Crowdfunding – An alternative way of investing

Crowdfunding

First, let’s understand what is “crowdfunding”

In the past, when someone wanted to fund a project, a company, or anything that required a starting investment capital — there were a few ways to raise the required funds: 

  • one could take on debt from a loan.
  • one could raise money from friends, family members, and angel or VC investors.
  • Or one could simply use your savings.

In the late 2000s, a fourth option was added to this list: crowdfunding.

Crowdfunding uses modern networking tools such as social media and specialized websites to introduce investors and entrepreneurs to each other, with the clear advertised purpose of gathering small amounts of capital from a number of individuals to finance a new business venture.

The value of such a match is the potential of increasing entrepreneurship by expanding the pool of investors beyond the circle of owners, relatives, and traditional venture capitalists.

There are 4 main categories of crowdfunding:

Debt crowdfunding or Peer-to-peer (P2P) lending is a way to raise money to back personal growth or projects. Investors are given the opportunity to fund a project in exchange for a share of the earnings. For example, poker players use crowdfunding to play against a promise of distributing a share of their winnings back; this allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Using this method, you should get a return in the form of interest on your invested money. 

Equity Crowdfunding –In this type of campaign, people are given the opportunity to invest capital in private companies in exchange for the promise of receiving future shares, stocks, or other securities issued by the company. 

If the venture is successful this investment can prove itself to be fruitful as the value of the shares will increase; at the same time, you could stand to face loss if the value of the shares decreases.

Donation-based crowdfunding For those who are not financially motivated and want to invest in a venture because they believe in the cause. 

Reward-based crowdfunding is exactly what it sounds like. The purpose of the investment is to unlock a specific reward linked to the supported project.  The reward is not financial but material, for example, you might help fund a new product and later receive that product in return.

The latter two, reward-based crowdfunding and donation-based crowdfunding, are grouped under the category of non-investment business models. These are also sometimes referred to as non-financial return models.

How does crowdfunding apply to real-estate or investment in properties?

Property crowdfunding is a specialized type of Equity Crowdfunding, but it can as well fall under the peer-to-peer lending category in certain deals.

In the real-estate vertical, crowdfunding is a service that connects individuals who want to invest in properties with real estate businesses and property owners who need to raise capital for their ventures.

The investment opportunities are usually presented as either debt or equity financing.  

So, if you are an investor checking out Real Estate Property Crowdfunding opportunities, you can find a debt-based investment where you can get a repayment with interest in fixed installments or at the end of a predetermined time, or you might be presented with an equity investment proposal, where you can participate in the profit on the real estate deal.

If you don’t have the full original amount needed to purchase a property outright, or hours spare to manage maintenance and tenants, dealing with mortgage brokers, real estate agents, or contractors – but you do want to profit from the lucrative return of investing in real estate and properties, then crowdfunding offers a new way to invest effectively even with minimal amounts.

The concept is upfront: a number of people (the size of the group may vary) group together and each invests a small amount of money to fund a project. Ultimately each investor in the collaborative investment will find himself owning a share of the property: the size of the share is of course directly proportional to the investment made.

Joining a crowdfunding property project will allow a group of investors with lower individual outlay to potentially take advantage of high-yielding property in the commercial and residential sectors.

It can cover many areas from renovation projects, land development, long term buy-to-let purchases, secured loans, bridging loans, etc.

Many property crowdfunding platforms present the buyer with the opportunity of investing in shares in the property venture.

Should You Invest in Real Estate Property Crowdfunding?

Advantages 

Gives Freedom To Choose

Investing in property / real estate crowdfunding gives you a sense of independence and freedom: as the platform you are using is doing most of the work for you – it will be listing for you the best properties, giving you the freedom to search with ease and compare between offers, quickly understanding which project is most relevant for your budget and return expectations.

It’s Affordable and Convenient

Very few have required available resources to purchase a rental property.
However, with real estate crowdfunding, you can buy a piece of property together with many other people as a collaborative investment.

The entry price may be as low as £1000 meaning you probably don’t need to worry about how to improve your bad credit score or being considered for a mortgage.

Build A Diversified Portfolio

Diversification is a basic principle of risk management for any investment. With crowdfunding, you can enjoy the rewarding steady return on investment from real estate while investing in parallel in the commercial and residential sectors, or even renovation projects. You chose where to invest and how much!

Transparency

Real Estate Property Crowdfunding is mostly done via online platforms where everything is clear and transparent. 

Respectable platforms provide all details and unlimited access to information regarding their assets in a safe and secure site.

Disadvantages 

You Are Not The Owner

Investing in real estate via crowdfunding gives you shares to a company which is the owner of the property, but it does not make you an owner of the property. 

All the details of your rights as a shareholder to share the company’s profit, generated at the property can be found in a document called Operating Agreement.

Low Liquidity

Most investments have a “lock-in” period (ranging from six months to 10 years) pending a loan maturity or for the sale of the real estate property.

Not In Charge Of The Property

As an investor, you will find yourself in a passive position and won’t be able to participate in the process of property management.

Besides having chosen the property, once you join the crew of investors, there’s not much room for creativity, instead, the entity managing the collective property will make decisions such as letting tenants in or selling the property. 

Understand the involved Fees

There are many hidden fees investors need to be aware of before investing on a crowdfunding website. The range of fees can include management fees,  construction fees, platform fees, etc. Sometimes, fees can be so hefty that they undermine returns on the investment.

Crowdfunding in numbers 2019 vs 2020 

Crowdfunding in the United Kingdom & Europe

The Cambridge Centre for Alternative Finance identifies 14 distinct alternative finance or crowdfunding models in 2017 (including “Other”). The clear leader of these models when it comes to funding volume in Europe is:
Peer to Peer (P2P) Consumer Lending accounting for 41.2%. followed by
Invoice Trading (16%),
P2P Business Lending (14%),
Real Estate Crowdfunding (8%),
Equity-based Crowdfunding (6%), and Reward-based Crowdfunding (5%).

These six models accounted for almost 90% of the total European funding volume.

Source: Global Trends in Alternative Finance, April 2020

Even though Europe has many players in crowdfunding, especially within peer-to-peer lending, the UK is placed in a leading place: number three in the world, with a worldwide market share of 3.40% with a funding volume of $10.37 bn and one of the most well-established markets for crowdfunding in the world.
Another high jumper on the list in 2018 is the Netherlands, ranked 4 in the world after an impressive growth in 2018, which resulted in a leap of six places on the list and a total crowdfunding volume of €1.61 bn up from €276.57.0 m in 2017.
Countries from the European region that made it into this year’s Global Top 30-list were:

Source: Global Trends in Alternative Finance, April 2020

Key Players – Real Estate Crowdfunding Platforms in Europe

  1. EstateGuru: European marketplace for property-backed loans. 
    Average Return: 11.79%.
    Zero fees.
    Low minimum investment.
    1574 loans funded.
    Regulated by multiple authorities
    Clear Executive Summaries available for each project
  1. CrowdProperty: Property crowdfunding site for residential properties in the UK. 
    Restricted to UK Bank Account owners
    The site is not intuitive at first but is ultimately easy to use.
    All loans are secured by property, typically with good loan-to-value (LTV), and always below 70% & with 1st legal charge.
    909 homes built.
    Auto-invest option with up to 8% returns
    FCA regulated and authorized.
  1. CrowdEstate: Investments across Europe.
    16.95% annual return rate
    High loan volumes and a wide range of investment opportunities. €92m raised. 
    252 project funded.
    No investment fees
    Minimum investment as low as €100
    Available option of immediate liquidation of the investments
  1. The House Crowd: Automated UK real estate investing with balanced returns.
    Delivers predictable, consistent returns – Gain interest on investment up to 10% per year
    £122 million Invested to date
    Available tax-free return via IF ISA or SIPP.
    Minimum Investment £1,000
    FCA regulated.
  1. Crowdlords:  UK developments and rental property projects
    Available tax-free return via IF ISA or SIPP
    Competitive rates of interest up to 20% per year. in some cases.
    Referral scheme for new investors available
    Minimum Investment £250
    FCA regulated.
  1. Property Partner:  Exclusively UK asset investments offering monthly dividend yield (rental income) and potential capital gains.
    They select, purchase, and manage the properties.
    Different plans of investment available with various fees packages
    20% cap on percentage ownership
    £145m assets under management.
    Regulated by the Financial Conduct Authority
  2. BulkEstate: Focused on funding new development or redevelopment projects as well as structuring group buying deals to acquire small size real estate at wholesale prices
    55.05% average LTV
    14.74% Weighted average annual return
    12 months average loan term
    Pre-vetted high-end quality projects.
    Offers group buying of flats below market prices.
    Regulated by the general commercial legislation of Estonia and the European Union.
  3.  LandlordInvest: Focuses on smaller residential and commercial property-backed loans.
    Gain interest on investment up to 12% per year
    Tax-free return ISA available
    Wide range of secured loans to choose from.
    Zero capital loss.
    Regulated by the Financial Conduct Authority (FCA)
  4. Blend Network: Exclusively UK niche markets.projects, run by professionals with substantial experience in real estate and finance
    Gain interest on investment up to 12% per year
    No fee – the only fee you may be charged is a 0.6% fee if you resell a loan on the secondary market.
    Minimal investment as low as £1,000
    FCA regulated.
  5. AblRate: Asset-Backed P2P Lending
    Best rates in the UK for property investing- up to 15% p.a
    Good track record of completed projects. 
    Unclear Fees policy
  1. NordStreet:  Finances various business loans as collateral for existing real estate, high-quality residential, and commercial property with very low LTVs.
    Minimal investment as low as €100
    Gain interest on investment up to 11.5% per year
    Loan recovery procedure in place
    Regulated and licensed by the national bank of Lithuania.
  1. Rendity: Specialized in exclusive in Austrian and German real estate deals along with institutional investors. 
    Rental income
    Gain interest on investment up to 7% per year
    Regulated by the German Chamber of Industry and Commerce.
  1. EvoEstate. Gatherers real estate deals from across Europe into one marketplace
    Proposes 3 types of deals:
    1.Rent: lowest risk you can expect 3-6% of annual returns as well as capital appreciation with time
    2. Fixed-interest loans: You can expect to earn 8-13% interest annually
    3. Equity: With this type of investment you are a business co-owner, therefore you can expect to earn between 14-30% annually
    Low minimum investment of €50.
  1. Ifunded: German investment platform offering pre-vetted deals of high-quality.
    Direct collaboration with national and international building contractors and project developers.
    Gain interest on investment up to 7% per year
    Minimum Investment €500
    Regulated under German Law as a Financial Investment Broker

Conclusions

Prior to investing in a Crowdfunded project make sure you check first the following:

The goal — understand how your funds will be used towards the project you are investing in by the person or company hosting the campaign.

Deal – understand what you are signing for, you will find all the details in the Executive Summary

Research the market and traction — A product or service is only good if there’s interest from potential consumers. Research the market they are hoping to address. Is there a need for their product or room for growth? One can also look up that company’s traction for data on how their concept is performing in initial markets.

Fees – Look for hidden fees prior to investing your funds as it can deeply affect the return on the investment you originally expected.

The team — Maximize the chance that this investment will be fruitful by making your due-diligence about the company.
Researching the founders, advisors, and team, seeing the right people are on board to execute the vision of the project you consider taking part in.

Fraud — Always check the company website, filing, and other paperwork to make sure they are truly credible. Always prefer a regulated platform over one that is not.