Real estate crowdfunding has been on the rise in recent years and is becoming an attractive option for investors, with many emerging startups offering this type of financial product. Their idea is simple: make real estate investment accessible to as many people as possible and democratize it. The Americans are increasingly commending this type of investment because it brings good returns. The year 2022 was particularly profitable for investors but, so far, 2023 doesn't present quite the same pattern. Investing in crowdfunding requires a well-defined plan and some prior checks. So, should we embark on real estate crowdfunding in 2023?
What is real estate crowdfunding?
Real estate crowdfunding is a recent and innovative type of investment that allows people to finance projects as a group in the real estate sector. Developed in the United States, it was then exported all around the world. So crowdfunding isn't just a passing trend. In recent years, it has become more democratic and has established itself in the minds of investors as one of the most profitable investment opportunities. Indeed, real estate crowdfunding can boast interest rates that are close to 10% - 12% on average, which is attractive for individuals who want to develop their wealth and grow their money. They see it as a safe, profitable asset that allows them to diversify their financial portfolio by mitigating risks.
So how do you invest in real estate crowdfunding? Projects are presented on a crowdfunding platform and transactions are carried out online. These platforms serve as intermediaries between those who wish to raise the necessary funds to finance their project (like specialized companies and real estate developers) and investors.
Real estate crowdfunding is easy to access online, is financially accessible to many people, (from a few tens of euros of investment only) and achievable in a few clicks from your computer. You can literally invest from your couch between episodes of a Netflix series. Everything is ultra transparent since the sums requested and the expected returns are clearly displayed for each project.
Currently, the most widespread projects are "green" and "eco-responsible" projects, quite in tune with the times (from buildings to entire neighborhoods) but also renovations of old properties, construction of shared housing or more conventional residential housing.
The advantages of real estate crowdfunding
It is accessible to many people
Real estate crowdfunding opens access to real estate, to as many people as possible, starting from a few tens of euros of investment. In short, anyone can get started in real estate crowdfunding: from the student to the entrepreneur; a mother to the expert investor. Real estate crowdfunding provides a solution adapted for all budgets. As a result, you invest to the extent of your capabilities and you become the owner of a percentage of the property on which you have placed your money.
Real estate crowdfunding is more profitable than some popular traditional investments
There are two main types of real estate crowdfunding investments: debt and equity. Both types require a relatively low initial investment.
Debt Investments are when investors have the opportunity to participate in a real estate loan with a fixed rate of return. Earning potential is tied to the investment amount and the loan’s interest rate rather than the property’s earnings, so there’s less risk for loss.
The most valuable benefits to debt investing are:
-
Short hold time of between six months and two years
-
Less risk because the property secures the loan
-
Payment priority over equity and preferred equity positions
-
Predictable payouts on a monthly or quarterly basis
Equity Investments are the type of crowdfunding that provides investors with equity ownership for their initial investment, which typically pays in quarterly returns. As a shareholder, investors can earn more money based on the property’s performance through rental income.
There are a lot of benefits to equity investments, including:
-
Cap-free returns for large earning potential
-
Depreciation tax benefits for property owners and investors
-
Generally no monthly asset management fees
You have to know that equity investments carry more risk than debt investments. The investment isn’t secured, so if the property doesn’t perform as projected, investors may see lower returns or even a loss on their contribution. Equity investments are also less liquid than other investments with a hold time generally between three and 10 years, so it’s important to consider it when you add them to your portfolio to determine if this is the right fit.
The main benefit of real estate crowdfunding is the potential for higher returns. Globally, real estate crowdfunding has rates of return between 10% and 12% on average, while some popular traditional investments don’t bring that high of a return. Equity crowdfunding investments, with terms of five or more years, have an average IRR of over 17%. So, real estate investments offer higher returns than other asset classes, and real estate crowdfunding platforms can offer even higher returns due to the lower fees associated with these platforms.
A less risky investment than other types of financial products
Real estate crowdfunding also has the advantage of being less risky than other types of financial investments, such as equities, for example. Indeed, it has fewer fluctuations and the yield remains relatively reassuring. However, even if it is a less risky investment, it is not without all risk! The proponent who initiated the project may be unable to repay the amounts invested, for x or y reason. Although defaults remained rare last year and affected only few of real estate projects, the risk is not non-existent.
Invest in projects that make sense to you
Investing your money is fine, but investing in projects that make sense to you is even better. Before you start, you have the opportunity to study the proposed projects, sort through and choose the projects that speak to you the most. If you have an eco-conscious mindset, investing in "green" and "eco-responsible" projects could make sense for you. If you are more focused on community and sharing, investing in shared housing projects could interest you. You will have the satisfaction of growing your money while investing in projects that are important to you!
The disadvantages of real estate crowdfunding
The risk of losing capital
Any financial investment involves risks, including the risk of losing your invested capital. Real estate crowdfunding is no exception, and the risk of losing money placed in a project is real, although uncommon.
Therefore, one of the basic rules of any investment is to invest only the money you are willing to lose and not the money you need to pay your rent, living expenses or your children's school fees. This may seem logical, but it is worth remembering.
You should keep in mind that the current economic crisis, or mismanagement can lead to the failure of a real estate crowdfunding project. So before you start, find out all you can about the proposed projects and conduct a thorough investigation. In theory, the most well-known crowdfunding platforms are already qualifying and validating projects from their side. But you can investigate to ensure the project feasibility and measure the risks of a project by checking the quality and seriousness of the platform, researching the developer to ensure his seriousness and ability to carry out a project, studying the scope and conditions of the project, and confirming that the project has all the planning permissions.
Regarding risks of real estate crowdfunding, we have seen in recent years that they are more of the order of late repayment than of project default. As we have already mentioned above, payment defaults concerned only a few of real estate projects in 2022.
Finally, the only real disadvantage of real estate crowdfunding is that you can not recover your capital before maturity. Keep in mind that delays are not unusual in real estate projects, so the originally planned deadline may be extended.
The non-feasibility of a project
Many projects have been able to see the light of day and succeed thanks to real estate crowdfunding. However, many also had to be stopped because they had failed to raise the necessary funds for the development of the project.
So be vigilant and read all the conditions before you start. You need to know what happens if the project fails to raise the necessary funds and repayment terms, if any. You also need to be aware of the clauses regarding returns and what happens if the project is no longer marketable for any reason or if one of the partners in the project goes bankrupt.
Many events can disrupt a real estate project and its profitability. Be aware of this and consider as many aspects of the projects as you can before investing your money.
The turnaround in the real estate market
The year 2022 was a very good for real estate crowdfunding. According to Custom Market Insights (CMI), in 2021 The Global Real Estate Crowdfunding Investment Market was estimated at USD 10.8 billion and is projected to reach approximately USD 250 billion by 2030 with a compound annual growth rate (CAGR) of roughly 45% between 2022 and 2030.
Sales of new property fell in 2022 and the first quarter of 2023 shows no signs of improving. Last year started with mortgage interest rates still low enough to entice buyers to take the plunge, with the most common mortgage term being a 30-year fixed rate, for about 3.5 percent in January, but that doubled to 7 percent in late November, and buyers started backing off.
So the new increase in interest rates do not encourage buyers to invest and buy a home. At the same time, inflation and rising prices of building materials are making real estate projects increasingly expensive for property developers. Although bankruptcies remain rare, delays in real estate programs are multiplying.
Real estate crowdfunding, therefore, seems to be facing its first real crisis in ten years. The first warning sign was the significant increase in reimbursement delays . Real estate crowdfunding investors will have to be a little more patient.
What is the future for real estate crowdfunding?
At the moment, we can not precisely determine the future of real estate crowdfunding. Indeed, the future of real estate crowdfunding depends on several external and cyclical factors, such as the economic situation, industry regulations, investor confidence, etc.
Although 2022 was a success for real estate crowdfunding, the current downturn in the real estate market is directly impacting it and the consequences are already being felt. In this context, it is better to proceed with caution. However, real estate crowdfunding could continue its ascent once the crisis is over. Investors are looking to diversify their investments, real estate is still perceived as a safe investment and online investing is becoming increasingly popular. At the same time, the strengthening of the transparency and security of real estate crowdfunding reassures investors. The growing interest we have seen in recent years should therefore not suddenly fall like a soufflé!
