand that this is an illiquid investment.

Your operator at this point may have to focus his time on getting those smaller, needier investors cashed out by raising money from others, rather than doing what he or she should be doing, which is managing your deal.

Question 5: Where does your money go?

You might believe that it goes towards buying a piece of real estate, but this may not be the case.

Where in the capital structure are you? Are you debt (safe), equity (riskier), or something else?

Stay away from “cash flow notes” and “cash flow certificates” as these are basically IOUs that are not secured by anything at all.

Ask your operator how you are secured. Then keep quiet as they explain it to you. If you want to go crazy, then ask them, “Where in the capital structure will my investment be?”

Question 6: What is your operator’s experience?

Resumes can be embellished, and inexperienced real estate investors are always impressed by throwing around the names of Fortune 500 companies. Being a real estate entrepreneur is just that, however, and nothing else—no nets.

There is no company middle management to hide behind.

You need to know if your operator has managed (as a principal) an investment similar to the one you are arranging.

Have they ever invested in their own pool before? What is the track record? Are they expecting you to be the stupid monkey that funds their first deal, where a huge amount of mistakes will happen?

Ask where the asset is located; it should be within 20 minutes of where your operator lives. Otherwise, they will go broke or worse—incur travel fees to manage the faraway asset.

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and is available to you here.)

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Overpaying on the Asset and Leverage

Question 7: Are they overpaying for the asset?

Real estate becomes the most popular asset class at exactly the wrong time—when prices are going up. If your operator is not using any of his own money, what does he care if he overpays or not?

Most buyers and investors will be easily seduced by the Pro Forma Net Operating Income, not the Current Net Operating Income—which is essentially smoke and mirrors. Any experienced multifamily operator will tell you that it is impossible to get 10% rent increases year over year when the majority of Americans have seen their paychecks shrink.

People that buy off the Pro Forma are losers as they will use your money faster than you can say “exit strategy.”

Ask your operator how they valued their deal. Is it based on recently sold assets of a similar size and unit number? Then go silent. You will learn more about your operator here that you will want to know.

Question 8: How much leverage are they using?

Leverage is good sometimes—but if your operator is using too much of it, then they are probably trying to use that juice to make a marginal deal look like a home run.

Debt can amplify your returns if used wisely but can also destroy you if the markets crash.

Assets and Partner Transparency

Question 9: What other assets does your operator currently have?

This question is similar to question five but a little more dangerous.

Do they have a portfolio of legacy assets that they are using your money for? They could be paying off other investors or expenses this way due to bad investments. This happens way more often than most people imagine.

Putting in good money to cover up bad investments is bad business.

Question 10: Do they have partners?

Does your operator have partners? If they do, ask how they know each other.

Do they all live in the same town or vicinity? The best case scenario here is that they have worked together on real estate transactions for many years. Perhaps they took some time off and decided to bring everyone together again because of a great opportunity.

These are the good management and operating teams that you want.

The last thing that you need are a pack of people that are “friends” that do not know each other at all. They have no idea about each other’s financial position or experience level.

Husband and wife teams can be red flags as well.

If they really are partners, they will have an operating agreement that will dictate who does what, and when and if a breakup occurs—who does what and who gets what out of the divorce.

If a partnership breakup happens, you will never know about it until it is too late.

Remember to always ask the hard questions no matter what. Operators with experience will respect your position and will take the time to answer you.

If they do not want to answer you or cannot, it is better to move on to another more viable opportunity.

Real estate has always been the prime wealth creation tool for investors—you do not need a fancy degree to participate in it; you only need to know how.

With crowdfunded real estate deals, it has never been this easy to invest in the market…with less money up front and more profit every month!

However, the lower barrier for entry is seen as a siren call for fraudsters, and they tend to take advantage of the less savvy investor that will want to place most of their life savings in these deals.

Real estate has always been full of scams, and this is no different.

Use what you’ve learned here, stay vigilant, and you’ll be ahead of the rest of the game.

Until next time.

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and is available to you here.)

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Salvatore M. Buscemi
A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.

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Salvatore M. Buscemi

About Salvatore M. Buscemi

A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.
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