How I Choose Which Real Estate Project to Invest In

The last 12 months have been great for investors. The stock market crashed in March 2020, but it came back quickly and generated a lot of wealth. If you invested in a good index fund at the low point last year, you’d double your money! That’s amazing, but the stock valuation is very high now. Investors should check their asset allocation and see if it needs any adjustment. Now is a good time to cash out some profits and diversify your portfolio.

A proven way to build wealth is through real estate investing. It’s a great alternative to the stock market. However, investing in real estate is daunting in the beginning. You need to come up with a sizeable amount for a down payment for a rental property. Also, most investors don’t want to be a landlord. It’s stressful and can be a lot of work. Commercial real estate (CRE) investing is even more difficult. I don’t have the expertise to evaluate a deal and run a commercial property. It sounds stressful to me.

This is where CrowdStreet comes in. They bring projects to investors and screen them rigorously. Investors can invest with experienced sponsors and reap the benefit of passive income. However, it is still daunting to invest in real estate crowdfunding. I trust CrowdStreet, but I want to invest in the best projects for me. Today, I’ll share how I choose which CRE project to invest in. I’ve been investing in real estate crowdfunding since 2017, but I’m still learning. Here goes.

*Disclaimer. This is just my selection process. Investing can be risky and any project can fail. You need to build your own selection process through experience. Sign up with CrowdStreet to see what projects are available today.

Type of project

When I first started investing in real estate crowdfunding, I invested in several different types of projects. It turned out mostly okay, but now I only invest in value-added multifamily and senior housing. You can see how the projects I invested in turned out here – Our Real Estate Crowdfunding Investment Performance.

Value-added multifamily

Here is how value-added multifamily projects work. The sponsor acquires a midgrade apartment at a good value. They fix the place up, update the units, improve the management, and raise the rent. After 5 years or so, they’ll sell the property at a profit. The investors get a cut of the rent during the holding period and the profit after the sale. I think this is the safest type of real estate investment.

Senior housing

Senior care facilities were hit hard by Covid in 2020. Many of them couldn’t make it work. Some sponsors saw an opportunity and acquired those properties at a discount. The United State is an aging society. We’ll need more senior housings in the future. I think this type of investment is pretty safe.

Avoid list

I avoid investing in these type of projects.

  • New development of any kind. It usually takes 2-3 years to build a commercial property from the ground up. You never know what’s going to happen. It’s just riskier. One small project I invested in ran out of money and couldn’t complete the project. The project has been on foreclosure for 2 years. However, the expected return is usually higher than value-added projects.
  • Offices. The office rental business is going through serious changes. Covid forced many employees to work from home and they don’t want to go back. It seems risky to invest in this space at this time.
  • Retail. I invested in a strip mall when I first started in 2017. It worked out pretty well and the sponsors paid investors on time. Fortunately, the project was sold before Covid hit and investors made a tidy 40% profit. I suspect it might have turned out differently if they had to sell in 2020. Consumers buy so much stuff online now. It will be more difficult to make a good profit in retail.
  • AAA properties. This means the project is already doing very well. The sponsor usually has to do some kind of trick to make money for the investor. In one project, they plan buy a very nice apartment and sell the land. Then lease the land back and run the apartment for several years. After the holding period, they will to sell the apartment. This project could generate a lot of profit if the location becomes more popular. But this seems risky to me.
  • Cannabis. I heard cannabis isn’t a great investment. There are so many shops in Oregon and the competition is fierce. The shops have to lower the price to attract customers. I assume the pricing pressure affects the whole business chain.
  • Industrial. I don’t know anything about industrial properties. They might be good investments.
  • Hospitality and student housing. Hotels and short term rentals could be good investments in the future. 2020 was just a terrible year for them. I’ll wait to invest in these segments until things are completely back to normal.

After investing for several years, I narrow my focus to apartment redevelopment and senior housing. I’m comfortable with them and not many things can go wrong as long as the sponsor is good. That might be even more important than the type of projects to invest in.

Sponsor Experience

One of the most important criteria for me is the experience of the sponsors. CrowdStreet has several designations for the sponsors to indicate their level of experience.

  • Emerging – Emerging Sponsors are defined as experienced commercial real estate principals who have invested through their current entity for fewer than 5 years.
  • Seasoned – Seasoned Sponsors are reputable real estate operating companies that have at least 5 years of investment activity at the entity level..
  • Tenured – Tenured Sponsors are proven multi-cycle industry veterans that have at least 10 years of investment activity at the entity level.
  • Enterprise – Enterprise Sponsors are large, established firms with nationwide platforms. They have at least 15 years of investment activity at the entity level and are currently ranked as a top 250 commercial real estate holder per Real Capital Analytics.

I only invest with sponsors that have 10+ years of experience – tenured and enterprise. The company must be around long enough to experience a down cycle. It’s easy to make money during the good times. A company must prove they can stay afloat in a down cycle because you never know when it’s going to hit us.

Sponsor background

When I see a potential partner sponsor, I try to find out as much information on the company and CEO as possible.

I rarely see many problems, but it’s good to check.

Property location

Lastly, I check out the project online to see if there are any issues. A great tool is Google Maps. I type the address in and see what the tenants have to say about the property. Usually, there are a lot of complaints about the management. That’s okay because the new sponsor will take over and become new management. However, there could be red flags too. Some apartments are located in very sketchy neighborhoods. If there are a lot of car break-ins, assaults, or other violent crimes, I’d skip those projects. You can improve the apartment, but it’s a lot harder to improve the neighborhood.

Webinars

If you’re interested in commercial real estate investing, signup for a free account with CrowdStreet. Then you can check out various projects on the marketplace. Usually there are some projects that are in the funding phase. You can click over and see the recorded webinar. The sponsor goes over the project and tells investors how they plan to generate profits. Some of these webinars are very educational. Most of them sound really good because they are trying to get investors to invest. Usually, there are some good questions by investors at the end of the webinars. That’s my favorite part.

There are many educational articles and webinars on CrowdStreet. They are right under the Investor Resources tab.

Investing in commercial real estate

Alright, that’s how I select which real estate project to invest in. I depend on CrowdStreet to vet the projects and sponsors first. If it doesn’t make sense, the project shouldn’t be on the marketplace. The sponsor needs to be solid too. If I find anything sketchy about the sponsor, I wouldn’t invest in their project. I haven’t been able to find any problems yet. Most experienced sponsors have been in business for a long time and have a good track record.

Do you invest in commercial real estate? Do I need to add anything to my selection process?

Sign up for a free account

If you want to explore commercial real estate investing, signup with CrowdStreet to see the projects on their marketplace. There are quite a few impressive projects on offer right now. The webinars are quite educational. You can also see how fast a project gets funded. Many projects are funded in less than 24 hours. Investors are ravenous for income.

Disclosure: We may receive a referral fee if you signup for a service through the links on this page.

Image credit: Raquel Martinez

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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10 thoughts on “How I Choose Which Real Estate Project to Invest In”

  1. Thanks for sharing, Joe! I have been investing in real estate too. Not with crowdstreet or real estate crowd funding though. I’ve been looking in to private real estate syndications.

    Reply
  2. Thanks for sharing! I’ve been thinking about REIGs and what I want to do about real estate investing in general this year or next year, but I also want it to choose an ethical way of investing and not contribute to gentrification. I wonder if it’s possible to figure that out when we’re not still juggling kids+work+life all at home.

    Reply
    • Unfortunately, the value-add space contributes to gentrification. They upgrade the apartments and raise the rent.
      You can invest in medical offices or something like that. That seems pretty ethical.

      Reply
  3. Value added multifamily strategy seems to be very interesting. You’re not just realizing the upside from the liquidation value but the rental income as well.. I haven’t heard of an investment like that before. Good highlight.

    Reply
  4. CrowdStreet has intrigued me for a while now. This is some good information on how you invest through them. I never thought about investing in senior housing but that makes a lot of sense. I would imagine that should be an area that continues to grow as the baby boomers continue to get older.

    Reply
  5. It’s good to invest in “what you know”, and your strategy seems centered around this Joe. I think you’re bound to do OK because of your real estate skillset.

    What kind of returns have you been seeing lately? Depending upon the market, rents have been both rising and falling. That could have a big impact on the expected return of a project.

    Good luck!

    Reply

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