Breaking Down the Offering Memorandum

When presented with long documents, it’s tempting to skim them, sign them, and hope for the best. But not so fast! Take the time to do your due diligence now to ensure you’re making smart decisions for your financial future. Our team broke down the basics of what every investor should know about that ever-intimidating document: the offering memorandum.

Key Points

  • What Is an Offering Memorandum?
  • Why Does an Offering Memorandum Matter?
  • What Is Due Diligence?
  • What Documents Can Supplement Due Diligence?
  • 3 Important Things to Remember When Reviewing the Offering Memorandum
  • 5 Important Questions to Ask When Reviewing the Offering Memorandum
  • What Are the Typical Components of a Prescribed Offering Memorandum?
  • How Do I Get Started?

If a company wants to raise money from investors, it will generally provide them with information about the venture. How the information is relayed to investors is governed by our rules regulating the securities industry. The rules vary per jurisdiction, but in general, securities regulators want to ensure that prospective investors know enough about the business to make an informed decision. This is a concept called “disclosure.”

One of the ways privately-held firms meet these disclosure requirements is to issue an offering memorandum (OM). There are two types of OMs: prescribed form and non-prescribed form. “Prescribed form” means the document must be prepared according to a guideline required by the regulators. This article breaks down the prescribed form of the OM.

What Is an Offering Memorandum?

An OM covers a substantial amount of legal and marketing material, including an executive summary, deal structure details, risks and disclosures sections, and an investor suitability form. It can be overwhelming to digest, but we’re here to break it down for you and highlight the crucial elements every investor should be aware of. You’ll likely find it useful not only for researching opportunities from Exempt Market Dealers (like Fundscraper!), but also private placement issuers, private equity and capital firms, and private mortgage funds.

In theory, OMs should provide investors with as much relevant information as possible. In practice, they’re complex documents written by lawyers for regulators.

Why Does an Offering Memorandum Matter?

Oftentimes, everyday investors don’t understand what an OM is or why they’re receiving it. They don’t have the experience or legal/financial/accounting training necessary to decipher 60+ pages of fine print—and that’s okay!

Since investors can only rely on an OM to make their decision, the reality is that many retail buyers do not know what they’re investing in unless they read the OM. They may grasp the general concept that they’re investing in real estate but be unaware of the minutiae that can alter the outcome of a deal. When they later discover unfavourable elements about the project, they often feel lied to and dismayed. Lack of awareness is one of the greatest risks associated with private investments.

At Fundscraper, part of our due diligence is making sure you understand yours.

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What Is Due Diligence?

An investor cannot make a good decision without knowing all of the facts. We call this “doing your due diligence.” You may want to understand the following before deciding to purchase:

  • Management fees
  • Investors’ voting rights
  • Indebtedness of the business
  • How the investment will be repaid
  • Conflicts of interest

All investors should know it’s impossible to disclose everything about an opportunity. A proscribed OM is designed by the regulators to deliver the minimum information the regulator believes a reasonable investor would require to make an informed investment decision.

With that in mind, use the OM as part of your due diligence before making an investment decision. You’ll want to investigate the industry, past performance, and the firm’s management team. Download the Fundscraper Due Diligence Checklist.

An Offering Memorandum is a crucial part of due diligence, but it’s just part of the equation.

What Documents Can Supplement Due Diligence?

The OM may refer to additional documents that prospective investors can receive upon request. For example, if the issuer is a trust (rather than a corporation or partnership), the OM might reference a declaration of trust or a trust indenture – documents that govern its mandate and management. You may want to understand exactly what the powers of the managers are and how the business must be run in far greater detail than what’s being disclosed. Investors should therefore scour through an OM for any mention of additional documentation.

For example, the OM may read, “ABC Trust will issue 1,000,000 trust units, pursuant to Section 4.1.3 of the Declaration of Trust.” While the declaration of trust is technically being disclosed, many investors will not realize that there is an entirely separate set of documentation that they should read before investing.

At Fundscraper, we aim to give you as much documentation, information, and transparency about properties in our marketplace as possible. The “Material Agreements” are available to you in the “Documents” tab of your account—see below.

3 Important Things to Remember When Reviewing the Offering Memorandum

  1. Regulators do not endorse investments.
    While an OM may reference securities regulators and state that it has been filed with the authorities, that should not be construed as being endorsed by the regulator as a good investment. The Canadian Securities Administrators, the body representing the 13 provincial and territorial securities regulatory authorities across Canada, are not responsible for performing due diligence on behalf of investors with respect to OMs. Rather, it and its members exist to protect the integrity of the capital markets and to enforce the law.
  2. Consider hiring independent counsel.
    While an OM may contain dozens of pages written by lawyers, accountants, and auditors, those professionals are representing the issuer, not the individual investor. Thus, investors should hire their own advisors before deciding to invest. Do not allow yourself to feel a false sense of security by knowing that the investment was assembled by professionals.
  3. Look for penalties, sanctions, and/or bankruptcies.
    An OM should disclose whether any members of management have any legal or serious financial blemishes. Use that information to help form an opinion about whether your money would fall into reliable hands.

Never make assumptions about a prospective investment. It’s best to hire an independent counsel to review the OM and the terms of the deal with you.

5 Important Questions to Ask When Reviewing the Offering Memorandum

  1. How are the funds being used?
    Never assume that all, or even most, of your money will be deployed into the targeted undertaking. The OM should disclose what, if any, fees will be paid to sales agents, how much will be advanced towards legal and administrative costs, whether there is any debt to service and how much will actually be deployed into the targeted undertaking. Moreover, investors should also understand what the continuing expenses of the venture will be over and above administration fees. These expenses can seriously dilute any available returns.
  2. How is cash being distributed?
    An investor should have a good understanding of how the fund receives income, how it intends to employ it, and how it will distribute any returns to investors. Once the underlying investments make returns to the fund, how much of those returns will be passed onto individual investors and how is that calculation determined? Do the managers earn a piece of the returns? Are there other parties that will share in those returns? Never assume that all or even most of the returns earned by the issuer will be passed onto investors. The flow of funds can turn a seemingly lucrative investment into a poor one.
  3. How liquid is my investment?
    Investments made via OM are less liquid than publicly traded securities on large stock markets. It is not uncommon for one’s capital to be locked up for a period of years in a given investment. Thus, an investor’s ability, or lack thereof, to sell the holding should be clearly disclosed in the OM. Note: Even in offerings where investors can easily redeem their shares, management usually reserves the right to reject redemption requests at their sole discretion.
  4. How am I being taxed?
    The tax implications of any investment are critically important for every investor to understand. What might be considered “tax advantageous” for one investor may be a disaster for another. (To complicate matters, investors and issuers are often taxed differently.) Where an issuer can provide a legitimate tax advantage to an investor, the investor must be fully aware of what the consequences might be if the issuer was to lose its unique tax status. Before investing, it’s important that the investor consult a professional about the tax consequences of the investment.
  5. What are your rights?
    As an investor, you can never assume that you have the ability to voice your opinions or influence management decisions. It’s important to search within the OM for your rights as an investor. For example, do you have the ability to vote, and if so, on what issues? How powerful is each individual vote? Can you attend annual general meetings? Are you able to request financial statements and other internal documents?

If you know what to look for and what questions to ask, you’ll be empowered to make smart investment decisions for your future.

real estate investment documents

What Are the Typical Components of a Prescribed Offering Memorandum?

The following are typical elements in a prescribed OM for a typical real estate investment in a hard asset like a building or development.

  • Executive Summary: Lays out the high-level description of the investment company (which may control or be the acquiring entity), its mission, the deal being pitched, a detailed description of the executives’ industry experience, and the deal financing requirements.
  • Location: If the OM is promoting a real estate opportunity, it will include the location of the asset. These images may include the property’s location on a map, an aerial view of the site, and a second map highlighting important places near the property such as an airport, public transportation, restaurants, and stores.
  • Investment Summary: Covers various subtopics, each of which has its own separate section and brief description.
  • Property Description: Describes where the property is located, when it was built, how large it is, any repairs it may need, and the current occupancy.
  • Purchase Price: The price for which the property will be purchased and how the purchased price will be financed.
  • Total Capitalization: Describes the “capital stack,” which shows the different layers in the financing of the project. Typically it would be first mortgage debt, next second mortgage, next preferred equity then finally equity. It’s really important to know where your investment dollars are in the “capital stack.” Traditional investment wisdom says the higher up you are, the safer your return.
  • Preferred Return: An investor who earns a “preferred return” means they will get a return on their money before ordinary investors. A “preferred investor” generally comes after debt and before a common investor. Preferred investors will have different return expectations than ordinary investors.
  • Projected Returns: Sometimes an OM will provide an indication of return. It is important for the investor to read the fine print wherever performance returns are disclosed. In a prescribed OM, certain kinds of “future-oriented financial information” must be prepared in accordance with strict guidelines. A licensed advisor can help an investor understand what is really behind an issuer’s projected return boast.
  • Manager or Sponsor: The sponsor company that controls the investment entity. This entity is often referred to as the “promoter.”
  • Property or Asset Manager: A description of the asset manager and their fees, which investors should review closely. They’re generally paid to the issuer, manager, and promoter before anything is paid to the investor.
  • Proposed Structure: The structure of the deal between investors, sponsors, asset management, and property management. An old adage to understand a deal is “follow the money.” Learn who gets paid what, and when.
  • Distributions: How surplus cash, i.e., the profits, are distributed to parties.
  • Acquisition Fee: This can be anything: a flat sum paid on closing; a flat fee plus a continuing interest. Always ask why are these fees being paid this way and if it’s reasonable given the terms of the deal.
  • Management Authority: How the manager holds control over the management and affairs of the property.
  • Proposed Use of Proceeds: How your investment dollars are being used. This could include acquiring the property, making repairs, and maintaining the property.
  • Estimated Sources and Uses: The amount of equity and debt to be raised, which then adds up to form the total sources of funds. Also included should be the uses of funds, including purchase price, closing costs, acquisition fee, working capital, and fronted capital expenditure.
  • Loan Terms: Where applicable or relevant, the loan terms section is broken into the following subtopics:
    • Loan amount: What is the approximate loan amount and the percentage of the purchase price it makes up?
    • Borrower: Which entity will be borrowing and what kind of company it is?
    • Interest rate: What is the locked interest rate?
    • Term: How long is the term? Is it a fixed rate or variable rate?
    • Amortization: Does amortization begin right away, or is there a period of interest-only servicing?
  • Competitive Set: A table depicting the competitors in the issuer’s market.
  • Industry Overview: Every industry is different, whether residential, retail, or another niche. This section describes what the specific industry for the property type is like in today’s market.
  • Market Overview: Similar to the industry overview, the market overview gives geographic-specific insight into the real estate market where the building is located.
  • Risk Factors: This section should include every risk related to the business, tax, accounting, and legality of the property. A typical OM includes 10-20+ risks and each one should have its own paragraph description.
  • Investor Suitability: Real estate deals frequently receive support from accredited investors. This last section in the OM describes what types of investors the deal is suited for, and may be based on rules and regulations with regards to investor accreditation or general solicitation. These are the guidelines that concern the investors’ financial status and their ability to bear the risk of losing an investment.

How do I get started?

As you can see, an OM is a complicated document. Don’t just rush through it and assume the best! Take the time to do your due diligence before you invest your hard-earned nest egg.

It’s critical to have a licensed dealer assess whether the investor is first eligible to participate in the investment and then, secondly, whether the investment is a suitable investment for the investor. That’s where Fundscraper can help!

If you’d like to learn more about private real estate investment, visit www.fundscraper.com and sign up. Once you are part of our community, you’ll have access to the resources our members enjoy that help them explore real estate investment!

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

How to Invest in Private Real Estate Investment Vehicles Webinar

Rewatch a 20-min conversation about getting started in passive real estate investing and how you can take the step into building your portfolio. Luan Ha, CEO of Fundscraper, and other experts on our team will be discussing how to successfully invest in private real estate investment vehicles along with a Q+A session to answer any questions you may have.

Grab a coffee and join the conversation to put forward any questions or challenges you have.

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How to Analyze REITs

The following article will walk you through why investing in real estate investment trusts are advantageous, the different types of REITs, pros and cons of this investment vehicle and finally how to analyze each trust to ensure it’s a good fit for you and your investment goals. 

Key Points

  • Real Estate Investment Trusts are the lowest-maintenance way to dip your toe into real estate investing. Modelled after mutual funds, REITs are trusts that allow you to passively hold interest in real estate. 
  • REITs allow investors, such as yourself, to participate in owning income-producing properties that otherwise may have been inaccessible to the average Joe.
  • To get into the nitty-gritty, at least 75% of the trust’s revenue must come from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. 

Not too long ago, I opened a new so-called High-Interest Savings Account that’s earning me 0.010% on my hard-earned cash. 

Now don’t get me wrong, the name has a very poetic ring to it, but sheesh – you know it’s not great when you have to go down to four decimal places to learn how the bank plans to grow your money!

Like so many Canadians, I knew that while this account would bring me 100% security, it wouldn’t get me very far in terms of financial growth and my long-term plans. And so, my personal financial horizons had to expand to include stocks, bonds, mutual funds, real estate, GICs, EFTs and whatever other combinations of the alphabet the financial sector could throw at me.

At Fundscraper, we firmly believe that as an intelligent investor (which we know you are because you’re doing your homework right now), diversification is key. And part of a well-diversified portfolio includes investing in real estate.

While there are an amplitude of ways to invest in the real estate market (you can read an overview here), one of the most popular among Canadian investors are Real Estate Investment Trusts, also known as REITs (another acronym for you to file away in your memory). 

Here’s Why You Should be Investing in Real Estate Investment Trusts

Real Estate Investment Trusts are the lowest-maintenance way to dip your toe into real estate investing. Modelled after mutual funds, REITs are trusts that allow you to passively hold interest in real estate. They allow investors, such as yourself, to participate in owning income-producing properties that otherwise may have been inaccessible to the average Joe.

REITs come in many shapes and sizes and often hold interest in specific forms of property, whether it be apartment complexes, office buildings, shopping malls or industrial spaces – spreading your investment over multiple properties and across many regions. Simply put, they aggregate capital from investors, which they then use to acquire, build, operate and/or update these properties. 

To get into the nitty-gritty, at least 75% of the trust’s revenue must come from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. 

When you invest in a REIT, the Trustees of the REIT hold the legal title to manage the trust on behalf of the unitholders (you), so no decision making is required on your part. These Trustees have a fiduciary duty and the income that is earned by the trust is passed onto the unitholders. 

REITs pay out almost all of their taxable income to shareholders, which makes their dividends attractive. The average Canadian return on a REIT is around 4% – that’s 400x higher than that “high interest savings account” we talked about earlier.

Bottom Line: REITs work in a similar fashion to how an investment property (such as owning and renting out a single-family home) earns rental income. However, unlike owning a rental property, REITs help you avoid the headache of property management, and best of all they trade on the stock exchange, making them more liquid than traditional real estate.

Types of REITs

Now that you know how REITs work, let’s explore the different types of REITs that you can invest in. 

Equity REITs

When most people talk about REITs, they’re talking about equity REITs.

Equity REITs derive most of their revenue from rent collection and from the sale of the properties they own. These REITs tend to specialize in owning certain types of buildings such as apartments, malls and/or resorts. Because a majority of their revenue is generated through rent collection, it’s fairly straightforward to calculate their payouts, providing relatively stable income to their unitholders.

Equity REITs, however, tend to be more sensitive to recessions and booms, often following the cyclical nature of the stock market. Like most markets, they are susceptible to swings in supply and demand, where too much supply can lead to lower rental income, in turn lower payouts for investors. 

Mortgage REITs

Just to make things confusing, mortgage REITs are also sometimes called mREITs or debt REITs. However, regardless of the naming convention, they offer their own set of benefits.

Unlike equity REITs, mortgage REITs make loans secured by real estate, but do not own or operate the properties themselves. By providing financing for these income-producing properties, mortgage REITs earn interest off these investments, which they then pay out to their unitholders. 

Like equity REITs, individuals can buy shares in these REITs via the stock exchange, just like would for any other stock. 

Of interesting note, mortgage REITs tend to perform better than equity REITs when interest rates are rising. However, changes in interest rates may also affect the probability that some borrowers will refinance or repay their mortgages – there’s two sides to every coin. 

Pros and Cons: What You Need to Know

Pros

  • No Property Management – We often consider real estate a passive form of investing. However if you buy a property and rent it out to a negligent tenant, it can be a huge time suck. REITs help you avoid being a property manager altogether.
  • Liquidity – Many REITs are traded on the public stock exchange. That means that unlike owning traditional real estate, you can sell your share with a quick phone call. 
  • Portfolio Diversification – REITs invest your money in multiple properties, in multiple different areas. This helps to diversify your portfolio and ensure that all your eggs aren’t in one basket.
  • Access to Commercial Properties – REITs open up investors to a whole host of properties that most real estate investors wouldn’t typically have access to. It’s not everyday that the average investor could go out and buy a multi-million dollar apartment complex.
  • Avoid Double Taxation – Unlike many investment vehicles, REITs pay out their distributions before they pay tax. This means that you avoid double taxation – helping you build wealth.

Cons

  • Lack of Control – Unlike when you buy a home and rent it out, as a unitholder you have no say in what properties you want to invest in or where they are located. While you don’t get to scope out the property first, you have to trust that the Trustees have done their due diligence – rest assured, they earned the name “TRUSTee” for a reason.
  • Property Specific Risks – As mentioned, REITs tend to specialize in a specific type of property, such as an office building REIT. It’s important to note that each type of property has risks associated with it and are susceptible to different economic conditions. This can be seen in the transition to work from home, in the case of office buildings. 
  • Investment Time – Like most real estate, REITs are best suited for longer term investments. It is recommended for investors looking to invest their money for 5+ years.
  • Slow Growth – In Canada, a REIT is required to distribute 90% of its profits to investors. Unlike penny stocks which don’t typically offer dividends and instead re-invest those earnings, REITs only have the remaining 10% of profits to grow the company by investing in additional properties. This means that you most likely won’t see your investment take off within a year or two.

How to Analyze REITs

Since REITs are dividend-paying stocks, they can be analyzed in a similar way that you would analyze other stocks, with a few minor differences. Before crunching the numbers, it’s important that you first look at the following factors:

  • The REITs’ Tenants – Are any of the tenants having major financial issues? This will likely affect their ability to repay their loan or pay their rent.
  • Acquisitions and Dispositions – Is the REIT growing their portfolio? Are they shrinking? Neither one of these is inherently good or bad, but it’s important to make note of and understand why they took those actions.

…now to crunching the numbers. Once a REIT looks like a solid investment opportunity, you need to make sure you’re paying a fair price for the stock.

Funds from Operations (FFO)

Following the General Accepted Accounting Principles (GAAP) , REITs must charge depreciation against their assets. However, as you likely know, many real estate properties generally appreciate in value over time, not depreciate. The depreciation expense can have a substantial impact on their reported net income and make a dividend payout ratio appear higher than it truly is. 

Additionally, we must account for the capital gains or losses from the sale of property. While these gains and losses are real, they’re not indicative of how much cash flow you can expect the REIT to generate in the future, so it’s important that we exclude these values to get a better understanding of the REITs performance. 

That’s where Funds From Operation (FFO) comes in. This quick calculation gives investors a clearer picture of the REITs true earnings. It is calculated using the following equation:

FFO = Net income + depreciation expense – gains on asset sales + losses on asset sales

Adjusted Funds from Operations (AFFO)

It’s important to note that each company calculates AFFO slightly differently. However, AFFO provides further adjustments to the REITs FFO to provides and even more accurate measure of the REITs performance. In the standard FFO calculation, we do not account for capital expenditures (CAPEX). Using AFFO, we deduct any capital expenditures to give a more accurate valuation. 

But utilizing these calculations, you’ll be able to get a better understanding of the REITs performance and if the REIT is undervalued or overvalued in comparison to other REITs.

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How Real Estate Investments Earn Money

Investing in real estate is one of the smartest moves you can make, no matter what age or stage of life you are in.

Real estate investments can add diversification to your portfolio – and getting into the market can be as easy as buying a mutual fund.

If you’ve ever had a landlord, you probably don’t dream of being one: Fielding calls about oversize bugs and overflowing toilets doesn’t seem like the most glamorous job.
But done right, real estate investing can be lucrative, if not flashy. It can help diversify your existing investment portfolio and be an additional income stream. And many of the best real estate investments don’t require showing up at a tenant’s every beck and call.

In this article, we take a look at how real estate investments on our marketplace earn money.

Key Points

  • Real estate investments break down into two broad categories: debt and equity.
  • The main ways to make money are from asset appreciation and dividends from rents/interest payments.
  • There are several ways to invest in real estate equity investments, including direct investment, mutual funds, REITs, and investment platforms.

Debt vs. Equity

Real estate investments break down into two broad categories: debt and equity. Let’s first look at the differences between these two types of investments to begin to understand how returns are structured in the form of income or appreciation.

DebtEquity

Under a real estate loan, an investor lends money to a borrower (typically a buyer or real estate developer). 

The investor earns income for the duration of the loan usually at a fixed rate following a schedule of regular interest payments on the loan principal. 

A debt investment is typically less risky than an equity investment, but there are several factors that impact how risky each individual investment can be, as discussed below.

See Example Debt Opportunity Listing

An equity investment gives an investor ownership of a physical property. An equity investment entitles the investor to a claim on money earned from any appreciation earned by the asset when it’s sold. 

Appreciation returns are usually realized in a one-time payment, in the form of capital gains. An equity investment also gives an investor the ability to earn regular income from rental payments for the lifetime of the investment typically on a monthly basis. While equity investments enable investors to earn both income and appreciation, they’re often riskier than debt investments as we discuss below.

The main ways to make money are from asset appreciation and dividends from rents/interest payments.

How Real Estate Investments Earn Income

Is your primary investment objective Current Income? Both debt and equity investments can earn you consistent income. Let’s take a look at how.

Loan Interest Payments

A real estate loan investment is an arrangement in which an investor lends money to a buyer or developer who then pays interest on the principal lent. An investor earns a return in the form of income from the interest payment while the loan is repaid. Payments are often made on a monthly basis making them an appealing investment option for those seeking “passive” or “residual” income.

Debt investments can only earn income, but they offer the advantage of lower risk than equity investments do thanks to their senior position within the capital stack. This means debt investors receive their principal plus interest before an equity investor can realize any returns (apart from rental income potential).

Within the debt tranche of the capital stack, there’s a further division of seniority among the types of debt which determines loan repayment priority. Senior debt is unsurprisingly the most senior and therefore has the highest repayment priority. It’s followed by junior debt and mezzanine debt, and then the equity portion of the capital stack.

In addition to seniority, debt real estate investments can be secured or unsecured. An investor with a secured debt investment has the right to foreclose on a property in the event of loan default to recoup the value of their loan. Senior debt investments are typically secured positions, and other debt investments may be secured, but the terms can vary by investment.

Rental Payments

Equity investments can also generate their own income stream using rental payments. Traditional, or common, equity ownership gives investors the right to lease the property to tenants to earn income through rental payments.

Unlike a debt investment, which generally has a fixed rate of return over a defined lifetime, an equity investment generates rental income that can change over time, growing or shrinking in relation to market demand. Income potential is also based on occupancy rates, which can also vary for any given property. This means that equity investors may incur more risk to earn income, but they also have the potential to earn a higher rate of return.

Also, common equity investments don’t usually have pre-defined periods of ownership and can last indefinitely, giving an investor the ability to earn income until the property is sold. Real estate is a long-term investment, especially for equity investments, which gives investors the ability to earn significant income over time on a monthly basis.

Common equity ownership offers rental income potential, while preferred equity investments offer cash flow in a way that’s more similar to debt investments. Like a loan interest payment, preferred equity investments offer a fixed rate of return commonly referred to as “preferred return.” Due to its middle position in the capital stack, preferred equity investments receive payments until they’ve reached the agreed rate of preferred return after all debt investments have been repaid and before common equity investors receive their return.

How Real Estate Investments Earn Appreciation

There are several ways to invest in real estate equity investments, including direct investment, mutual funds, REITs, and investment platforms. The investment vehicle used to invest in an equity investment impacts how an investor receives their return as well as how and when it is taxed.

For example, an investor with a direct investment can collect their capital gains directly from the sale of an investment. On the other hand, an investor with an investment through a fund may realize appreciation from the sale of a property through a fund distribution or through an increase in the value of the shares that they own. Each option brings its own advantages and disadvantages, which can make each option more or less preferable for an investor, depending on their financial goals and resources.

Regardless of how you invest in real estate, at some point, a rigorous underwriting process, which evaluates the aspects of a potential investment property, is key. If you’re investing independently, the onus for that underwriting process will fall on your shoulders, whereas, if you’re investing through a fund or platform like Fundscraper, a team of experienced real estate professionals will handle the evaluation on your behalf.

No matter who performs the underwriting, this due diligence process plays a vital role in determining whether an investment opportunity is financially sound.

Evaluating Your Options

Common equity investments are easier to access than debt investments. Individual investors can buy an investment property and manage it on their own. However, due to the high sums of money, knowledge, and time commitment required for direct investment, individual investors are often limited in the number and types of properties that they can buy — and manage — on their own.

As with debt investments, pooled-fund investment options, such as mutual funds, REITs, and investment platforms, offer a way to invest small sums of money across several assets and asset types. Private equity funds are also available to accredited investors. While it’s more feasible for an individual investor to invest in a single-family home or duplex, a fund can give an investor access to investments across a wide range of commercial real estate in multiple locations at a fraction of the dollar investment size.

For instance, with Fundscraper, you can invest in opportunities with a target diversification level that matches your goals containing a mixture of assets across different geographies.

Fundscraper allows investors with small amounts of capital to get in on private real estate deals. Whether you are looking for cash flow now or let your money sit and grow over the long term, Fundscraper offers a wide range of opportunities including Real Estate Investment Trusts, Private Equity, Mortgage Investment Corporations and Mutual Fund Trusts with shorter and longer term horizons.

We welcome you to create a free profile and browse our marketplace. If you’d like to discuss your financial goals and your options with one of our licensed dealing representatives, fill out this short questionnaire and book your call today.

Start Investing in Real Estate Today

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The Modern Playbook for Super Successful Real Estate Investing

Every winning team has two things: a great coach and a great playbook. At Fundscraper, our coach is Luan Ha, MBA, our founder and CEO. And he recently published “The Modern Playbook for Super Successful Real Estate Investing.”

What is the Modern Playbook for Super Successful Real Estate Investing?

Luan is one of North America’s leading real estate experts. His playbook — which you can download for free — is filled with valuable insights about putting your money to work. He writes in a conversational, easy-to-understand style, drawing comparisons to the sport of professional football: scouting, leading, game-planning, and play-calling. But you don’t have to be a sports fan to get a lot out of it. If you’re interested in learning more about real estate investment, this free resource is an excellent place to start.

A good playbook is the secret of success, whether in sports or business.

Luan methodically describes the background homework behind his playbook. In the “Tips and Quotes” section, he explores advice from industry icons that helped him find success. Very informative is the “Profiles of Best Investors” section, a look at the big players, banks, institutions, wealthy families, and pensions. Have you ever heard of the famous 20% rule of investing, practiced by the Yale University Endowment Fund? Luan will tell you all about it!

Luan’s 9 best go-to plays for successful real estate investing

At the heart of Luan’s playbook is his actual list of go-to plays. These are the real, tried-and-true methods that got him to where he is today:

  1. Do your Due Diligence – from creating a checklist, to relying on experts to make sure the “story” makes common sense
  2. Determine the Location Works – all the factors to bear in mind
  3. Assess the Fundamentals of Supply and Demand – key things to remember
  4. Understand the Zoning – useful rules of thumb
  5. Consider Debt as an Investment Vehicle – important considerations
  6. Carefully Analyze the Debt Leverage of the Project – a double edged sword
  7. Figure Out Your Real Estate Investment Style – match your risk appetite, liquidity, expectations and return objectives to the deal
  8. Maximize Your Exit Options – more are better
  9. Avoid Mistakes – automatic if you follow the first 8 Go To Plays

Luan is convinced his playbook will give you a leg up in making real estate decisions. At the same time, he recognizes that not everyone has the time or skills to make these types of decisions on their own. That’s where Fundscraper comes into play!

How to get started

Who are we? We’re a team of experts who can do the heavy lifting for you, but at the same time, leave it to you to decide which real estate investments are right for you. We’ll be your coach, or your cheerleader, or both. We’re here as much or as little as you need.

Fundscraper is on the cutting edge of technology and government compliance. We’re registered with and regulated by the Ontario Securities Commission and also falls within the jurisdiction of Financial Services Regulatory Authority of Ontario.

To quote Luan, “Go for the touchdown and pass the ball to Fundscraper.”

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

Why Real Estate Is an Essential Part of Every Investment Portfolio

Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible, and we’ve got you. Even if the extent of your financial experience is a high-yield savings account, you can—and should!—diversify your portfolio with real estate. We’ll teach you how the 1% invests.

Key Points

  • Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible.
  • Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. 
  • Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

The case for diversifying your investment portfolio

Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. Our thesis is simple: You’ll likely be more successful if you put more emphasis on solid direct real estate investing, while at the same time maintaining a high degree of safety.

Being risk averse is a good thing. We’re risk averse, too! Most people are naturally risk averse. We’re drawn to what we know and hesitant of what we don’t know. The average person knows more about traditional investments like stocks and bonds, so that’s where they put most of their money. But the investment environment, especially in the stock and bond markets, can be volatile. If you’re risk-averse, you should know that limiting your investments to only the public markets is one of the biggest investing risks of all.

Investing limited only to public markets risks the chance of devastation if the “bubble” precipitously bursts based on factors beyond our control, such as environmental disasters, inflation, or fluctuating interest rates. Common sense tells us to spread our money out into a diversity of pots, hoping the ups and downs will balance out and we will enjoy a somewhat stable, if unspectacular, return on our investments. As such, it’s a good idea to put a bigger emphasis on real estate investing.

Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

Why is real estate an essential part of an investment portfolio?

Direct real estate investing fluctuates quite distinctly from other conventional asset groups like stocks and bonds. For instance, real estate is tangible and is what lawyers call an “immovable.” It’s not a substitute that should take the place of other assets in your portfolio, but rather an asset group all its own.

Unlike stocks and bonds, real estate trades privately based on local factors such as location, supply, demand, and investment lifespan. It is often scarce, particularly in growing areas, which translates to a history of appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets providing a regular income stream and long term growth coupled with the benefits of diversification.

You can enjoy superior performance and diversity at the same time. This is especially true if you’re maintaining and growing the value of your retirement portfolio. Smart real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage (typically as much as 4 or 5 times) and the miracle of compound interest over an extended period of time.

You can add real estate to your portfolio without actually buying property.

What are the benefits of real estate investment?

Meaningful real estate investing is essential for a well-rounded and successful investment package, and the benefits go well beyond diversification. The most obvious benefit of real estate investment is the financial one. Real estate earns attractive monthly returns and can provide a regular fixed income stream over a set time frame. Speaking of tangibility, that’s another benefit: Real estate is a hard permanent asset that can be easily securitized. It has value, and you can calculate that value at any given moment.

Take advantage of having solid real estate investing as a meaningful part of your portfolio. It’s a self-evident way to enjoy reasonable returns and balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international. It’ll pay off in the long term while maintaining a high degree of safety.

Other benefits of real estate investment to note include:

  • The ability to take advantage of leverage
  • Tax deductions
  • A chance to create added value
  • An increased voice in the management of the asset

What is the 20% rule of investing?

Most of us never get a chance to participate directly in a major real estate project — usually grabbed up by big players, like private equity firms, banks, insurance companies, pension funds, and government institutions. We are mostly left to public mutual funds, real estate investment trusts (REITs), exchange traded funds (ETFs), and the like.

Consider the experience of and the lessons to be learned from the Yale University Endowment, which is one of the best performing investment portfolios in North America, having a current value in the range of $30 billion. The fund is known for its “20% rule” which recommends at least 20% be invested directly in private markets, such as real estate.

This invariably translates into significantly higher returns over time for a real estate investor over one who employs a more traditional allocation based in public markets. One can only conclude that it makes sense to piggyback onto a tried and true paradigm of real estate investing established by the major players.

Your investment portfolio can enjoy superior performance and diversity at the same time.

How do I get started?

If you’re new to real estate investing, the idea of adding such a large asset to your portfolio may seem intimidating. But it’s easier and more attainable than you might think.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

How to Invest in Real Estate

The wealthiest investors all have one thing in common: They invest in real estate. You can do it, too, even if you can’t afford a down payment. Read our latest article to learn how to invest like the 1%.

Think you can’t afford a real estate investment? Think again. Worried now isn’t the right time to add another property to your portfolio? It is possible, and we’ve got you.

Even if the extent of your financial experience is a high-yield savings account, you can—and should!—diversify your portfolio with real estate. Fundscraper will teach you how to invest in real estate like the 1% does. If you’re wondering how to invest in real estate, Canada is an excellent real estate market for both seasoned investors and newbies alike.

How to Invest in Real Estate

Here’s Why You Should be Investing in Real Estate

Most of us never get a chance to participate directly in a major real estate project — usually grabbed up by big players, like private equity firms, banks, insurance companies, pension funds, and government institutions.

We are mostly left to public mutual funds, real estate investment trusts (REITs), exchange traded funds (ETFs), and the like. Most people don’t think they have the means or personal finance to buy an investment property, a rental property, an office building, or a single-family home as an investment, but they very well might.

The bottom line isn’t necessarily where you think it is.

Every investor’s goal should be to build a more perfect portfolio designed for maximum rewards and minimum risk.

Consider the experience of and the lessons to be learned from the Yale University Endowment, which is one of the best performing investment portfolios in North America, having a current value in the range of $30 billion. The fund is known for its “20% rule” which recommends at least 20% be invested directly in private markets, such as real estate.

This invariably translates into significantly higher returns over time for real estate investors over those who employ a more traditional allocation based in public markets. One can only conclude that it makes sense to piggyback onto a tried and true paradigm of real estate investing established by the major players.

If you’re new to real estate investing, the idea of adding such a large asset to your portfolio may seem intimidating. But it’s easier and more attainable than you might think.

Is Investing in Real Estate a Good Decision?

Too often, the traditional portfolio mix fails to achieve optimum performance because of the under-representation of direct real estate investing. Our thesis is simple: You’ll likely be more successful if you put more emphasis on solid direct real estate investing, while at the same time maintaining a high degree of safety.

Being risk averse is a good thing. We’re risk averse, too! Most people are naturally risk averse. We’re drawn to what we know and hesitant of what we don’t know.

The average person knows more about traditional investments like stocks and bonds, so that’s where they put most of their money. But the investment environment, especially in the stock market and bond market, can be volatile.

If you’re risk-averse, you should know that limiting your investments to only the public markets is one of the biggest investing risks of all.

The Modern Day Playbook For Super Successful Investing

How can a smart, modern investor get in on the real estate investing action, especially since going on your own may require prohibitive amounts of capital? Most people do not have the requisite knowledge or expertise to invest in real estate on their own.

Why Investing in Real Estate isn’t just for the Wealthy Anymore

An investment property probably conjures images of the wealthy 1%, but we help make that dream accessible to many. Investing limited only to public markets risks the chance of devastation if the “bubble” precipitously bursts based on factors beyond our control, such as environmental disasters, inflation, or fluctuating interest rates.

How to Invest in Real Estate

Common sense tells us to spread our money out into a diversity of pots, hoping the ups and downs will balance out and we will enjoy a somewhat stable, if unspectacular, return on our investments. As such, to grow and build wealth, it’s a good idea to put a bigger emphasis on real estate investing.

You can add real estate to your portfolio without actually needing to buy a home, or even buy a property.

How to Invest in Real Estate Like a Pro: What You Need to Know

Direct real estate investing fluctuates quite distinctly from other conventional asset groups like stocks and bonds. For instance, real estate is tangible and is what lawyers call an “immovable.” It’s not a substitute that should take the place of other assets in your portfolio, but rather an asset group all its own.

Unlike stocks and bonds, real estate trades privately based on local factors such as location, supply, demand, and investment lifespan. It is often scarce, particularly in growing areas, which translates to a history of appreciating value. In your portfolio, real estate investing is a channel to investments backed by real hard assets providing a regular income stream and long term growth coupled with the benefits of diversification.

You can enjoy superior performance and diversity at the same time. This is especially true if you’re maintaining and growing the value of your retirement portfolio. Smart real estate investing can only enhance the prospect of enjoying the benefits of things like reasonable leverage (typically as much as 4 or 5 times) and the miracle of compound interest over an extended period of time.

Your investment portfolio can enjoy superior performance and diversity at the same time. You don’t even need to be a landlord or property manager!

Meaningful real estate investing is essential for a well-rounded and successful investment package, and the benefits go well beyond diversification. The most obvious benefit of real estate investment is the financial one.

Real estate earns attractive monthly returns and can provide a regular fixed income stream over a set time frame. Speaking of tangibility, that’s another benefit: Real estate is a hard permanent asset that can be easily securitized. It has value, and you can calculate that value at any given moment.

Take advantage of having solid real estate investing as a meaningful part of your portfolio. It’s a self-evident way to enjoy reasonable returns and balance out the vagaries and unpredictable fluctuations in public securities markets, both domestic and international. It’ll pay off in the long term while maintaining a high degree of safety.

Other benefits of real estate investment to note include:

  • The ability to take advantage of leverage
  • Tax deductions
  • A chance to create added value
  • An increased voice in the management of the asset

Now that you know more about how to invest in real estate in Ontario, Fundscraper is here to answer any further questions you have about how to invest in commercial real estate, real estate development, and more. It’s time you start earning passive rental income. Contact us today to get started.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

The Role of the Credit Committee of an Exempt Market Dealer

The Credit Committee, sometimes called the Investment Committee, is a panel of individuals ubiquitously found in financial institutions, pension and endowment funds, credit unions, banks, insurance companies, and the like. Here, we’ll focus on the role and inner workings of the Credit Committee of an Exempt Market Dealer offering real estate products to the public.

Key Points

  • An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business
  • The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD
  • The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD

What is an exempt market dealer (EMD)?

An EMD is a firm that has been licensed to distribute investment securities that are exempt from the rigours of a prospectus normally required by the Canadian Provinces in which it is registered to carry on business.

EMDs may act as dealers for prospectus exempt securities sold to qualified clients. Typically, an EMD offers products covered by an Offering Memorandum (OM) which need not be pre-cleared by a Securities Commission. An OM is an issuer-prepared document purporting to describe its business. OMs assist prospective purchasers in their decisions of whether to invest in the securities being offered by the Issuer.

The Credit Committee does much of the “heavy lifting” for investors in evaluating the underlying merit of any investment opportunity.

What is a credit committee and what does it do?

The Board of Directors of an EMD normally establishes the Credit Committee comprised of senior management individuals with authority and relevant skill and experience. They meet regularly to consider new investments and approve, amend or turn away investment opportunities being brought forward under the auspices of the EMD.

The Credit Committee has a broad range of duties and responsibilities, including the obligations to:

  • Ensure regulatory compliance for each investment
  • Review regularly investment policies and recommend to the Board of Directors changes in policies, procedures, internal controls and underwriting guidelines
  • Promote wise investment and credit management
  • Rule on investment opportunities, taking into account credit, market, operational and legal risks
  • Ensure any investment is consonant with the EMD’s published investment criteria and policies

What is a loan officer?

The Loan Officer assigned to any proposed transaction is an experienced underwriter charged with presenting the investment opportunity to the Credit Committee, including all the supporting research. An underwriter’s main task is to assess the quality of an investment, its sponsors, and its inherent risks. Oftentimes, the Loan Officer’s presentation to the Credit Committee will have been previously vetted and endorsed by the Loan Officer’s supervising manager.

Why is it called underwriting? The term comes from the historical practice of Lloyd’s of London Insurance of requiring each risk taker (often for a sea voyage with risks of shipwreck) to put their “written” signature “under” the total monetary risk they were willing to assume in return for a fee. Hence the term “underwriting.”

It’s the credit committee’s job to approve, amend, or disapprove of an investment application.

How does a credit committee evaluate an investment opportunity?

Over and above its general obligations, on a daily basis, the Credit Committee is charged with evaluating potential investment opportunities falling within the EMD’s jurisdictional orbit. The review begins with the Loan Officer’s discussion paper, which includes a profile of the people behind the deal, its proposed terms, detailed analyses, and recommendations.

After deliberating over the Loan Officer’s underwriting report and completing any follow up interviews, the Credit Committee can approve, amend, or disapprove of the investment application at hand.

If the application is turned down absolutely or with amendments, the Loan Officer will advise the applicant accordingly. If it’s approved, a letter of intent will be sent. Upon acceptance by the applicant, a term sheet and commitment letter prepared by the Loan Officer and approved by the Credit Committee is forwarded to the applicant for signature and acceptance. The Loan Officer then will confirm that all due diligence and funding requirements are in order and that arrangements are put in place to fund the transaction. The EMD’s Legal Counsel will be retained to prepare and register the mortgage and/or any other security documents and ensure all conditions have been satisfied before funds are released. Barring the need for an extension down the line, the work of the Credit Committee is now done.

At this juncture, the EMD moves on to fulfill its regulatory obligations and attends to matters related to qualification of investors, suitability, conflicts of interest, disclosure, and more. It’s a complex process; the full treatment of these tasks is beyond the scope of this paper!

The credit committee serves as a natural buffer or safeguard against an overly enthusiastic promoter. An essential part of its mission is to protect the ultimate consumer of products offered to the public under the umbrella of an EMD.

What is due diligence?

Due Diligence, as applicable, covers many things, including:

  • The credentials of an Issuer or Sponsor
    The financial details of the proposed deal, including principal amount, yield, duration, and other salient features and conditions
  • Creditworthiness of the borrowers and/or guarantors, including credit checks, financial statements, personal references, and net worth statements
  • Third party reports such as valuation appraisals, architectural certificates, environmental reports, building condition assessments, geotechnical appraisals, and quantity surveyor reports
  • Leases, rent rolls, and estoppel certificates
  • Development budgets and construction schedules
  • Ability of the originator to fund budget shortfalls and need for a Deficiency and Cost Over Run Agreement
  • Zoning and building permits
  • Details of prior and subsequent encumbrances and availability of lender consents, if necessary
  • Assessment of loan to value ratios and other compliance with the EMD’s investment criteria
  • Evaluation of current competing market conditions for similar deals, including prevalent offerings by competitors
  • Timing of advances to the borrowers
  • Availability of collateral security
  • Builder’s risk and liability insurance
  • Validity of repayment schedules, as well as feasibility of exit route through refinancing or sale of underlying property
  • Evaluation of originator’s track record and project’s progress to ensure continued sustainability in case an extended term is needed
  • Location of the property, including marketability, condition, and value
  • Contemporaneous assessment of general economic and societal forces, including state of financial markets, existing and proposed government policies, local issues, and force majeure conditions
  • Review of commitment administrative and all incidental expenses and fees
  • Legal structure and supporting documentation

Meet the Fundscraper credit committee

Our team has over 125 years of experience in real estate development, finance, private equity, law, and technology. We’re proud leaders in our fields! Meet the Fundscraper credit committee here.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

Due Diligence Checklist Before You Invest in Private Real Estate

Today, there’s a wealth of options for accessing the market for investors of all kinds. Many investors struggle with the private real estate investment due diligence process. It can be intimidating and stressful to know where to start, what information to review, and how to determine whether or not a property is a smart investment. We’re here to make that process a lot less intimidating by explaining essential due diligence to-dos for investors, whether you choose a fund, service, or platform.

Key Points

  • Many investors struggle with the private real estate investment due diligence process.
  • Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise.
  • Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.
  • People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

See If You Qualify

Before spending too much time envisioning your future with a particular service, be sure to check and confirm which kinds of investors it admits. For example, some funds provided by famous private equity real estate companies, like Blackstone, have a history of only admitting investors that meet certain salary thresholds, while newer platforms, like Fundscraper through Fundscraper Property Trust, allow anyone to invest.

Check Past Performance

Past performance does not guarantee future results, but looking at track record is one way to gauge an organization’s expertise. How has the manager fared in prior years? Did they show responsible custodianship over investors’ funds in the past? What does their portfolio say about their investment biases? How is their portfolio weighted? Each of these factors can help you determine what your investment experience might be like with a particular service.

 Due Diligence Checklist Before You Invest in Private Real Estate

Understand the Fee Structure

Every real estate investment has built-in expenses. In order to generate dividends, a property incurs ongoing fees, such as property management and future upkeep. Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.

Make Sure You Can Manage Your Investment

One of the big advantages of investing in real estate directly is that you never have any doubt about what your money is up to or how to track it. On the other hand, when you invest through a third party like a fund, partnership, or corporation, you can only track what they make visible. Now that most investment services are online, make sure you can interact with, manage, and evaluate your investment to your desired level of involvement.

 Due Diligence Checklist Before You Invest in Private Real Estate

Consider Diversification

People turn to real estate to improve their portfolio’s overall diversification. Public REITs are terrific products, but if your investment portfolio is generally made up of publicly tradable shares, you may lack diversification.

Public REITs in Canada correlate very closely with our public markets. When the markets go up, so do the REITs; when the markets go down, the REITs follow. Private real estate investment does not correlate with the public market. It’s one of the important reasons folks look to “anchor” their investment portfolios with private real estate investment. It sits at the bottom of your portfolio and chugs along, regardless of what’s happening in the public markets.

At Fundscraper, part of our due diligence is making sure you understand yours. Download our due diligence checklist template for real estate property investment here.

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The Modern Investor's Playbook
to Super Successful Investing

Become a master of real estate investing! This playbook has inside industry knowledge that you can use to help generate passive income! Discover tactics used by the savviest investors, how to diversify, maximize your returns and avoid mistakes. It’s everything you need to know to invest like a pro.

Start investing with Fundscraper today.