ASC CHECKFIRST

Real estate crowdfunding: What you need to know before you invest

By Damilola Ibirinde – February 4, 2025

Real estate crowdfunding has gained popularity as an easy way to invest in property without committing a large amount of money. While these opportunities can be appealing, it’s important to understand what you’re signing up for and the level of risk you are taking. This article breaks down real estate crowdfunding and key factors to consider when making investment decisions.

What is real estate crowdfunding?

Real estate crowdfunding allows multiple people to pool their money to invest in proposed real estate projects. Instead of owning a property outright, investors own shares in a company involved in the project with potential returns paid out at a later date, often years. These crowdfunded investments fall into two categories:

• Equity investments: You own equity shares of an entity, which may increase (or decrease) in value over time. When the shares are sold, the value of the shares is returned to you.
• Debt investments: You lend money to a corporate entity by way of a loan. You earn interest over time and when the shares are sold, the amount you lent should be returned to you. Debt can either be secured against the property or unsecured.

It’s important to know that you won’t own the property directly. Instead, your investment is tied to the expertise of the company developing the project.

Here are some questions to ask before jumping into this type of real estate opportunity:

1. Who owns the property, and who manages it?
   Confirm whether the property’s title is held by the corporate entity you are purchasing shares in or another entity. Knowing the ownership structure will help you understand the risks tied to your investment.
2. Are the expected returns realistic based on current market conditions?
   Be wary of overly optimistic projections. Even completed projects can face cost overruns, and actual returns may not align with initial projections. There is no such thing as a guaranteed return; market forces and other unpredictable factors influence investment outcomes, especially for long-term investments.
3. How much debt is on the property, and what is the repayment plan?
   Projects requiring significant debt can put your investment at risk since debt is repaid before equity. Investigate how much debt the project requires and whether it comes from private lenders, who typically charge higher interest rates than traditional banks. Unsecured debt is riskier than secured debt. When there are multiple lenders, the position of the debt on the property’s title affects the risk level of the loan. Lower-priority debt on the title is riskier because higher-priority debt is repaid first.
4. How experienced is the developer or project manager?
   A developer’s track record plays a critical role in project success. Developers with experience in completing projects with a history of returning money to investors are typically more reliable. On the other hand, new developers or those with multiple unfinished projects may lack the experience needed to navigate challenges. New developers often face a learning curve and might be overly optimistic about returns and timelines, while seasoned developers may be more realistic and less likely to overpromise.
5. Is the crowdfunding platform registered with the Alberta Securities Commission or operating under an exemption?
   Some crowdfunding platforms are operated by registered dealers who specialize in assisting private companies to raise capital. Other platforms, whose only business is crowdfunding, operate under an “exemption” from registration. Registration-exempt platforms have been vetted and approved by the Alberta Securities Commission but are not allowed to provide any investment advice or assess whether a particular investment is appropriate for individual investors. These platforms are only allowed to accept a maximum investment of $2,500 per person. Check the platform’s status on CheckFirst.ca to see if it is registered or operating under the crowdfunding exemption.
6. Is the company raising money transparent about its operations?
   Transparency is essential. If the company raising money for the project cannot explain how funds will be used or refuses to provide supporting documents, treat this as a red flag. Look for details about fees, ownership structure, project management and how the funding is allocated.
7. What fees and costs will you pay?
   Real estate management often involves multiple fees for property management and administration. These fees can eat into your returns. Ask for a full breakdown of fees, determine who benefits from them, and ensure they are reasonable compared to industry averages.
8. Are there conflicts of interest?
   Investigate related-party transactions, such as properties purchased from affiliates of the company raising money for the project. Check whether the property was sold at a price that an independent third party assessed as being fair and examine relationships between property developers, property managers and the company raising the money for the real estate project. Close ties could lead to biased decisions that negatively impact investors.

Beyond these considerations, understand that while real estate crowdfunding offers a unique way to invest in property, it’s not without risks. These investments are often illiquid, meaning you are not able to access your money quickly. Returns are also not guaranteed and depend heavily on project management expertise, the success of the project and the broader real estate market.

Before investing, make sure you have a clear picture of how this opportunity fits into your overall financial goals and risk tolerance. Doing your due diligence is key. Take the time to research each opportunity, ask critical questions, and/or consult with a registered financial advisor, if needed. Your investment decisions should empower you to build a strong, diversified portfolio while protecting your financial future.

This article was originally published on the Alberta Securities Commission’s (ASC) investor education website CheckFirst.ca. The ASC is the regulatory agency responsible for administering the province’s securities laws. It is entrusted with fostering a fair and efficient capital market in Alberta and protecting investors. As a member of the Canadian Securities Administrators, the ASC works to improve, coordinate, and harmonize the regulation of Canada’s capital markets.