All you need to know about real estate crowdfunding

Average returns of 10%, a transparent and short-term investment with stable growth: real estate crowdfunding is becoming increasingly popular. But what is its origin and what are its particularities? Let's take a look at this financing method to understand everything... and get started.

Real estate crowdfunding: financing by loan with interest

When you hear "crowdfunding", you think of a donation platform, with or without a counterparty? It's normal, it's the first form of crowdfunding, which appeared at the beginning of the 2010s with platforms such as Kickstarter.

The principle is simple: you collect funds directly from the population to finance a project. A model that is not new, since it allowed, in 1875 to a certain Édouard de Laboulaye to finance the construction of... the Statue of Liberty! The difference is that "crowdfunding", a term invented in 2006, is done through internet platforms. Platforms that allow to collect money from the whole world (or almost), without intermediaries.

Since then, other forms of participatory financing have developed and there are now three of them:

• Donation funding, with or without consideration;
• Financing through loans, with or without interest;
• Financing through investment, in company capital.

The real estate crowdfunding belongs to the second category: financing through loans with interest. A loan that generally takes the form of a bond or debenture issued by a project owner. This allows investors to invest in simple increments of €1,000.

This category of crowdfunding (or "socio-financing" in Quebec) has developed recently. Coming from the United States, real estate crowdfunding has been regulated in France since 2014 by the AMF, the French financial markets authority.

Real estate crowdfunding to meet developers' need for money

There are two types of borrowers: real estate developers, who carry out construction projects, and property dealers, who buy buildings and resell them with or without renovation or development work.

To raise the money needed for the purchase and the work, real estate professionals have several sources of financing :

1. their equity (cash flow),
2. bank loans,
3. pre-marketing (sale before the end of the work).

The collection of funds from individuals and professionals, via real estate crowdfunding, makes it possible to constitute a new source of financing that can be called "quasi-equity". This money complements the project owner's own funds - it should be noted that banks require that these funds represent 10 to 30% of the total, or even more for property dealers. This mechanism allows promoters to reduce the money invested (their equity) in order to reallocate it to other operations and to remain flexible in case of unforeseen events.

This explains the high return of real estate crowdfunding:

1. The project owner is willing to pay high interest on part of his financing, because this money allows him to unlock bank loans, which have very low interest rates. For example: He will borrow 5% of the funds in crowdfunding and 80% of the funds from the bank. So the interest paid on the 5% of the cost of the operation is very strongly diluted. That said, it is this 5% that will allow him to unlock the bank loan and complete his operation.

2. For promoters who do not have the necessary equity, crowdfunding allows them not to open their capital to other investors (which would cost them much more because they would have to share their margin).

3. There is no intermediary between the promoter and the investor, and the (good) platforms do not pay interest. Hence a high return for the investor.

 

What return can I expect from real estate crowdfunding?

Let's remember that the investment in real estate crowdfunding is a loan issued in the form of a bond. Beware of preconceived ideas, by participating, you do not become the owner of a property in a collective manner, as is the case with SCPIs. You are simply lending to a developer so that he can complete his operation. As soon as the project is completed and the property is resold, you get your money back, with interest.

Consequently, it is a short-term investment, from 12 to 36 months on average (the time to build and sell). And the returnfor the investor is 8 to 12% per year depending on the risk, with an average of 10% - a significant return in today's environment.

In concrete terms, a 10% return means that each year the investor receives 10% of his initial investment: this is called the coupon. For 1000 euros invested over 2 years, he will receive 100 euros after one year, then 1100 euros at the end of the 2 years - the 1000 euros invested plus the coupon of the second year.

Moreover, one of the particularities of real estate crowdfunding is its accessibility. You don't need to be a millionaire: the minimum amount to invest varies according to the platform, but it is generally 1000 euros.

And the taxation in all this? It too is advantageous, thanks to the Flat Tax, which came into effect in 2018. Also called Prélèvement Forfaitaire Unique (PFU), this tax applies to all capital income with the same rate: 30%. Investors will therefore have to pay 30% of their returns to the state. For a gross yield of 10%, the net yield, after taxes, will be 7%, i.e. 70 euros per year for 1000 euros invested. But the investor has nothing to do: it is the platform that declares the return and pays the Flat Tax directly to the tax authorities.

Risks to be aware of

Any investment involves risk for the investor. Generally, the riskier the investment, the more attractive the return. Thus, by buying shares on the financial markets, one can hope for high annual returns, but... one should not be heartless. Stocks are very volatile, they can lose 10% of their value in one day, or the opposite. On the contrary, bonds (or loans) issued by governments for example, have very low (or even negative!) rates of return, but are very stable (for the most part).

From this point of view, real estate crowdfunding is a good compromise, combining a high return and great stability. The investor knows in advance how much he will earn at the end of the operation. It is totally transparent and there are no hidden costs.

But, of course, there are risks:

• Liquidity risk : Liquidity is the ease with which the investor can resell his securities after having acquired them. Bonds acquired through real estate crowdfunding are unlikely to be resold. But their predefined maturity (on average 20 months) offers stability to the investor who can already project himself.

• The risk of partial or total loss of capital: the return on investment depends on the success of the operation financed. If the operation fails, the investor can lose everything. Fortunately, this is very rare, and several platforms have had default rates of less than 1% since 2014 and = some historical platforms are even still at 0% default on several hundred funded and repaid operations. A clean default rate means that investors have always recovered their principal and interest as initially defined.

• Political risk: there are several types of political risk, for example, before the end of the investment, new tax restrictions may be imposed on their products, thus reducing their return.

• Inflation risk: the value of the capital invested and the value of the interest received may depreciate throughout the life of your investment. This risk, like the political risk, is limited by the short duration of the projects.

The choice of the real estate crowdfunding platform: a key point

In real estate crowdfunding, the investor has total control. He chooses the platform and the project in which he wants to invest. He must use this latitude to limit the risks.

The first and most important step is to choose the platform. It is imperative to choose a platform with a certification: preferably that of Participatory Investment Advisor (CIP), which is the most recognized in France. Platforms with this status have no limits on the amount lent, unlike those with the status of Intermediary in Participatory Financing (IFP), which are limited to 2000 euros per lender and per project.

In addition, the default rate of the platform can be consulted, which is compulsorily displayed. This rate allows you to know the number of projects that are late or in default. The lower it is, the better - the ideal being a default rate of 0%.

Finally, you must choose your project carefully, without stopping at a tempting rate of return. All the information is normally displayed. So, how to choose? By looking at the profile of the promoter: is he a beginner or an experienced promoter? You can also look at the developer's assets and the history of his projects, but also at the way the project is financed: are the homes already sold? Is the bank lending money? All this information is analyzed by the platform and displayed in the details of the operation.

It is essential to analyze: the guarantees on the reimbursement

An essential point to analyze: the guarantees on the repayment of the loan. When the bank does not lend money, there may be a first mortgage. This means that, in case of default, the lender can force the sale of the property in order to be reimbursed in priority. This is one of the most secure guarantees, but a project without a first mortgage does not mean that it is not secure.

Indeed, most often, a first demand guarantee and a personal guarantee are already good guarantees. The first one obliges the guarantor to pay a sum of money if the creditor asks for it, the second one allows the promoter to be surety on his personal funds.

In any case, the platforms' advisors are there to guide you. But the best advice they can give you is to diversify your investments. It is better to invest 1,000 euros in 10 projects than 10,000 euros in one project. And this also applies to real estate crowdfunding.

You know everything: what real estate crowdfunding is, why project owners use it, what the return is, what the possible risks are and how to control them. It is an investment that has many advantages, and this explains its constant growth since its creation. It is perfect for people who want to invest small or large sums of money, in the short term, with a high and guaranteed return. If this is your case, you now have all the keys to get started!

Watch our video explaining real estate crowdfunding