Real estate crowdfunding is a method of financing real estate projects by making these investment projects available for everyone. This enables entrepreneurs to launch real estate projects without being dependent of the bank or a single lender. Instead, they will offer the investment to many people (the crowd) who each invest a small amount making it possible to raise large sums of money in a short period of time.
Benefits of Real Estate Crowdfunding
For the investor, real estate crowdfunding is an opportunity to harvest the benefits of real estate investing without having to put down a large investment with little diversification of risk. Instead the real estate investment can be spread across different types of real estate, countries, currencies and more.
For the real estate developer, using crowdfunding is an opportunity to seek financing through the community and business partners, at a faster speed than possible in the traditional established bank/financing sector. Other than the time it takes at crowdfunding compared to traditional financing methods, here is also often an advantage in lowering costs. Crowdfunding platforms can in instances provide the same service with lower commissions compared to banks, which translates to lower fees and ultimately lower interest rates or giving up less equity.
Real estate crowdfunding can take two different forms depending on whether it is based on investments in equity (equity-based crowdfunding) or debt (lending-based crowdfunding). The two types vary greatly in their risk and return profiles so it’s vital that you understand the difference between them. More on these below.
Equity-based Real Estate Crowdfunding
In equity-based real estate crowdfunding, the investor will be offered part-ownership of the property available for investing. This can either be residential or commercial property. In other words, you will become shareholder in the property. Investing in real estate this way will provide you with a return based on the rental income of the property. Also, you will receive a return equivalent to your ownership % in case the real estate is sold.
Lending-based Real Estate Crowdfunding
If you invest in debt, you are lending money to the owner of the property. Thus, you do not receive shares in the property like in equity crowdfunding. Instead, you will receive a fixed return based on the interest rate offered in the project and the amount invested. How the money will be repaid can vary and you can invest in both short- and long-term loans.
Investing in Equity vs Lending in Real Estate Crowdfunding – Pros and Cons
Which of the two types of real estate crowdfunding you should choose as an investor depends on what kind of return you are looking for and how you would like to balance your risk-reward ratio. Below you will find an overview of the different pros and cons related to each investment type.
Lending Real Estate Crowdfunding - Pros
- Lending is generally safer than equity: Given the investment project is the same, it’s generally safer to invest in real estate lending compared to real estate equity. This is caused by the fact that if the property is foreclosed and sold, the holders of debt will get paid first. Remember, this does not mean that investing in debt is always less risky than investing in equity. It does, however, serve as a rule of thumb, but you must always look at the individual investment.
- Lending generally provides a more stable and predictable return than equity: Because you get a fixed return based on the interest rate of the loan you invest in and because you know the repayment schedule of the loan, it’s easy to predict both the size and timing of your return.
- The holding period is known and often shorter than in equity: The loan duration of the debt you invest in is always known and you have the possibility to invest in both short- and long-term loans.
Lending Real Estate Crowdfunding - Cons
- Lower risk means lower returns: Since your return in lending-based crowdfunding is fixed and you do not have ownership in the project, you will not get access to the party in the case that the real estate project turns of to produce extraordinary rental income or increase in value. On the other hand, you will most likely not be hit as hard in the case it turns to be a failure.
Equity Real Estate Crowdfunding - Pros
- Equity has the potential for bigger returns than lending: The profitability of debt investments is limited by the interest rate. Equity, on the other hand, has the potential to provide bigger returns, both in terms of a higher rental income and a larger than expected increase in the value of the property.
- Tax benefits: This can differ from country to country, but with equity investments you usually do not have to pay tax before the shares are sold.
Equity Real Estate Crowdfunding - Cons
- Higher returns mean higher risk: As an equity investor you will be last in line for payouts, so if the real estate project does not provide any returns, you will not get any either. Also, if the real estate project should fail, there’s a real risk that will lose some or all your money.
- The holding period is often unknown and longer than in lending: Investments in real estate equity are almost always very illiquid even if a secondary market is available. Also, where debt investments will have a limited duration, the holding period for equity investments in real estate are often unknown and you should expect a holding period of at least 5-10 years.
Choosing Real Estate Crowd Investing Platforms
Investing in real estate crowdfunding is simple but figuring out what platform to chose and what projects to invest in is not always an easy task. However, there are some important questions to keep in mind that can help you a long way – both in terms of finding quality platforms and platforms that fit your hunger for risk and reward.
Below you will find 10 essential questions that can guide you to find the right platforms for your investments in real estate crowdfunding:
1. What type of real estate crowdfunding are being offered?
Investigate if the platform offers debt or equity investments. Remember, that some platforms offer a mix of both. You can find examples of all three types of platforms below.
2. Are you eligible for investing on the platform?
Some platforms impose limits on who can invest in their projects. To be an accredited investor on these platforms you will need to live up to minimum requirements such as annual income or net worth. However, many platforms are open to everybody.
3. What is the minimum investment on the platform and how does it fit your budget?
The required minimum investment varies greatly from platform to platform. It’s important to pick platforms that have minimum limits that still allow you to diversify across different real estate projects.
4. Is the platform transparent and willing to share data?
A transparent platform is usually a trustworthy platform. If you cannot understand how your money are being used there are plenty of other investment options. In the same way, if it is not possible to find relevant financial numbers either on their own site or on a trusted third-party site like P2Pmarketdata.com, you can find many platforms here that are transparent with data and look for somewhere else to place your hard-earned money.
5. Does the platform look healthy?
Whether you are an investor looking for returns or an entrepreneur looking for funding, you will want to work with a platform that are going to survive. There are never any guarantees, especially not in investing, but two important indicators to keep an eye on are the total funding volume of the platform and whether it is showing a healthy growth level or not. In all humility, a great tool to get an overview of the funding volumes and growth levels of the different crowdfunding platforms available for real estate investing can be found on our front page. Also, you should investigate the management behind the platform. Do the founders and senior management have the experience needed to run a trusted and reliable crowdfunding platform focusing on real estate? Make sure to look out for expertise not only in real estate, but also in technology and finance.
6. Do the real estate projects offered on the platform fit your risk profile?
The projects offered on real estate crowdfunding platforms consist of different types of financing in which it is possible to invest. As an investor it is important to understand these different types of investment products as they come with different levels of risk. Here, real estate professionals operate with the “capital stack” and platforms can offer everything from senior debt to common equity. As can be seen from the illustration below, when you move up the capital stack (from debt to equity), you risk as well as your expected return will generally increase. Thus, to find out if the projects offered on the platform fit your risk profile, make sure you understand the product you invest in.
7. What kind of properties are being offered on the platform?
In real estate crowdfunding two categories of properties exist: Residential and commercial. Residential real estate is generally less risky and requires less knowledge but has lower returns. Commercial real estate has much higher yields but is significantly more volatile and requires a greater knowledge to pick out the right projects. Which one is better depends on your risk profile and investment goals.
8. What is the business model of the platform?
All platforms earn their money by charging fees, but it is important to keep in mind that not all platforms are created equal and that different business models exist in the market for peer-to-peer investing.
9. How is the interest balanced between the seekers of funding (entrepreneurs) and the providers of funding (investors)?
Some platforms operate force their seekers of funding to have skin in the game. This can provide greater incitement for them to deliver on their promises, which will be beneficial for you as an investor.
10. What Happens if the real estate project you have invested in fails or underperforms?
Some investments will most certainly underperform or even fail. Therefore, it’s important to know in advance how the platform will handle this: and what kind of help you can expect to get. Also many platforms have a backup plan to protect the investors, involving a lawyer taking over the administration if a worst-case scenario like a platform default should happen.
Examples of Platforms with Real Estate Equity
- Rendity is one of several tech-driven Real Estate websites offering equity to investors enabling buying & selling shares in a specific property. This platform offers Austrian real estate at a low minimum investment of 50 Euro. Beside equity they provide the first real estate Investment Depot in Europe yielding quarterly income from leased properties.
- Reinvest24 offers shares in residential and commercial real estate projects located in Tallinn, Estonia at a minimum investment of 100 Euro. This platform uses SPV’s as an investment structure, having an individual unit dealing with tenants, operations and day-to-day activities, limiting the risks to individual properties.
- Rontgen connects real estate developers with investors making prime Lithuanian residential property enabling European investors to collect monthly passive rental income. As with many other equity real estate platforms, this offers shares at a minimum investment of 100 Euro.
Examples of Platforms with Real Estate Lending
- Landlordinvest connects investors with professional landlords and real estate developers, providing lending-based investments secured by British property. At a minimum investment of £ 100 European lenders can receive monthly interest income from a wide range of secured loans.
- Estateguru is one of the largest real estate lending platforms in Europe, facilitating loans to Estonian, Lithuanian, Latvian and Finnish property projects. This platform provides secured real estate loans at a minimum investment of 50 Euro.
- Housers is one of the largest pan-European real estate investment platform, offering residential and commercial real estate projects in Spain, Portugal & Italy in various ranges of size from small vacation homes to castle resorts. The minimum investment is 50 Euro.
- Loanpad offers an easy to go solution with two different interest-bearing accounts backed by secured property loans. At this platform you do not choose the individual projects, but invest in “The Classic” or “The Premium” account at a minimum of 50 Euro. The Classic yields 4% and you can withdraw daily. The Premium yields 5% and you can withdraw in 60 days.
Examples of Platforms with a Mix of Real Estate Equity and Lending
- Crowdestate offers both real estate equity and lending, as well as regular business lending hence the name at a minimum investment of 100 Euro. This platform is facilitating loans for specific traditional financial institutions and real estate companies.
- Bulkestate have large group-buying real estate equity investments and short-term loans secured by property available for investors and lenders. At a minimum investment of 50 Euro lenders can get access to Latvian real estate deals.
Real Estate Crowdfunding is a high growth business area slow becoming a major game changer that concerns both the traditional real estate industry and the traditional financing/lending industry (banks).
By developing tech driven solutions to this old traditional industry which have rarely changed since its beginning, it is challenging the largest barriers to real estate investing, opening the doors for investors and borrowers alike in all layers of society.