Basics to understand what is real estate crowdfunding

Find out all the details of this new way of investing in the real estate sector with little initial investment.

Thanks to new technologies that allow secure money transactions through digital platforms, the collaborative economy has emerged.

An economic trend where the premise is that small amounts of capital contributed by different people generate sufficient capital to make larger investments, whether in financial products or other types of economic assets.

After this investment, participants receive profits proportional to the amount they contributed.

This is the basis of real estate crowdfunding, a system that has opened up the panorama by making it possible to participate in this market without the need for huge amounts of initial capital.

Therefore, it is interesting to learn everything about this real estate investment scheme.

One fast way to understand more about this investment opportunity is to read what investor say about their experience with the most popular Real Estate Crowdfunding platforms. One of the most popular is Estateguru.

It may be useful to read investors' reviews of Estateguru to understand if this way of investing fits our needs.

Collaborative economy, the basis of crowdfunding

To answer the question of what is real estate crowdfunding, we must first understand the concept of "sharing economy".

This is the basis on which real estate crowdfunding operates, which essentially consists of raising capital from many small investors to invest in a contruction project that will generate a return in the short or medium term.

Is crowdfunding safe?

It is natural to have doubts when using this new real estate investment scheme, as the way to invest and receive funds is through digital platforms.

However, you should know that nowadays, thanks to blockchain systems, i.e. digital data encryption systems, transactions through internet platforms are increasingly secure, which has allowed, for example, that practically all banks today have their mobile application, from where you can perform all kinds of operations without having to go to a branch.

Likewise, investment platforms are obliged to comply with the guidelines dictated by the governments worldwide through laws that regulate financial technology institutions, also known as “Fintech Laws”.

How real estate crowdfunding works

In the crowdfunding scheme, a target amount of money is set, which is collected through a shared account, in which each participant freely decides the amount to invest based on a minimum investment, which generally does not exceed a few thousand dollars or euros.

Once this target amount has been reached, the money is used to partially or fully finance the construction of real estate projects, which are then sold at market price for a profit.

Depending on the real estate appreciation in the area and the stage of the project to be financed, a percentage and a deadline are determined for investors to receive the profits that correspond to them according to their percentage of participation in the collective account.

Like any investment model, real estate crowdfunding has particular characteristics that can be seen as advantages or disadvantages depending on the investor's profile.

Here are some of the most important ones.

Advantages

You do not need to be an expert in the real estate market:

Digital platforms dedicated to real estate crowdfunding are responsible for carrying out all the research of the projects to be financed, so the investor does not need to have advanced knowledge of the market. 

However, it is highly recommended to know very well the terms of this activity such as return on investment, annual return, fixed term, variable term and real estate capital gain.

The initial investment amounts can be very low:

Unlike the traditional scheme of purchase and resale of real estate, in real estate crowdfunding it is possible to participate in a construction project with very little money.

This opens up the possibility for small investors to grow their money safely, in addition to diversifying their investment portfolio.

The percentages and terms of return on investment are stated clearly:

Real estate projects, by having well-defined investment plans, allow investors to offer transparent investment returns and terms.

This is very different from other types of investments such as REITs and investment funds, where profits depend on the operations of the companies, which are in turn subject to the economic environment.

Disadvantages

You cannot keep the property:

One of the disadvantages of this real estate investment scheme is that none of the participants can retain full ownership of the property.

Your profits are limited to the monetary gains proportional to your percentage share of the investment made.

You don't own any property investing this way.

The money cannot be withdrawn at any time:

Unlike other types of investments such as ETF and some low-risk bank investment funds, in real estate crowdfunding it is not possible to make partial or total withdrawals of capital until the project is completed. It is therefore very important that the investor uses a minimum amount that he/she is sure he/she will not need during the life cycle of the project.

Cash drag:

Sometimes it is possible that the financing goal will not be completed within the set timeframe.

If this happens, the amount that the investor decided to contribute to the collective account will be held until the goal is completed or until the fundraising is cancelled and the money is returned to its respective owners.

In either case, the investor will be unable to withdraw their money and use it for other investments, which will prevent them from making a profit.

Now that you know what real estate crowdfunding is, how it works and its advantages and disadvantages, it will be your decision whether or not to invest in this innovative scheme. Determine if this is the best option based on your financial objectives and take advantage of the benefits of the multiple crowdfunding companies that currently exist.

Remember that this way of investing can be very profitable but brings also a certain degree of risk.