Real estate crowdfunding is a method of using the crowd to finance real estate projects. These investment projects are available for almost everyone. Entrepreneurs can launch real estate projects without being dependent on a 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 the capital needed to fund the project.
This post has lots of useful information in it, so if you have a specific area of interest, you can jump around using our Table of Contents.
Table of Contents
Benefits of Real Estate Crowdfunding
Real estate crowdfunding is an opportunity to earn the benefits of real estate investing without much money. Unlike with a single property, there is no large investment with little risk diversification. Instead, the real estate investment can be spread across different real estate types, countries, currencies and more.
Real Estate Developer Benefits
Using crowdfunding is an opportunity to get financing through the community and business partners. Often this is faster than using the traditional bank/financing sector. Besides speed, crowdfunding can often lower financing costs. These lower costs can mean lower fees, interest rates or giving up less equity.
Real estate crowdfunding can take two different forms: equity (equity-based crowdfunding) or debt (lending-based crowdfunding). The two types vary significantly 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 receives part-ownership of the property. This can either be residential or commercial property. In other words, you will become a shareholder in the property. Investing in real estate this way will provide you with a return based on the property’s rental income. You will also receive a return equal to your ownership % in case the real estate is sold.
Lending-based Real Estate Crowdfunding
If you invest in debt, you lend money to the property owner. Thus, you do not receive shares in the property like in equity crowdfunding. Instead, you are the bank. You will receive a fixed return based on the interest rate offered in the project and the amount invested. How the property owner/lender will repay the money can vary, and you can invest in both short- and long-term loans.
Real estate is the most common collateral in peer-to-peer lending and an effective way to offer secured loans to the crowd.
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.
Investing in Lending with Real Estate Crowdfunding
- Lending is safer than equity: Given the investment project is the same, it’s generally safer to invest in the loan than in the property through equity. Why? Because if the property is foreclosed and sold, the debt holders will get paid first. Remember, this does not mean that investing in debt is always less risky than investing in equity. While generally true, you must always look at each individual investment.
- Lending provides a more stable and predictable return than equity: You get a fixed return based on the interest rate of the loan you invest in. You know the loan’s repayment schedule, and it’s easy to predict both the size and timing of your return.
- The holding period is known and often shorter than with equity: You always know the loan duration of the debt you invest in. You have the option to invest in both short- and long-term loans.
- Lower risk means lower returns: Your return in lending-based crowdfunding is fixed. You do not have ownership in the project, so you will not get access to the profits if the real estate project produces extraordinary rental income or increases in value. But you will most likely not lose as much in the case it turns to be a failure either.
Investing in Equity with Real Estate Crowdfunding
- Equity has the potential for bigger returns than lending: The interest rate is the limit on your return when lending. Equity has the potential to provide bigger returns, both from a higher rental income and an 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.
- Higher returns mean higher risk: As an equity investor, you will be last in line for payouts. 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 you 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 have a limited term, the holding period for equity investments in real estate is long. You should expect a holding period of at least 5-10 years.
Choosing a Real Estate Crowd Investing Platform
Investing in real estate crowdfunding is simple in theory. But figuring out what platform to choose and what projects to invest in is not always easy. However, there are some essential questions to keep in mind that can help you along the way. You want to both find quality platforms and platforms that fit your hunger for risk and reward.
Below you will find ten essential questions that can guide you to find the right platforms for your investments in real estate crowdfunding.
We have put together a list of the best real estate crowdfunding sites in Europe. This can be a great place to start, but you still have to make sure that the platforms on the list match your own preferences.
What type of real estate crowdfunding are they offering?
Investigate if the platform offers debt or equity investments. Remember, some platforms offer a mix of both. You can find examples of all three types of platforms (debt, equity, hybrid) below.
Are you eligible to invest?
Some platforms impose limits on who can invest in their projects. To be an accredited investor on these platforms, you will need to prove specific requirements, such as annual income or net worth. Yet, many platforms are open to everybody.
What is the minimum investment, and how does it fit your budget?
The required minimum investment varies significantly from platform to platform. It’s essential to pick platforms with low enough limits that still allow you to diversify across different real estate projects.
Is the platform transparent and willing to share data?
A transparent platform is usually a trustworthy platform. If you cannot understand how the platform handles your money and investments, there are plenty of other investment options. Look for relevant financial numbers either on the platform’s own site or on a trusted third-party site like P2P Market Data. Many platforms here are transparent with data. If they aren’t, look for somewhere else to place your hard-earned money.
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 will survive. There are never any guarantees, especially not in investing, but two critical indicators to keep an eye on are:
- The total funding volume of the platform
- Whether the platform is showing healthy growth or not
You can find a great tool to get an overview of the funding volumes and growth levels of the different crowdfunding platforms for real estate investing on our front page. It’s one of the reasons we built this site. We wanted this information for our own investments.
You should also investigate the management behind the platform. Do the founders and senior management have the experience needed to run a trusted and reliable crowdfunding platform focused on real estate? Make sure to look out for expertise not only in real estate but also in technology and finance.
Do the real estate projects offered fit your risk profile?
The projects offered on real estate crowdfunding platforms have different financing options. As an investor, it is important to understand these different types of investment products and their risks. Here, real estate professionals operate with the “capital stack”, and platforms can offer everything from senior debt to common equity. As you see in the illustration below, when you move up the capital stack (from debt to equity), your risk, as well as your expected return, will generally increase. You can’t know if the projects offered on the platform fit your risk profile unless you understand the product you invest in.
If you want a more detailed walkthrough of the capital stack and the different investment types in real estate crowdfunding, please have a look at this article.
What kinds of properties are available?
In real estate crowdfunding, two categories of properties exist: Residential and commercial. Residential real estate is generally less risky. It requires less knowledge but has lower returns. Commercial real estate has much higher yields. It’s significantly more volatile and requires a greater knowledge to pick the right projects. Which one is better depends on your risk profile and investment goals.
What is the business model of the platform?
All platforms earn their money by charging fees but remember to keep in mind that not all platforms are created equal. Different business models exist in the market for peer-to-peer investing.
How is the interest balanced between funding seekers and funding providers?
Some platforms force the real estate developers to have skin in the game. This can provide greater motivation for them to deliver on their promises, which will benefit you as an investor.
What Happens if the real estate project you have invested in fails or underperforms?
Some investments will underperform or even fail. So you need to know in advance how the platform will handle this. What kind of help can you expect to get?
Many platforms have a backup plan to protect investors. That could mean backup loan servicers or using lawyers to take over the administration if a worst-case scenario like a platform default should happen.
Platforms that offer Real Estate Equity
- Rendity is one of several tech-driven Real Estate websites offering equity to investors. You can buy & sell shares in a specific property. This platform offers Austrian real estate at a low minimum investment of €50. Besides 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. This platform uses SPV’s as an investment structure. This limits risks by having an individual unit dealing with tenants, operations and day-to-day activities on individual properties.
- Rontgen connects real estate developers with investors on prime Lithuanian residential properties. European investors can earn a monthly passive rental income. As with many other equity real estate platforms, they offer shares at a minimum investment of €100.
Platforms that offer 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. They make loans on Estonian, Lithuanian, Latvian and Finnish property projects. This platform provides secured real estate loans at a minimum investment of €50.
- Housers is one of the largest pan-European real estate investment platforms. They offer 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.
- Loanpad offers an easy to go solution with two different interest-bearing accounts backed by secured property loans. You do not choose the individual projects at this platform but invest in “The Classic ” or “The Premium” account at a minimum of €50. This is a pool of capital deployed into projects. The Classic account yields 4%, and you can with
Platforms that offer a mix of Equity and Lending
- Crowdestate offers both real estate equity and lending and regular business lending (hence the name) at a minimum investment of €100. This platform facilitates loans or equity investment for specific real estate projects and developers with existing relationships with the platform.
- Bulkestate has 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 access Latvian real estate deals.
Alternatives to Real Estate Crowdfunding
Real Estate Crowdfunding is a high-growth business model that’s on its way of becoming a major game-changer. It disrupts both the conventional real estate industry and the traditional financing/lending industry (banks).
If you have the money, you do, however, still have the opportunity to invest in a rental property yourself. For investors in that position, we have put together an article discussing the pros and cons of Real Estate Crowdfunding versus Rental Property Investing.
New tech-driven solutions to this old traditional industry challenge the most considerable barriers to real estate investing, opening the doors for investors and borrowers alike in all society layers. The technological development also makes it easier to invest in Real Estate Investment Trusts (REITs), a popular alternative to real estate crowdfunding. You can find a comparison between the two investment types here.