Real estate crowdfunding: In view of great uncertainties and rising fluctuation on the world’s stock markets on the one hand and an extremely low interest rate phase for bonds on the other, investors are increasingly looking for alternative investment opportunities.
This includes investments in real estate, which have already experienced an enormous hipe in recent years, but demand for which continues unabated. Real estate corwdfunding is one of the many ramification in this area, and the one I will discuss with you today.
This post, based on my experience and my opinion, is for informational purposes only and is not intended as investment advice
However, direct investments in real estate are associated with a number of hurdles:
- the required capital
- the quite high ancillary costs for the acquisition (ca. 10% of the purchase price)
- project management trouble with craftsmen, tenants and possibly the homeowners community
- a usually long commitment to a property.
Real estate crowdinvesting offers the ideal solution to overcome this hurdles:
- High returns with manageable terms
- No costs
- Low (to no) minimum investing sums
- No hassle with tenants, craftsmen, etc.
The idea of crowdinvesting in real estate
The concept is relatively simple: a large number of investors participate with their money in the financing of a property. This can be a new building project or a renovation or revitalization of an existing property.
Such a real estate project is carried out by a so-called project developer. The developer usually uses equity capital as well as normal bank loans to finance the project.
If the project developer can now replace part of his equity with crowd capital, he ties up less equity in this one project and is able to carry out several projects at the same time. As a result, he is able to significantly increase his revenue and profit, so he is willing to pay a comparatively high interest rate to the crowd investors.
Even before (or during) the construction phase, the properties are usually sold, so that a project financed in this way, both for the developers, as well as for the investors is completed after the completion of construction. This takes different amounts of time depending on the project, but is usually in the range of 12-24 months.
Real estate crowdfunding in practice
Since around 2014, such crowdinvesting projects have been offered by various providers. What they all have in common is that they can be accessed via online platforms on the Internet that offer clear and simple participation in current real estate crowdfunding projects.
Participation takes the form of subordinated loans. As one can recognize from the designation “subordination”, these loans stand in last place of the demands in the case of an insolvency of the project developer. This is also the risk of such an investment:
If the project developer becomes insolvent, the investment is probably completely lost!
It is therefore advisable to invest only in amounts that one can do without if necessary. In addition, one should not make only one large investment, but should divide the available sum over several projects. And, of course, one should select the projects in which one wants to invest. Not every project is equally interesting. Not every project developer has a long list of references. Here (as with any investment) the right selection is crucial.
One need have fewer concerns regarding the overall relatively young platforms on which these projects are offered. The loan agreements are merely brokered here. The contract is always concluded directly between the project developer and the investor and remains in force even in the event of the failure of the intermediary online platform.
The real estate crowdfunding providers
Real estate crowdfunding has seen an enormous hipe in recent years. Both on the side of the project developers, who have recognized their advantage in multiplying their business, and on the side of the investors, who expect a high return here – with a comparatively low risk compared to other crowdfunding concepts, which broker loans to private individuals or to young start-up companies, for example.
And so it is no wonder that new online platforms are constantly emerging offering this business model. I do not want to and cannot present all of them here, but would like to mention the largest and most important ones in German-speaking countries:
- Exporo (website*): The real estate crowdfunding platform has been the longest on the market since 2014 and is the current market leader, with the most ongoing projects and the most already completed (i.e. repaid) projects.
- Bergfürst: The peculiarity of the platform Bergfürst has it that the minimum sum for an investment is only 10€, therefore even investors with a very small wallet have the chance to participate in projects.
- Reacapital: ReaCapital is a special case: The real estate crowdfunding platzform provides all investors with real security in the form of a registered first-ranking land charge. In the event of a default on an investment project, the existing property is to be sold by the trustee so that the investors’ outstanding claims can be settled with the proceeds of the sale.
- Propvest (website*): Propvest offers investors the opportunity to digitally invest in real estate and provides retail investors with two investment options: an automatic real estate savings plan and select properties in prime locations through Propvest Select. The Hamburg-based fintech Expor is behind it.
- Engel & Völkers Digital Invest: Their focus is on project financing of construction projects and land for property developers and project developers via institutional special funds.
- Rendity: Rendity is a Viennese real estate crowdinvesting platform. They offer investment opportunities in development projects as well as in existing real estate.
More articles like this here: financial tips for expats in Germany
My experiences and further information
So far, I have only made my own experiences with Exporo (website*) and Propvest (website*), as I really liked the simplicity of the platform. Currently I am invested in many projects: The larger part of them is invested with Exporo, simply because I mostly liked the projects and the platform is running since a longer time.
I see following risks involved in real estate crowdinvesting, but in my opinion they do not overweight the benefits.
The “risk” of premature repayment
I want to start with this “problem”, as it occured a few times over the last years and is something you should expect.
The investments on the platform do not always have fixed terms; they can also have a range, i.e. of at least 12 to a maximum of 24 months. The full repayment can therefore happen already after 12 months, or at any other given time within this range – well, sometimes also after the maximum term, but that’s another story.
Of course I am very happy that the money is being paid back at all. But this is exactly the point: The more successful the project and the more solvent the borrower, the sooner the loan will be repaid.
This means that the faster the developer in my case, for example, pushes ahead with privatization, the higher my “risk” that he will end the project early. In the worst case, I have to look for a new similarly solid investment for the freed-up capital after already 12 months.
On the other hand, the worse the project and the more insolvent the borrower, the later I will receive my repayment and my interest, but I may even have to fear for my invested capital if the borrower gets into even greater trouble.
In conclusion: Well-running projects pay me too fast and I get too little of the upside. Poorly running projects could be delayed for 1-2 years and in the worst case lead to a 100% loss – after 1-2 years of uncertainty of course.
Real estate crowdinvesting is an illiquid investment
This happen to be an actual limitation, but does not fulfill the definition of risk, as I can be sure that I cannot access the money while it is invested. The uncertainty comes from when I will get back the money, and if I will see it at all.
I don’t think I need to elaborate further, because the nature of such an investment is clear. The risk of a 100% loss is always there.
Groping around in the dark
What also makes it difficult to plan – and I love to plan – is the lack of regular updates. Not all platforms offer these kind of updates, so if I want to know how the project is doing after the minimum term has expired, it may be necessary for me to wait, and wait, and wait…
The real money isn’t made with interests
Last but not least, I think real estate crowdfunding can be very lucrative, especially in such times when the bank interests are almost zero and the inflation is growing faster than I can blink.
The only thing is that you don’t earn the big money with interests, but interests are the key fundation of having a return from real estate crowdfunding. And in such cases, the the return does not always match the risk.
The fact that my money is tied up for a certain term and I can’t get it out before the term expires is not the problem. After all, I have the same issue with a traditional fixed-term deposit.
Even the statement “…can lead to the complete loss of the capital invested” is not a problem in itself. At least in the worst case I don’t have to inject additional money and I cannot lose more than 100% of my invested capital.
But – you already know the big “but” – if I compare these risks with my return of 5% p.a. on average, I find the risk/return ratio somehow unequally distributed. Namely to my disadvantage.
In comparison, if I invest in stocks, I can just as well lose 100% of my investment, but if the value of the stock increases tenfold, my capital also increases tenfold. Sure, different risk profile, but hopefully you understand what I am trying to say.
Conclusion: Is real estate crowdfunding really worth the risks?
I have become used to question the relationship in which the risk I have to take stands to the possible return. If my risk is limited, but the return is not, and the odds are also good, then I get curious.
Having now several years of experience in the area, this is exactly what I miss with real estate crowdfunding offers. The risk is simply not in good proportion to the return, so since my last investments in 2020 I prefer to look for better alternatives.
At the same time, I still find the platforms ingenious, because if you leave the return aside, you can perhaps finance one or the other startup or promote social projects, which was not so easy in the past.
That’s why I would be very interested to hear what you think about it. Have you already invested in real estate crowdfunding? What experiences have you had so far?
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