Real estate crowdfunding is still in its nascent stages. After the passing of the JOBS Act in 2012, this form of the asset class has garnered the attention of institutional and accredited investors.
If you’re new to this, you should be aware of the key legal documents associated with real estate crowdfunding.
It works in quite a simple manner, as several investors pool their investment into a property, residential or commercial. Whether equity investment or loan secured by an asset, either way, the appeal is the diversity of portfolio and relatively lower risk.
After all, this industry is projected to worth $93 billion by 2025. Yes, you read it right.
Key Documents Related to Real Estate Crowdfunding
You should make sure everything is legit when taking part in real estate crowd investment.
Similarly, ensure that you’re abiding by all the regulations set by the Securities Exchange Commission (SEC). One way to do that is to possess all the key documents proving your stake in the properties.
Here are the most important documents you should have:
You should have electronic receipts for all the transactions you have made on the crowd investment platform. This includes the receipt for money you deposit or transfer on to the platform (in your account).
Similarly, you should also get receipts via email when you invest your money in a project or withdraw the principal or profits. Each transaction completed regarding the investment in a real estate project on a crowd investment platform should be accounted for.
When you’re exploring your options for investments, look for drafts of the documents you’ll be signing to invest. You will sign these documents electronically and receive them in your inbox.
This is perhaps the single most important document that proves you’re a shareholder in the asset.
The terms of the investment would vary depending on the investment structure, whether it’s equity-based or loan. Make sure to thoroughly read the document before signing it.
Once you have signed it and received it in email, save a copy in a secure place, for instance, you drive or cloud.
Tax Document (K-1)
Companies, whether partnerships, S-Corps, trusts, or real estate firms, should give you a K-1 form against your real estate crowdfunding investments. This K-1 form is similar to the W-2 and helps you with filing your tax returns. So this is one document you should be aware of for tax purposes.
This form is usually not given out till later in the year, which means that you might have to apply for an extension in April. Generally, you’ll need a K-1 for each real estate investment. However, that can be a hassle with crowdfunding if you’ve invested in multiple properties.
To deal with that, you can ask the company to consolidate all your investments in a single form.
In case you’re not able to get a consolidated form, it should not take much longer to file a K-1 form for each property. It’s important to file this form so long as you hold these investments to properly declare your assets and income from those assets.
A lot of the platforms, like Fundrise, can integrate with tax software like TurboTax. Therefore, you can easily import your forms when doing your taxes.
Fundrise, for instance, delivers these forms by March, to allow ample time to file taxes before the April 15 deadline. However, it could be different for other companies, so make sure to ask them when they send these forms out.
Quarterly or Annual Reports
Most real estate crowdfunding platforms and REITs provide their investors with quarterly or annual reports about the assets they have invested in. These reports are crucial for investment decisions like investing more by reinvesting the dividends or pulling out from the investments altogether.
It gives you a clear idea about how certain properties are performing against others. You also get a market analysis as to how is the overall health of the real estate sector. You should study these reports diligently and keep a copy for your records.
If you’ve invested in a property under development, you should get regular updates about its progress. This could be a separate report or part of the quarterly reports the company sends you.
While crowd investing in real estate is a unique apparatus with potential lucrative outcomes, but like any other investment, there are risks.
Even though real estate does not usually respond to stock market fluctuations, it still has some risks. One way you can shield yourself from such risks is to keep all your paperwork on point.
As an investor, you should to receive all the legal documents regarding the properties you have invested in. So do not hesitate to ask the company if something is missing.