Profitus is one of the leading real estate crowdfunding platform in Lithuania. It offers real estate backed loans to investors and connects financing to developers and businesses throughout Lithuania. In this interview, Profitus CEO Viktorija Vanagė explains how she sees real estate crowdfunding and the future ahead. We also get to hear details about the platforms ownership, management team, the impact of Covid-19 and much more. You can learn more on the Profitus Info Page or by visiting the platform directly at Profitus.com
The Story of Profitus
Profitus funded its first loan in 2018 and has a focus on loans backed by real estate collateral. How did you get the idea to launch a platform with this focus? Why did you choose to focus on this specific business model?
While we have been working with real estate buyers and sellers and developing real estate projects ourselves, we’ve had an increasing number of people asking about becoming partners in real estate projects. Keeping your money in a low-interest savings account in a bank isn’t profitable, while investing in shares is risky for the inexperienced. And then there’s tangible real estate, which protects money from inflation - a smart solution. And what if we say that real estate generates permanent additional income? There’s no better investment. Thus we had the idea of creating PROFITUS: uniting people through collective monetary investments in real estate. As such investors become partners in real estate projects or undertake their own real estate projects.
We have chosen to finance business loans secured by real estate mortgages for several reasons. First of all, real estate provides investment security and stability. A mortgage secured with real estate is one of the safest investment protection measures. Another reason is our “know how”. I believe that we are most successful when we do what we know best. I have been working in real estate for 10 years, so naturally I know the field very well.
During the last year, most platforms have seen a large negative impact due to the Covid-19 pandemic. How has the pandemic affected Profitus? Have there been other significant challenges for Profitus you can share with our readers?
Insofar as the pandemic, the market for crowdfunding has not suffered significant losses. On the contrary, most of the indicators on our platform have grown: the amount financed, the number of investors, the number of transactions, the number of visits to the website of the platform. But we are well aware that this was due to our well-earned reputation and confidence in the platform. Another important aspect is that the amount of money has significantly increased in the market. So naturally people are looking to invest money and platforms have become one of their choices.
It is clear that the pandemic has somewhat paused our development plans and thus we’ve concentrated on the local market. However, this year we are going to renew our plans and launch projects in new markets.
Profitus Ownership Structure & Management Team
Are you the sole owner of Profitus, or how is the ownership structure of the business? How did you finance Profitus in the beginning?
I have established Profitus together with my business partner – Mindaugas Vanagas and so far, we make business decisions together. We finance this activity with our own capital and we have not yet used additional external funding.
What is your own background, and how did you become interested in the real estate crowdfunding industry? Who are the other management members, and what skills do you think are necessary to run a platform like Profitus?
In 2010, I started my career in real estate business as a broker, and after a year I established my first business, the “Citus” real estate agency. The market was indeed competitive, but in a few years our agency was able to boast a team of 50 brokers and 4th place in the market. The merger of Citus with Re/Max Lietuva was a landmark event for the company. After this success, I got even more involved in the real estate world. In December 2017, we established Profitus, a crowdfunding company, and in 2018 – an investment company UAB “Victory Funds”.
Frankly, I do not believe in luck. The best way forward in life is through strict discipline, continuous learning and hard work. In my team, I value efficiency and pro activity the most. I aspire to every team member having the opportunity to implement their ideas and create added value for our team, investor community and brand.
Investing at Profitus
Could you briefly explain what type of investment products you offer at Profitus? How does it work?
We currently have three main products for investment, all of which are secured by real estate mortgages. First, there is a one-off real estate development loan. The funds are allocated to the development of a particular project, and the assets that are being developed are pledged as a guarantee to our investors as a primary mortgage. In most cases, these are smaller-sized real estate projects, which do not require significant investments; an average amount is EUR 200,000.
The second product is business loans secured with real estate. In this case, funding may be allocated to working capital, acquisition of other real estate or refinancing. In this case real estate that is mortgaged to investors will not be developed, so its value will not increase significantly during the investment period. This may be premises owned by the company or project owner (apartment, commercial premises, warehouse, etc.).
The third and most important product is the stage funding of real estate projects. This funding model has helped to grow several large-scale real estate projects. The financing itself is being carried out from the very beginning of the project, i.e. when only land plots or foundations are located on the project site. The project developer increases the value of real estate pledged to investors with the funds provided, and after assessing the change in value, the project is financed in addition. This is a particularly convenient model as investors can monitor the whole process and progress of the project. Meanwhile, the developer borrows and pays only for the amount that is used at that project development stage. The average funding for these projects amounts to EUR 1-2 million.
What does the average investor on Profitus look like?
Private investors comprise the greatest percentage of the Profitus investor Community, representing as much as 90% of all investors. The majority, about 70%, is from Lithuania. The average age of our investors is 35, and the average investor’s active investment portfolio amounts to 5 thousand euros. Up to 75% of our investors invest regularly. The historical portfolio of one investor amounts to 11 thousand euros.
If I decide to place money at Profitus and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
Profitus investors have not yet experienced losses, and in the event of late or early repayment, investors earn even more than they had planned. The average annual interest for the projects announced on the Profitus platform is 9.62%. However, in the case of real returns, the above additional conditions often make the XIRR of the projects even higher and reach about 10-11%.
How do you calculate your returns? What method do you use to decide when a loan must be written off and accounted as lost or with minimal chance of recovery? Do you use an objective or subjective way of determining when to write off loans in the actual returns?
Loans could only be written off if all the real estate pledged to investors has been realised and there is no longer any possibility of recovering the existing loan. As the loans provided on our platform are at least 30% lower value than the assets mortgaged to investors, we do not encounter situations where the realization of the assets would not fully cover the loan. In addition, an increased interest rate is applied throughout the loan recovery period, which ensures that investors' money continues to work for them and generates as much income as possible.
When calculating investor returns, the calculations are performed with daily accuracy. For typical internal analyzes, we use the XIRR indicator, which most accurately describes the return earned.
How Profitus Handles Risk
Profitus uses a risk rating ranging from A+ to D. Could you explain a bit about the due diligence you do to assess the project risk and make sure the loans listed on Profitus are safe for investors to put money into?
We have a professional team that undertakes risk analysis. Real estate evaluation and business analytics experts evaluate each funded project individually.
We have also developed a unique risk assessment algorithm to determine the rating of the project. This algorithm consists of a wide range of individual indicators and evaluations which not only focus on funding requirements, but also the project owner, their financial indicators, credit rating, experience and reputation. They furthermore evaluate the project and business plans, both those presented by the project owner, and the pessimistic scenario plans as prepared by us, which incorporate possible market developments and the risks that could affect the project. Of course, every project also assesses the real estate, which is pledged to investors as collateral.
If the unlikely event should occur that Profitus goes out of business. What will happen to the investors’ money?
Profitus operates in Lithuania, where the market for crowdfunding is strictly supervised and regulated. Our activities are licensed and supervised by the Bank of Lithuania. As such, before we started our activities, we had to plan a business continuity plan covering the indicated situation. If Profitus activity stops or is completely interrupted – investments, business loans and the entire process of service administration would be taken over by the Bank of Lithuania and allocated to another licensed operator of a crowdfunding platform. This ensures that investors experience the minimum possible interruption.
The Future of Profitus
Who do you see as your biggest competitors, and what sets Profitus apart from them?
As alternative financing representatives, we receive most competition from traditional investment methods and financiers. When we started out, we set ourselves ambitious goals in educating and making the public aware of the crowdfunding market. Personally, I participate in the Lithuanian crowdfunding Association and I am responsible for the field of education. Unlike in other countries, this activity is quite new in Lithuania as the main platforms have only been operating for 3-4 years. However, our growth compared to foreign platforms has been particularly rapid. I would regard our relationship with investors as our main distinction, as well as our very low tolerance to risk. These factors set us apart the most.
What do you think the future of real estate crowdfunding will look like? Which challenges do you see for the industry in the coming years?
I am extremely pleased that the new Regulation of these activities will come into force in Europe. This is a major step forward for the entire crowdfunding community. This Regulation defines common requirements for all platforms, which allow us to create a more reliable and continuously improved environment for our investors. I believe that this will also enable our platform to offer better conditions for foreign investors.
What is Profitus’ strategy for the coming years? Have you planned any new initiatives? What is your vision for the future?
Our expectations are positive and ambitious. We believe that the crowdfunding market will grow rapidly, both in Lithuania and in Europe. In 2020, Lithuania recorded a 66% growth in the real estate funding market. I believe that the trend will continue in the upcoming years. Moreover, during the first quarter of this year, we attracted three times more new investors than during the whole of 2019.
In terms of business, the market for crowdfunding in Lithuania is steadily growing. When seeking funding, developers turn to banks, credit unions and us in order to compare offers and make decisions. We are glad to see that for business, crowdfunding is no longer the last resort. And we have become the financial partners for developers.
If we look ten years down the road and Profitus no longer exists: What went wrong?
I believe that while we maintain our direction, we’ll have the greatest experience and know how to ensure the stability of the platform's activities. Our goals are ambitious and as soon as we achieve one, we’re planning another. So I do not see a scenario in which Profitus will no longer exist.
Well, the course of our plans would likely be hampered if we wake up one morning - to a world without the internet. All the same, we are a fintech business, which could not exist without innovation and technological solutions. But without such extremes – we are standing strong!