How to Evaluate an Online Real Estate Investment

Here is the playbook our investment team recommends based on experience from investing in 1,000s of real estate assets.

Updated
October 20, 2022
by

HoneyBricks is on a mission to unlock the potential of real estate investing. We are rebuilding the real estate investment experience, making buying, earning income, and selling income-producing real estate instant, low cost, and enjoyable.

Real estate will always be a local game. Real estate investing doesn’t have to be.

Since the JOBs Act came into effect in 2012, real estate investing has continued to move online, providing access to thousands of real estate investment options to investors through platforms like HoneyBricks

Although sourcing and funding investments has become easier, there is a big quality disparity in offerings across crowdfunding sites which investors should be aware of. 

This makes the majority of these deals tough to navigate. So how do you evaluate an online real estate investment? 

Snapshot: How to Evaluate an Online Real Estate Investment

Before we dive deeper, here’s a high level playbook our investment team recommends:

  1. Assess the platform: Ensure the platform you choose is run by an expert team applying a strict vetting process to every deal 
  2. Filter the high level: Explore and become familiar with the types of investments available
  3. Understand the sponsor: Validate that sponsors have operating experience in both the sub-market and strategy
  4. Dig into the investment offer: Thoroughly review the business plan, risks, fees, and more.
  5. Make your decision: Confirm your investment amount, and sign the subscription documents.
Okay now let’s dig into the details how to evaluate an online real estate investment 👇

1. Assess the Platform

Every business is built on the strength of its people. Real estate is no exception.

Operating successfully in the online real estate industry depends on having expertise in the fundamentals of real estate.

This includes:

  • Sourcing
  • Underwriting
  • Financing
  • Closing
  • Managing
  • Exiting 

You want to know that the platform you choose is run by a team of experts who apply a strict vetting process to every deal. 

The best part of working with reputable online platforms is for the significant amount of due diligence they conduct before offering an investment to their investors online. Why? They have to.

No company will survive in online real estate investing if they are bringing bad investment opportunities to investors.

You’ll want to look for is a strong mix of expertise in their investment committee.

Here some key things to evaluate their investment expertise: 

  • The number of assets their investment committee has invested in
  • Total transaction value their investment committee is responsible for closing
  • The specialization of the committee. For example, if you are interested in investing in commercial real estate but the investment committee’s experience is mainly single family, then that should serve as a caution to you

Secondly, to assess different online real estate platforms you need to understand what you’re actually investing in and how the platform makes money.

Conflicts of interest can be everywhere in real estate and you want to make sure interests are aligned.

The key things to look out for are:

  1. How is the real estate sponsor being compensated?
  2. How is the online platform being compensated?
  3. What fees are investors paying to use the platform?
While fees are never great - it’s important to recognize the significant amount of value these platforms can provide in building and supporting the technology platform, and enabling access to high quality real estate investments

Watch: How sponsors and real estate operators make money through fees

2. Filter the High Level

Once you have access to the platform - it's time to explore the marketplace to become familiar with the types of investments available. 

Typically, marketplaces will organize available investments by:

  • Product type (multifamily, office, industrial etc.)
  • Investment strategy
  • Targeted returns

Here is a snapshot comparing some of the most common real estate investment strategies:

There are dozens of metrics you can use to evaluate a deal’s return and compare it to others in the market. 

But four of them stand out as being critically important: 

  • IRR
  • Equity Multiple
  • Cash-on-cash
  • Cap Rate

You can check out this YouTube video where we walk through each metric in detail:

3. Understand the Sponsor

Once you have assessed the platform, and filtered the high level - you should review the sponsor or operator of the investment.

We encourage investors to do this before digging into details of specific investments, as the most important ingredient to a successful online real estate investment is who you are investing with. 

Ensuring sponsors have operating experience in both the sub-market and strategy is key.

Coming back to the longevity of successful businesses, online real estate investing platforms need to be highly selective with who they work with.

This doesn’t mean that you shouldn't invest in newer sponsors - only that you should be aware of their underlying experience and ability to manage the inevitable bumps along the road. 

Perhaps the best part of online real estate investing is that you are not limited to your local market and sponsor. You can access many markets, with different managers and get the benefit of their relationships, skills and capital which can help achieve higher returns. 

Develop a Scorecard for Your Investment

Most platforms like HoneyBricks that partner with experts highlight their sponsor's experience to ensure customers can get a sense of the sponsor behind the investment. 

For example, for every investment, HoneyBricks develops an-depth scorecard of the sponsor and the specific investment. Every HoneyBricks investor can view this scorecard as a quick way to understand the investment.

Evaluating Sponsor Experience

As a passive investor, you want to ensure that you’re working with experienced operators who have adequate ‘skin in the game’. 

Here’s a simple chart to help you understand the different tiers of sponsor experience:

4. Dig Into the Investment Offer

Once you’ve found a platform and sponsor you’re excited about - it’s time to dig into the details of the actual investment.

Due to private real estate offerings being securities under SEC regulation, online real estate investments will come with detailed offering information and disclosures.

Reviewing these documents can be a drag - containing a lot of information and covering the investment opportunity, risks, fees, and more.

That said, they are incredibly important and should be read in full.

There are lots of resources available online about evaluating real estate investments which we won’t cover here. 

What we will say is that assessing the forecasts that drive the investment returns is very important and often under-appreciated. 

We recommend you take the time to understand the most assumptions in the project's return profile and valuation, broken into the following two groups:

  1. Asset Purchase Details
  2. Operating and Exit Assumptions

Asset Purchase Details

Operating and Exit Assumptions

5. Make Your Decision

Although no real estate investment — or any investment — can be entirely 100% risk free, investing with an online real estate company that sets strict criteria for all investing offerings is a key way to limit your downside risk. 

To finalize an investment - you’ll be required to confirm your eligibility, investment amount, and sign the subscription documents.

A key thing to look for as a real estate investor is understanding the liquidity of your investment, as most online real estate investments make it incredibly difficult to get out of the deal until the asset is solid. But there is new technology that's making this far better - called tokenization, and it basically puts real estate on the blockchain.

This makes it a financial product that is far more liquid, and can give you that flexibility and other options at much sooner time horizons. You can learn more about real estate tokenization here.

What Next?

Real estate investing has proven its strength in preserving and generating wealth through the centuries. Its continued migration online is a multi-decade theme and this framework should serve as a valuable guide for you in evaluating an online real estate investment.

HoneyBricks is focused on making real estate investing more efficient, accessible and transparent. Learn more about how you can get started from as little as $100.

About the Author

HoneyBricks Team

HoneyBricks is a technology platform that connects investors with high-quality commercial real estate opportunities through asset-backed security tokens.

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