Real estate crowdfunding is one of the easiest ways to invest in property and one of my favorite forms of investment together with P2P lending.
Until recent years, the only options to enter the real estate market were to either buy property directly or to invest in a REIT.
Now, we have real estate crowdfunding sites, which are somewhat between those two forms of investment. If you want to learn more about the differences between these types of investments in the property market, check out my article on REITs vs Crowdfunding VS Private Investing.
Here’s a quick list of my favorite European real estate crowdfunding platforms in 2021:
- Rendity – top platform for 2021 – my Rendity review
- Reinvest24 – the highest interest rates – my Reinvest24 review
- EstateGuru – the biggest platform – my EstateGuru review
- Crowdestate – a reliable platform in the Baltics – my Crowdestate review
- EvoEstate – curated real estate investments – my EvoEstate review
- iFunded – specialized in German real estate – my iFunded review
- Property Partner – best UK platform – my Property Partner review
- Bulkestate – Baltic and Scandinavian real estate – my Bulkestate review
- Raizers – best for French real estate – my Raizers review
How Real Estate Crowdfunding Works
So let’s explore what real estate crowdfunding entails.
There are three basic ways of buying a stake in a real estate crowdfunded property: secured loans, unsecured loans, and equity investment.
Here is a short recap of what each of these means for the investor:
- Secured loan (senior debt) – collateral is offered to secure the loan. The collateral can be real estate or some other asset, including a personal guarantee. With this type of loan the investor is the first in line to receive their payout, and in case of any problems the collateral can be sold to minimize losses. However, the existence of collateral means that the risk (and therefore the yield) is lower and one should definitely investigate the asset that is offered as collateral.
- Unsecured loan (mezzanine loan) – while mortgage holders are usually first in line to receive payments, an unsecured loan means exactly that. It is not secured by collateral. This means that the interest rate offered should be higher than for a loan that is secured. If the project is unsuccessful, there are no assets to sell to recover any funds (i.e small loans). In this case, one should pay a lot of attention to whom they are loaning their funds in and how well the platform is equipped to handle problematic customers.
- Equity investment – with this type of investment one should note the structure of liabilities – the company will pay debts to employees and creditors first and only then investors may receive their payments from the remaining assets of the company. In case of failure, there is a real possibility that the earnings of the investor are reduced to a 0. When the project succeeds, however, employees and creditors usually receive a fixed interest rate while the equity investor earns more. So, in this case, one should make sure that they assess the probability of failure. Is the project understandable? Are the numbers presented in the project realistic?
As a rule of thumb, it is good for an investor to remember – the lower the risk of the project, the lower the expected yield. And if you are considering investing in real estate that offers a 20%+ yield per annum, be sure to be very critical about the contents of the project before investing. Most likely it is not a secured project meaning a significantly higher risk level for the investor.
So, be sure not to look at just the yield but rather the investment. It is important to always know what you are investing in, who you are trusting your money with and to be realistic in terms of expectations.
My Experience with Real Estate Crowdfunding
Before we talk about my favorite real estate crowdfunding sites in 2021, let me remind you that I’ve been investing in real estate through online platforms since 2015, and I’ve used many platforms targeting various geographical regions.
On average, my returns have been around 5-7% per year.
Investments in the UK have also not provided me with much joy, but apart from the Lendy scam, the other platforms have been quite well managed and the big issue with property in the UK has been the Brexit event which was quite unexpected and threw everything off the rails.
On the other hand, the Baltics have provided some excellent returns, and this is what I consider to be the hottest real estate market in Europe at the moment. The German and Austrian markets have also provided me with stable returns – these are mature markets and the platforms in these countries tend to be run by serious and ethical people.
Investing in real estate online can be a daunting prospect to many new investors, as they might not be used to mixing an offline asset like property, with the technology and intangibility of the internet. And that is why I’d like to guide you towards what I feel are the best and most trustworthy platforms of 2021.
Keep in mind that within each platform there are different modalities of real estate investments. I’ve written briefly about these in my article about risk vs yield in real estate investment.
1. Rendity – overall platform for 2021
The vast majority of deals are situated in Austria. There are also a number of opportunities in Germany, too.
In these turbulent times, I appreciate the opportunity to invest in solid markets such as Germany and Austria.
In terms of statistics to date, Rendity notes that it has successfully completed 63 funded projects, which translates into €34 million in invested capital. The average annualized return thus far amounts to 6.10%.
This is a very solid platform with a good team behind it, and investors have been very happy with the results so far.
You can read my full review of Rendity to learn more about this platform and decide whether it’s the right choice for you.
2. Reinvest24 – for the best interest rates
After having invested in this platform early in 2019 and speaking with Tanel Orro (CEO of Reinvest24) on my podcast I can safely say that it’s one of my favorite real estate platforms. I like their approach of being cautious and very transparent with their investors.
Whereas other platforms publish risky loans indiscriminately at times, Reinvest24 are focused on projects that return interest over their lifetime. Their idea is to obtain real estate at very good prices, do some great refurbishing and then rent it out for some sweet monthly returns.
I would especially recommend such a platform to someone who wants to build a monthly passive income stream that can fully or partially sustain one’s lifestyle, which is what has popularly come to be known as financial independence, and closely linked to the FIRE (Financial Independence, Retire Early) movement.
All the projects I have invested on with Reinvest24 have exited successfully, and I look forward to continuing to invest on this platform. Moreover, they have kept their promise of launching the secondary market in 2020, thus increasing liquidity options for existing investors.
While Reinvest24 started off focusing on Estonian projects, they have now started to expand beyond, offering projects also from Latvia, Moldova and Spain.
Their interest rates are pretty fantastic, with plenty of projects offering rates of around 15% and just 6 months duration, so you won’t be tying up your money for a long time.
3. EstateGuru – the biggest platform
EstateGuru provides investors with the chance to invest in real-estate loans. The projects usually yield a bit more than 10% and are on average a year long.
Apart from pure real estate development loans for new projects, they also put up the following types of loans on the platform:
- business loans
- bridge loans
- reconstruction loans
Most loans return interest on a monthly basis, although some have other arrangements. The main market for EstateGuru is Estonia, however, I have also seen loans from Latvia, Lithuania, Finland, Spain and Portugal. I expect them to keep diversifying geographically as they grow over the next few years.
I’ve had the pleasure of interviewing their COO Mihkel Stamm on Mastermind.fm, so do check out that episode if you want to learn more about the platform.
I have also written an extensive review of EstateGuru on this blog, where I provide you with all the details about how investing with this platform works and what results you can expect.
4. Crowdestate – another top Baltic platform
Crowdestate was launched in Estonia in 2014 and has a very good track record with returns upwards of 20% and more than 40,000 investors to date. I love their site as things are very easy to find and it’s a pleasure to navigate through all the investment opportunities.
There is also a secondary market that helps maintain liquidity with your investments. I have written about my experience on Crowdestate in my full review so check that out if you want to see how I was able to obtain 13.28% returns on this platform so far.
5. EvoEstate – curated real estate investments
EvoEstate is an innovative platform as it aggregates and curates the best deals from many platforms. The team at EvoEstate specializes in real estate deals as they believe that this is the investment vehicle that will produce the best and most reliable returns in the next few years.
You can read my full review of EvoEstate or listen to my podcast with EvoEstate cofounder Gustas Germanavičius for more information.
6. Property Partner – the best UK platform
This is the top UK real estate platform in my opinion. They’re very well organized and professional in their analysis of each investment opportunity, which enables me to make informed decisions about my investments.
I’ve written an in-depth Property Partner review where I explain how this platform works. I’ve been very happy with how I’ve been treated as an investor. I think of this platform as one of the bedrocks in my real estate investment strategy.
I’ve been investing in UK real estate for several years through this platform, and even though Brexit was a tough blow, I have high hopes for future returns as the UK will never lose its appeal for international investors and expats.
7. iFunded – specialized in German real estate
Germany is one of the top countries to look out for when investing in real estate, and thankfully the iFunded platform makes it easy for investors to get a piece of the German property market.
I recommend reading my detailed iFunded review to see why I decided to invest in German real estate with this platform and what results I obtained.
They still have to fully develop the English version of their content (especially their newsletters which are currently only sent out in German), but it’s nothing that Google Translate can’t solve for you.
The Bulkestate platform, as the name implies, enables real estate investment project crowdfunding and apartment bulk-deals for a price lower than the market value.
Bulkestate concentrates on Latvian real estate, and you can learn all about why they made this choice in my interview with the founder and CEO of this platform, Igor Puntuss, on Mastermind.fm.
You can also read my Bulkestate review for more information about this platform. Average returns are over 14% per year which is very good. You can invest in property development loans or engage in group buying of apartments, which is perhaps a unique feature of this platform and one to keep an eye out for in the coming months.
Raizers is the platform of choice if you want to invest in French real estate. It’s a platform that has been operating for 5 years with zero defaults. Go ahead and read my Raizers review if you’re looking for investing options in France specifically.
I’ve had the pleasure of discussing Raizers and the French real estate market with Raizers co-founder Maxime Pallain on my podcast, check out that episode if you want to learn more about Raizers. I found Maxime to be very open and knowledgeable and I have no problem trusting this platform based on their track record and solid team.
As I mentioned earlier, I believe that the Baltics together with Germany and Austria offer the best opportunities at the moment.
However, the real estate market is in constant flux due to the numerous factors that affect it, and you, therefore, need to do your homework properly before deciding on an investment. For example, the duration of the investment can be the main differentiating factor between a successful investment and a disastrous one. Some markets offer time-limited but very lucrative investment windows, while other markets have certain properties that make them really stable and thus ideal for long term investments, perhaps at lower rates of return.
I also recommend that you check out my article about the taxation of P2P and real estate platforms in Spain. Although I wrote that article with Spanish residents in mind, the same concepts apply to most other countries in Europe.
Why do Borrowers Obtain Finance from Real Estate Crowdfunding Platforms?
A common question that comes up with investors new to real estate crowdfunding, is why exactly do borrowers go to these platforms when borrowing rates are so low these days? Why don’t they go to the banks directly?
Every entrepreneur and property developer is looking for the best measures to save money and earn a solid profit, so why would they take on debt obligations with an interest rate of 11% per annum?
The answer is not unequivocal as there are several advantages to be taken into account when evaluating financing possibilities on P2P lending platforms and real estate crowdfunding sites:
When using traditional financing methods, real estate developers often fail to get the desired results within the required timeframe – banks make decisions slowly, the period from application submission to receiving funding may be up to 4-6 months, while P2P lending platforms can provide an indicative offer within 24 hours of submission and money on the borrower’s account within 2 weeks. Developers are happy to use this opportunity as a “bridge” – you can start working on your project while the bank is still evaluating it.
When considering the possibility of using a P2P lending platform for financing your project, it should be taken into account that this is a short-term solution for the sales period of the property, during the development phase of the project or a bridge loan. The major benefit can however be seen in the fact that many of the above platforms allow early repayments with no penalties, so should the borrower sell one of the apartments or establish long-term financing, they can repay the loan earlier if convenient. This means that if the funds were used for 6 months and 6 days, then the interest payment will be calculated for exactly 6 months and 6 days.
No monthly payments
P2P lending platforms normally enable flexible repayment schedules, for example, the possibility to pay both interest and principal at the end of the period – you won’t find this kind of opportunity in traditional financial institutions. This significantly boosts work on a new project by enabling the borrower to fully focus on the project, with no additional liabilities each month. The developer can use the money to actually finance the project, not to pay interest.
What is the cost of a new development project’s sales campaign in the media and how effectively can you reach people who are interested in real estate? Many of these platforms have thousands of registered investors from different countries interested in property and development, which gives the developers free publicity for their projects.
Doesn’t the publication of a project’s financial data in a public manner negatively affect the eventual sale of the property?
Not really, although it might initially appear to have that effect. In reality, what happens is that the eventual buyer is looking at the property and comparing the price to other properties in the same area in the same conditions. The buyer is also comparing the price and property to other properties he has shortlisted, even in other areas. Therefore, ultimately these two facts are much more important than the limited downside of the project details being published on the platform.
Many platforms also limit access to the project’s most important financial details to investors themselves, meaning the eventual buyer (unless he is an investor himself) would not have seen those details.
Communication and knowledge
A less important factor might be the opportunity to get another partner on board. A partner who understands the business has evaluated dozens of similar projects. If your project gets rejected, it probably means that there is something seriously off and you can go back to the drawing board to make adjustments. With banks, sometimes getting rejected is just the result of excessive bureaucracy and doesn’t mean there is necessarily anything wrong with your project.
When investing in real estate, there are many ways we can put our money to work. Each type of real estate investment carries its own risk factor as well as yield percentage.
How Property Crowdfunding is Taxed
So how does taxation of property crowdfunding finance work? We can use Property Partner as an example.
Property crowdfunding is a form of indirect property investment. This consists of the investment in shares of a company that owns, develops and manages property on behalf of its shareholders. Investors will hold legal shares in the company that owns a specific property. For each investment, an SPV company is created. Information on the special purchase vehicle (“SPV”) that holds the property can be found on the companies house website. Please type the SPV name into the search box on their site to find out more details.
Each property is held for a fixed term which is specified on each investment page. The investor hopes to receive a financial return in the form of dividends on rent received as well an increase in the value of the property subsequently shown as an increase in share price. The value of investment may go down as well as up and, as with all investments, you may get back less than you have invested. Indirect property investment allows investors to enter property markets without having to provide the full, up-front capital of buying a house or flat.
Your shares are held in a nominee account, registered in the name of Property Partner Nominee Limited. This account is ring-fenced from the assets and liabilities of Property Partner. You, as the beneficial owner, will receive all of the economic benefits including dividends and capital returns. More information on the nominee structure can be found on the Property Partner site.
Investment Costs are calculated using a First In First Out (FIFO) costing method per share, rounded to the nearest penny.
What income is taxed?
In most countries, you are taxed on capital gains as well as dividends, which are the two ways you can make money with property crowdfunding on platforms such as Property Partner.
With that in mind, you will then have to consult the laws of your country of residence to determine the tax rates for capital gains and dividends.
Please note that I am not an accountant or financial advisor, the above is the fruit of my personal research, and might contain inaccuracies. Before you submit any tax returns, I highly recommend you contact a tax consultant or accountant to check your numbers.
How to Evaluate Real Estate Crowdfunding Investments
With the proliferation of real estate crowdfunding websites over the past years, investors can now invest all over Europe and the UK from the comfort of their homes.
Not all platforms and investments are equally good, however, and while it is good practice to diversify and thus spread the risk, it still makes a lot of sense to have a basic skill set in evaluating real estate investments, before you hit the Invest button.
In general, from my experience, investing in loans tends to be riskier, however, it is the format favored by many projects on these crowdfunding websites, as it is much more straightforward to structure. The alternative is to set up a company that owns the property, but that incurs more costs and is harder to manage. The advantage for an investor, however, is that he would own shares in a property and thus not be at the sole mercy of the developer.
If the deal involves giving a loan to a property developer to build or refurbish a property, a very important metric to look at is loan-to-value, or LTV in short.
The lower the loan amount compared to the value of the property, the safer you are as an investor, as it means that in case of any problems, the chances of recouping the investment are higher.
You have to be extra cautious with this one, and take a close look at what value figure is being taken into consideration.
This can easily be explained by an example. Let’s say the developer puts up a project that involves buying an old and dilapidated building at 500,000 Euro, refurbishing it completely to luxury standard, and selling it off within a year for 1,000,000 Euro. He asks for a loan of 250,000 Euro for the project.
Now, here’s the trick some platforms use. Instead of listing the project as having a loan-to-value figure of 50% (250,000 divided by 500,000), they will use the anticipated value of the finished project, giving a loan-to-value figure of 25% (250,000 divided by 1,000,000).
I would advise staying away from these kinds of projects, as they tend to be much riskier. The price that the project is eventually sold at depends on many factors, including how good of a job the developer does, prevailing market conditions, the buyers’ profile, etc. As investors, we should concentrate on the facts, and therefore look at the value of the property right now, and that is 500,000 Euro in our example.
The fantastical figures that developers provide can lead to investors getting burned, as happened with the Lendy platform, which eventually went bust.
First or Second Rank Mortgage
A mortgage is the collateral of real estate which is pledged against borrowed capital. It is divided into primary and secondary ranks, which indicate which investor or institution is the first to recover the money. Typically, a first-rank mortgage holder in large projects is a bank or other large financial institution, while the second-rank mortgage is held by crowdfunding platforms or other institutions.
In general, you should prefer first rank mortgages. Platforms like LendSecured only do first rank mortgages, for example. Other platforms might offer the riskier (but potentially more profitable) second-rank mortgages.
Secondary rank mortgages are quite popular on the German and British real estate crowdfunding platforms, such as Property Partner.
There are nuances, of course.
For example, if the property is already built and has tenants that generate rental income the risk is naturally lower. When assessing the risk in such a scenario, one should look at the property’s profitability.
Consider the case of a €5M property that is generating a net rental income of €350,000 or a 7% annual return, You can check what would be the return for primary and secondary mortgage holders. You can do this with a simple formula: €350,000 (rental profit) / €3,600,000 (sum of primary and secondary mortgages loan values) * 100 = 9.72% net yield.
This step is important to assess the liquidity of the real estate, which helps to understand whether after a takeover of the asset it would be difficult to find a buyer and repay both mortgages to the investors. In this scenario, selling a property that is generating a yield above 9% shouldn’t be complicated.
Apply Financial Ratios & Rules
When you are buying a property, or investing through online real estate crowdfunding platforms. it’s a good idea to keep in mind the following ratios that can help you in judging whether this is a good investment or not.
Look at the median price and median rent for the area in which you are considering buying a property. You will want to favor lower ratios versus higher ones.
The 50% Rule
The 50% Rule is just a shortcut to estimate the Net Operating Income or NOI of a rental property.
The 50% Rule says that you will only keep 50% of the rent you collect on an average rental after paying for vacancy, management, taxes, insurance, and maintenance.
The 50% Rule and NOI exclude mortgage costs.
The 50% Rule allows us to quickly determine a cap rate so that we can decide to pursue the deal or not.
A capitalization rate is a tool experienced investors use to compare the performance of one property to another.
In some neighborhoods, a 6% cap rate will be a great deal. In other neighborhoods (usually lower-priced ones) a 12% cap rate or more might be needed to make it worthwhile.
The 1% Rule
The 1% Rule states that your gross monthly income from the rent of a property must equal or surpass 1% of the total investment in that property. By total investment, I mean the purchase price plus fees and expenses to refurbish the property before putting it onto the rental market.
As an easy example, if your total investment into a property was €100,000, then you would want to get at least €1,000 a month in gross rental income.
The 2% Rule
This is exactly the same as the 1% Rule, except this time we are looking for a 2% gross return in monthly rent versus the total investment.
When To Apply Each Rule
The obvious question is, therefore: when should we apply each of these rules. The answer is that it is totally dependent on the area you’re considering. There are some areas where a 2% deal is possible from time to time, and other areas where even a 1% deal would be a real stroke of luck.
The key here is to know the yields being produced in the area and the investments needed to produce those yields. Armed with that information you can then decide whether to apply the 1% or 2% rule to your investment options.
Like every shortcut, these rules have limitations. The major limitation you should be aware of is that what matters most in buy-to-let is the net rental income.
Here are a few costs that will eat into your gross monthly rental:
- Condominium Fees
Some of these costs will inevitably be equal for all properties in a particular area (taxes is one such example), but others may not (for example maintenance). An older building might meet the 1% Rule criteria while a new building wouldn’t, however, the older building will probably have significantly higher maintenance costs. It might therefore very well be the case that the newer property might end up outperforming the older property even though at first glance and based on the 1% Rule the old building looked like a better investment.
Using the Rules
Given the additional intricacies we discussed, the best use of these rules is for quick filtering and comparison. If you’re using crowdfunding property platforms, for example, you’re likely to have several options to consider every month, and having a few quick rules to sort out the wheat from the chaff will be useful in saving precious time. Once you narrow down your options to a handful of properties, you can then dig deeper until you find your perfect investment.
Consider the Platform’s History
Take a look at the history of the platform you plan to invest in. Ideally, it should have been operating for a number of years already with no significant issues. If it’s been through a sideways or downward market and emerge unscathed that’s even better. Everybody can perform well when the market is up, but when the market is not helping many platforms cease to make updates and run into problems.
Property Partner are a good example of how to keep things professional and take care of your investors in a bad market, such as that of the UK during and after Brexit and the COVID crisis.
While you should always assume that the reviews you read online are biased in some way or another, I still recommend checking out blogs, forums and specialist review websites to get a general feel of whether a platform is trustworthy or not.
Do you use any other criteria when evaluating real estate crowdfunding platforms? Let me know in the comments section.
Yield VS Risk Relationship in Real Estate Investing
Like any financial product, the higher the estimated yields the higher the risks. Investment opportunities with renovation are placed in a balanced position in the real estate investment type chart, almost in the middle, which is also why they are one of the most popular projects on many crowdfunding platforms.
Which are your favorite types of real investment? I’m a big fan of renovations that last around 8 months from purchase to an eventual sale. I tend to balance my portfolio with this type of investment together with savings opportunities where I get dividends/rent every month and have a constant flow of income.
Ratios that can help you evaluate projects
Do you know of any other platforms that I have not mentioned? Let me know in the comments section.