What is real estate crowdfunding and why invest in it

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Have you heard of real estate crowdfunding and want to know more? Discover the complete guide to this particular form of financing that involves the community. We will see in detail what real estate crowdfunding is, how it works, what is the situation in Italy. Then we will analyze the possibilities of buying a house and investing in crowdfunding, with an assessment of risks and costs but also excellent earning opportunities.

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What is real estate crowdfunding

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The crowdfunding is a form of collective financing in which a group of people are using more or less significant amounts of money to support projects of other people or organizations. For some years now, crowdfunding has also been introduced in the real estate world. The money raising process generally takes place through specialized online platforms that play a mediating role between investors and beneficiaries of the loan.

What is real estate crowdfunding and how does it work: are there risks?

Crowdfunding works in real estate as in all other sectors. There are mainly two forms of collective financing: Equity and Lending.

• In equity crowdfunding, a company seeking funding for the launch of a new service / product publishes the project on an ad hoc platform. Interested lenders invest their own money and get shares in the company in return. If the share is significant, you can even become a member of the Board of Directors. 
• In lending crowdfunding, on the other hand, a company that needs money for a project is financed with a sort of collection in which private individuals participate. The company then undertakes to repay the loan in monthly installments within a set time: from a minimum of 3 months to a maximum of 84 months. A greater number of installments naturally correspond to greater interest.

In real estate, the equity model is generally used, since these are important projects. In this case, the investor becomes a shareholder of the building company, but not the owner. The return on such investment will depend on the d difference between the final sales price of the property financed and invested capital.

But is it a safe investment or are there risks? 

The main problem of real estate equity crowdfunding can be the insolvency of the financed companies. The equity investor becomes part-owner of the company that owns the property, so in the event of bankruptcy he risks losing the capital invested. Considering that sums of a few hundred euros can also be invested, this would not in any case be a huge loss.

Either way, crowdfunding real estate platforms strictly monitor the financial status of these companies. However, they cannot foresee any problems that may undermine the success of the project.

If the project does not receive enough initial funding, the risk is zero. The campaign will be canceled immediately and the investor will receive their investment back.

Real estate crowdfunding in Italy 

Italy is the first state of the European Union to have regulated the legislation relating to real estate crowdfunding. However, this is still a very recent condition, given that the relative decree law, number 50, is dated April 24, 2017. This decree has finally allowed any company, of any size and date of foundation, to adopt this instrument. 

In the past, this instrument was in fact reserved only for small joint-stock companies that were recently active and engaged in innovative technological or social sectors. In this way you can become an investor in the Italian real estate market even with small amounts of money and up to 5 million euros can be raised per project.

The data show that as of 30 June 2020, real estate lending crowdfunding has raised about 39 million euros. Equity, on the rise, brought 32 million euros instead. This data reflects the lower perception of risk and the greater number of platforms regarding social lending. 

Crowdfunding to buy a house, how does it work?

You can also buy a house through crowdfunding. But be careful, you don't own a house with a few hundred euros. However, you can become a shareholder in the company that actually owns the property and make a profit. By joining a campaign on a real estate crowdfunding platform you can participate, for example, in the construction of a property on land, in the purchase and splitting of a property for rent ...

It will be necessary to invest at least the minimum capital indicated in each project, up to a maximum of € 3,000 (for a total investment for individuals that cannot exceed € 10,000 per year). Once the amount established by the project is reached, the money is transferred to the Sal that started the campaign. At that point, the investors will not become pro-quota owners of the property but, as we said before, owners of the securities of the company that buys the asset.

Always keep in mind that crowdfunding platforms are always and only intermediaries. They have no responsibility. Each user must therefore be aware of accepting a risk of total or partial loss of capital or of not obtaining the expected return.

Investing in real estate crowdfunding: how much do you earn?

Investing in real estate crowdfunding certainly allows you to obtain good profit margins, which vary according to the type of platform in which you invest.