Is investing in crowdfunded real estate a wise choice?

This column is by Mark Ting, a partner with Foundation Wealth who helps clients reach their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast's guide to personal finance.

The high cost of real estate is often cited as the main barrier to entry into Vancouver's housing market. As a result, some determined Canadians have turned to crowdfunding.  

In North America, there are several real estate crowdfunding companies that divide investable properties into fractional shares. I recently bought a fractional share of a rental development in Mission, B.C. This project's crowdfund goal was $500,000 consisting of 500,000 shares at a dollar each.   

In total, about 1,000 people invested an average of nearly $500 to raise the half million. It is a longer-term holding with the developer building 105 units which include 11 affordable rental units over the next two years, then renting them out for three years before selling the units and dividing the profits among the investors.  

The reason I got involved in the Mission rental property crowdfund was two-fold. First, I agree with the crowdfund procurement team's assessment about Mission — it has great capital appreciation and rental income potential — and second, I'm using this investment as a learning experience for my children.  

A learning experience 

For every 'A' my kids earn at school on their report cards, I give them $100. This year they decided to invest their earnings in real estate via crowdfunding. We chose the Mission project as it is local, which means we can visit the development, monitor its progress and experience, albeit in a small way, the sense of pride that often accompanies home ownership.

On behalf of my children, I invested $500 in the crowdfund which projects an annual return of 14 per cent. In dollar terms, if achieved, our investment would double in about five years. Yielding $500 in five years isn't going to dramatically change my life, however, for my kids it's likely to be much more impactful. My hope is that they continue to invest the money they earn for good grades into more projects, essentially building a small pipeline of investments with different risk profiles that pay out at different times. My goal for them is to form good financial habits which, if accomplished, is worth several times more than the potential $500 profit created by this investment.

When doing due diligence on crowdfunding, pay attention to the fees. Many offerings, in my opinion, overcharge or take an excessive cut of the profits. Before I invested, I compared the fee structures of various crowdfunding companies and ultimately went with a company that didn't charge fees but instead were compensated via a subscription model. 

To participate in the Mission development, I had to first pay $25 for an annual subscription. Something to consider if you are only planning on making a small investment. For example, it doesn't make financial sense to pay a $25 annual subscription fee if you only plan to invest $100 into a project. Aim to invest at least a couple hundred dollars —ideally a couple thousand dollars, into various projects throughout the year. 

Other factors to consider:

• The crowdfunding company's management team experience and track record.

• The minimum investment amount which can be range from $1 to more than $250,000. 

• The expected returns of the investment versus the risk of the project.

• The time horizon of the project which usually ranges from two to five years and more.

Overall, I feel that real estate crowdfunding can be a viable tool for those who want to invest in real estate but are restricted due to a lack of money or credit. Small investments in multiple projects add up over time. That makes it appealing for young people who want to get in the habit of investing — which now can be done in real estate for as little as the cost of a daily cup of coffee.