Real estate crowdlending, when investors cement homes

Through real estate crowdlending, investors finance the construction or renovation of real estate and receive an economic profit in return

Nowadays, it is possible to finance almost anything. A company, a studio, a car… Even a building. An infinite world of possibilities unfolds before investors. And many of them bet on real estate crowdlending to profit from their savings.

Through this system, people invest in a real estate project, financially supporting a construction company or developer that will build a building to sell it later.

These operations occur on alternative financing platforms: online spaces that connect individuals seeking to multiply their capital with developers who need financing to build a property. Both parties use these channels because they usually provide better conditions than traditional financial institutions.

Real estate crowdlending platforms, endorsed by competent authorities, operate as a marketplace. Among their tasks is the audit and analysis of the viability of the projects, intending to ensure that they comply with legislation and offer a series of guarantees to protect investors.

Construction companies that opt for real estate crowdlending can diversify their sources of credit. In contrast, centralizing them would mean relying exclusively on a single entity, such as a bank, which would enjoy more power over the firm.

Later, the companies must reimburse savers the amount they originally lent them. This repayment can be made in two ways: by paying it back in installments, through different monthly installments, or by paying it back in full once the loan maturity date arrives.

Regardless of the option to repay the money, the organizations include the interest established in the contract: a certain percentage of the total sum, where the investor's profit lies. A reward for having advanced the money.

The advantages of real estate crowdlending

The main advantage of real estate crowdlending is that it is unnecessary to have a very high net worth to participate in. Some platforms allow people to get started with as little as fifty euros, a very affordable threshold.

How can it be possible to finance a building with such insignificant amounts? Thanks to one of the defining characteristics of crowdlending: the power of the crowd.

Individually, it would be unthinkable that every single saver could finance building construction. But crowdlending brings together many people who pursue a common goal and who, by joining hands, can achieve it.

Bringing people together in the same direction has considerably democratized the financial system. In the past, investing in real estate was reserved for high-net-worth individuals. Now, with real estate crowdlending, even a millionaire can make a profit by financing buildings. This has led to a substantial improvement in equality of opportunity, as it avoids excluding people with fewer resources.

Savers can also use real estate crowdlending to diversify their investment portfolio. This is a key strategy for minimizing the risk they assume as much as possible and improve their investment strategy. If one of the products on which they have placed their bets fails or makes a loss, they can rely on the profits of the others, thus cushioning the impact, and their financial situation will not be so badly affected.

Another advantage is that this mechanism knows no borders. Therefore, people can direct their capital towards real estate projects located in other countries, always considering the legislation in force in those countries.

In addition, the intermediation of real estate crowdlending platforms makes it easier for the lender and the borrower to connect easily and quickly, closing the operations in a safe meeting point.

The risks of real estate crowdlending

It is essential to remember that real estate crowdlending, like all other forms of investment, is not without its dangers. And the one that worries investors the most is the risk of default.

Suppose the developer suffers liquidity problems when paying off its debts. In that case, it may have serious difficulties repaying the money to the lenders, even though it is contractually obliged. And they will have to initiate a lengthy and costly claims process to recover the loan. For this reason, ensure you have a financial cushion and do not invest money you may need in the short term.

What can cause this lack of liquidity? The causes are very varied. To begin with, it can be caused by unforeseen expenses, building damage or delays during the construction process.

A crisis in the sector, such as the one in 2008, or a generalized increase in raw material prices, such as during the pandemic, can also seriously affect your liquidity.

In other cases, the cause lies in the depreciation of the property itself. This situation is influenced by external factors, such as the level of crime in the neighborhood or the area's attractiveness, variables that rise and fall over time and directly affect the value of the buildings.

Types of real estate crowdlending

There are two broad classes of loans related to real estate crowdlending: mortgage-backed loans and real estate development loans.

Despite being considered a type of real estate crowdlending, in mortgage-backed loans, the investor does not use his savings to finance a building. Instead, this system is based on granting loans to support projects or the capital increase of an organization, which resorts to crowdfunding and puts up real estate or mortgage collateral as collateral.

On the other hand, there are real estate development loans, the most popular kind of real estate crowdlending. Their mechanics are as explained above: a developer seeks a certain sum of money to build a property, the use of which may be commercial, residential or industrial. However, it wants to escape conventional financial institutions, so it turns to a group of savers who grant loans individually.

Later on, you will have to pay them back that amount, including the agreed interest. Although in this modality, the constructed work is not usually put as a guarantee, another guarantee usually covers the risk of non-payment to protect the individuals and not discourage the investment.

Real estate crowdfunding

There is an investment mechanism very similar to real estate crowdlending that, although it shares many of the same characteristics, introduces a variety of radical importance. We are talking about real estate crowdfunding. A true proof of the extreme personalization of the investment world to adapt to the needs of all profiles.

The main difference between crowdlending and crowdfunding is that, in the first option, the company is obliged to return the contributions of the people who collaborate, adding interest.

However, in crowdfunding, the contributions of individuals are voluntary. Therefore, the company does not have to reimburse them anything, although it can reward their support and offer them a small part of the capital. In this way, if the project is successful, they will enjoy the benefits.

Transposed to the real estate world, the similarities and differences are identical. For example, in real estate crowdfunding, many people come together with the same objective: to acquire, build or renovate a property. In the future, they will exploit it by selling or renting apartments or premises, and the income will be shared.

The profit depends not on the contract's interest but on the profits obtained. If the project is successful, the profits will be high. If it fails, there will be no guarantee to recover the money. The involvement is much more direct: sometimes, the investors carry out the initiative. In real estate crowdlending, the investor remains outside and is limited to receiving the benefits.

Regardless of the option chosen, people enjoy the satisfaction of not investing in something distant and intangible. Thanks to their support, businesses can be set up and homes built, positively impacting the lives of families and encouraging ethical investment.