Real estate crowdfunding has been growing in popularity. The benefits are great to both the investor and the syndicator (or “sponsor”). Sponsors can benefit from greater access to investor funds, while investors can benefit from pooling their funds to acquire real estate projects that would not normally be available to them.
Sponsors typically make money in a variety of ways. First of all, they are able to earn a portion of the cash flows as well a share of the ultimate gain once the property is disposed of somewhere down the road. But in addition to this they are often paid certain fees for providing services to the syndication deal. Here are some of the ways:
• Acquisition fees. There is often an upfront fee of between 1% to 3% of the total acquisition cost. This fee will cover due diligence completed by the syndicator and compensate the syndicator for locating the property.
• Asset management fees. These fees are often charged on an annual basis and cover the offsite management issues relating to the property. They are typically based on a percent of total income (often 1%) and there can be a minimum amount assessed.
• Construction management fees. If the property is being upgraded there may be extensive rehab costs. This fee compensates the syndicator for managing the construction process.
• Disposition or selling fees. These fees relate to coordinating and negotiating the final sale of the property.
In addition to the above syndicator fees, there are often fees associated with the ongoing property management of the property. This would cover the cost associated with onsite property management and hiring a property management firm who has the expertise at managing the particular type of investment. Also, there could be fees charged for investor reporting that is charged by an outside party.
Make sure that you carefully review any real estate crowdfunding deal for any sponsor fees or charges.