Real estate crowdfunding is a way to finance real estate investments by making such investment investments open to everyone. This helps entrepreneurs to start real estate ventures without having to be dependent on the bank or a single lender. Instead, they would sell the investment to other people (the crowd) who each invest a small amount allowing large amounts of money to be collected in a short period of time.
Real Estate Crowdfunding Opportunities
Real estate crowdfunding is an opportunity for the investor to reap the benefits of real estate investments without having to put down a substantial investment with no risk diversification. Alternatively the investment in real estate can be distributed through various forms of real estate, countries, currencies and more.
For the real estate developer, using crowdfunding is an opportunity to pursue financing in the typically developed banking / financing market, at a quicker pace than normal, through the group and business partners. Other than the time it takes for crowdfunding relative to conventional forms of financing, here, too, is also an benefit in rising costs. In cases, crowdfunding platforms may offer the same service with lower profits compared to banks, resulting in lower fees and potentially lower interest rates, or less equity giving up.
Real estate crowdfunding can take two different types, depending on whether it is based on equity (crowdfunding based on equity) or debt (crowdfunding based on lending). All forms vary significantly in their risk and return profiles so it is important that you understand their distinction. Below for more on these.
Inmobiliary equity investment
In equity-based real estate crowdfunding, part-ownership of the property available for investment would be given to investor. That can be either residential property or commercial property. You’ll become a shareholder in the land, in other words. Investing in immovable property this way would have a return depending on the property’s rental income. Additionally, in case the property is sold, you can earn a refund equal to your ownership per cent.
Crowdfunding of real estate on loan
When you are investing in loans, you lend money to the property owner. Thus, as in equity crowdfunding, you don’t earn shares in the property. Alternatively, you can earn a fixed return depending on the interest rate offered and the sum invested in the project. Where the money can vary and you can invest in both short- and long-term lending.
Investment in equity vs loans in crowdfunding immovable property – pros and cons
Which of the two forms of crowdfunding you would select as an investor depends on what kind of return you’re aiming for and how you’d like the risk-reward ratio to play out. Below is an overview of the various pros and cons relating to each form of investment.
Crowdfunding Real Estate Loans-Benefits
- Loans are usually safer than equity: Since the investment strategy is the same, investing in real estate loans is typically better compared with real estate equity. It is induced by the fact that the mortgage holders must be paid first, if the property is foreclosed and sold. Know, this does not mean that debt investments are necessarily less risky than equity investments. However, it does serve as a thumb rule but you also have to look at the individual investment.
- Loans usually have a more secure and reliable return than equity: Since you get a fixed return depending on the interest rate of the loan you are investing in, and because you know the loan repayment schedule, it is easy to foresee both the size and timing of your return.
- The holding period is known and always shorter than in equity: the debt length in which you invest is often known and you can invest in both short- and long-term loans.
Crowdfunding on real estate loans-Cons
- Lower risk means lower returns: Because your return on loan-based financing is set and you have no control of the property, in the event that the real estate property turns to generate exceptional rental income or rise in value, you do not get access to the group. In the other hand, most likely you won’t get hit as hard in the event it turns out to be a disappointment.
Equity Lending Real Estate-Pros
- Equity has the potential for greater returns than lending: the interest rate limits the profitability of debt investments. At the other hand, equity, both in terms of a higher rental income and a larger than expected rise in the value of the land, has the ability to yield greater returns.
- Tax benefits: This will vary from country to country but typically you don’t have to pay tax on equity investments until the shares are sold.
Equity Lending Real Estate-Cons
- Low returns mean higher risk: As an equity investor you would be last in line for payouts, and if you don’t get any returns from the real estate project, you won’t get any. However, if the real estate project fails there is a significant chance that any or all of your money will be wasted.
- The holding period is always uncertain and longer than in lending: investment in immovable equity is almost always very illiquid, even though there is a secondary market. In addition, where debt investments would have a short length, the holding period for equity investments in real estate is often uncertain and a holding period of at least 5-10 years should be required.
Choosing Platforms for Investing Immobilities
Investing in real estate crowdfunding is simple but it’s not always an easy job to find out which platform to use and in which projects to invest. Nonetheless, there are some important questions that can take you a long way – both in seeking quality platforms and platforms that suit your risk and reward hunger.
Below are 10 important questions that can help you in finding the right platforms for your real estate crowdfunding investments:
1. What sort of crowdfunding is being provided for real estate?
Investigate whether there are debt or equity investments on the site. Know, a combination of both provides several channels. Below you’ll find examples of all three platform forms.
2. Are you eligible for the Platform investment?
Such platforms impose limitations on who can invest in their ventures. You would need to live up to minimum standards such as annual income or net worth to be an accredited investor on such platforms. Lots of sites are available to all, though.
3. What is the Platform’s minimum investment and how does it suit your budget?
The minimum investment required varies enormously from platform to platform. Select platforms with minimum limits that still allow you to diversify across different real estate projects is significant.
4. Is the network open and dedicated to data sharing?
A clear platform is a trustworthy platform, in general. There are plenty of other investment opportunities when you can’t grasp how your money is being invested. Similarly, if it is not possible to find specific financial numbers either on their own website or on a reputable third-party website such as p2pmarketdata.com, you will find other sites here that are straightforward with data and search for your hard-earned money elsewhere.
5. Looking safe on the platform?
If you are an investor in search of returns or an entrepreneur in need of capital, you’ll want to work with a platform that will succeed. There are no guarantees, particularly not in investing, but two important metrics to keep an eye on are the platform’s total funding volume and whether it shows a healthy level of growth or not. With all modesty a great resource can be found on our front page to get an overview of the funding amounts and development rates of the numerous crowdfunding sites available for real estate investment. You will also examine the behind the network management. Will the founders and senior management have the expertise required to operate a trustworthy, efficient, real estate-focused crowdfunding platform? Search for skills not only in the real estate field but also in technology and finance.
6. Do your risk profile suit the real estate projects offered on the platform?
The projects offered on real estate crowdfunding platforms are made up of different types of financing in which investment can be made. It is necessary as an investor to consider these various types of investment products, because they come with various levels of risk. Here, the “capital stack” is used by real estate practitioners and platforms may deliver anything from senior debt to common equities. This can be seen from the example below, as you step up the capital stack (from debt to equity), you can usually raise your risk as well as your anticipated return. So, to find out whether the ventures on the platform suit your risk profile, make sure you understand the product in which you are investing.
7. What types of properties are provided on the platform?
There are two types of properties in real estate crowdfunding: residential and industrial. In general, residential real estate is less risky and needs less expertise but has lower returns. Commercial real estate returns much higher, but it is much more competitive and takes more experience to choose the right projects. Which one is better depends on your risk profile and goals for investment.
8. What is platform business model?
All platforms earn their money by charging fees, but it is important to bear in mind that not all platforms are created equal, and that there are different business models on the peer-to-peer investment market.
9. How is the competition between the funding seekers (entrepreneurs) and the funding providers (investors) balanced?
Some sites operate forcing funding seekers to get skin in the game. This will give them more motivation to deliver on their commitments, which would be of benefit to you as an investor.
10. What happens if you’ve invested in the real estate project fails or underperforms?
These investments would most likely underperform or even fail. So it’s important to know how the platform will handle this in advance: and what kind of support you can expect to get. Many platforms often have a contingency plan to protect creditors, which entails a lawyer taking over the administration if a worst-case situation like a default platform could arise.
Examples of Real Estate Action Channels
- Renditure is one of many tech-driven Real Estate websites providing equity to investors allowing the purchase and selling of shares in a specific property. This platform provides Austrian real estate at a minimum investment amounting to 50 Euro. They have the first real estate investment depot in Europe that generates quarterly income from leased assets in addition to equity.
- Reinvest24 provides a minimum investment of 100 Euros in residential and commercial real estate projects located in Tallinn, Estonia. This model uses SPV’s as an investment mechanism, including an independent unit dealing with tenants, projects, and everyday activities, reducing the risks to individual properties.
- Rontgen links real estate developers with investors make prime Lithuanian residential property allowing European investors to earn passive monthly rental income. As with several other outlets for real estate investments, this provides shares at a minimum investment of 100 Euros.
Examples of Real Estate Lending Sites
- Landlordinvest links investors with skilled landlords and real estate developers, offering British property-secured lending-based investments. European borrowers may earn monthly interest income from a wide variety of secured loans at a minimum investment of £100.
- Estateguru is one of Europe’s largest real estate lending platforms, facilitating loans for Estonian, Latvian, and Finnish property projects. This platform offers secured real estate loans with an investment of at least 50 Euros.
- Housers is one of the largest pan-European investment network for real estate, providing residential and commercial real estate ventures in Spain, Portugal & Italy in different size ranges, from small holiday homes to castle resorts. The minimum investment will be 50 Euro.
- With two separate interest-bearing accounts backed by secured property loans, Loanpad provides an easy-to-go solution. You don’t select the individual projects on this site, but spend at least 50 euros in “The Standard” or “The Premium” account. The Classic yields 4 per cent and every day you can withdraw. The Premium yields 5 percent and in 60 days you will withdraw.
Examples of sites with a combination of lending and real estate equity
- Crowdestate provides both immovable equity and financing, as well as daily business loans, hence the name at a minimum investment of 100 euros. This platform facilitates lending to various mainstream financial institutions and real estate firms.
- Bulkestate has significant group-buying real estate equity investments and short-term loans secured to investors and borrowers via property available. Latvian real estate deals can be obtained at a minimum investment of 50 Euro lenders.
Real Estate Crowdfunding is a gradually growing business field, becoming a big game changer that affects both the conventional real estate industry and the mainstream financing / lending (banks) industry.
By introducing tech-driven approaches to this old conventional industry that have seldom changed since its inception, it is questioning the biggest barriers to investment in real estate, opening the doors to developers and lenders alike across all levels of society.