At the end of 2020 Chapel ran a successful campaign on Vicinity’s portal to fund a multi-tenant facility in the Poe Mill area. For context, Poe Mill is a historically overlooked neighborhood in downtown Greenville. At face value, it might appear this project didn’t check the box for a “location, location, location” real estate deal; however, a closer look reveals the opposite.
Poe Mill’s neighborhood is part of the downtown Greenville community. What drew many investors to Chapel was that it came with tools to revitalize the community: jobs, entrepreneurs, and space. Chapel is betting on the neighborhood, and leveraging investments from the community to further validate the idea.
What do investors and real estate developers have in common? They look for opportunities but attempt to minimize risk. It’s a tricky balance.
Real estate deals in the investment crowdfunding world don’t have to be complicated though. There are a few ways to better understand if these are the right fit for your portfolio. We start by outlining a simple playbook for approaching real estate deals:
READ THE CAMPAIGN PAGE
This might seem like a no-brainer, but getting an overview of the deal before digging into details is the best way to know if a particular deal is a good fit for your portfolio. This might be a quick glance or a thorough read-through, but giving the campaign a quick scan is the fastest way to find out if an investment makes sense before spending too much time on the decision.
LOOK AT THE FINANCES
When looking at real estate deals for microinvesting, there are three basic types of deals: debt, equity, and future equity (a convertible note or SAFE). Debt investments are usually pretty standard with annual interest rates, a maturity date, and regular disbursements. Equity investments give an investor actual stock ownership (typically preferred stock) in the project. You can also calculate your ownership percentage using the project’s valuation.
Always comb through the Investment Summary section and look out for key numbers like:
- The share price
- The targeted hold term
- The targeted return
These numbers can give you a good idea of what your returns (if any) you might make on your investment and when.
Another helpful practice is to look at the capital stack for the project. This will outline how the project is being financed and give you insight into what other financial backing the project is using. If you’re not familiar with real estate investing, you can take advantage of the Q&A section of the campaign and ask direct questions to the project sponsor.
CONSIDER THE VALUATION
Valuations can be both an art and science so there’s no one way for determining a project’s value. Two common methods are NOI and Comps. The NOI method (Net Operating Income) bases the valuation off the income (or projected income) of the development. The comp or comparison method looks at a similar project (perhaps even by the same project leader) and market data to set a valuation for the project.
Since no valuation is an exact science, you’ll want to factor in your own appraisal of the campaign. This, along with the elements below combine to make a final value that you place on the project and that ultimately helps you decide whether or not to invest.
CONSIDER THE MISSION
Now that we’ve talked about number and dollar signs, let’s pivot to the mission, which can be just as important. Here is where that nebulous term “location” comes into play. In real estate, location means a lot of things. It’s not just a pin-drop on a map or a Chick-fil-A is across the street from you.
When considering the location, look at things like how big the property is (square footage), the surrounding neighborhood and its receptiveness to the project, crime rates (depending on what they’re building), and, yes, what attractions and business surround the building (aka where’s the closest Chick-fil-A).
One thing we loved about the Chapel project was the beautiful balance between valuation and mission. It was bringing a lot to the community, but not in a way that sacrificed financial returns.
When looking at the mission, consider the project leader and evaluate them and their team. Ask yourself: do they have what it takes to make this succeed? The experience, the know-how, the budget, the track record, etc.
The one-dimensional approach of location, location, location is a cave dweller’s strategy.
Tapping into these new opportunities takes a more holistic look at real estate investment crowdfunding. Weigh the factor above against the risk and you’ll be well on your way to finding the right real estate investments for your local portfolio.