There are three basic ways of buying a stake in a real estate crowdfunded property: secured loans, unsecured loans, and equity investment.
The risks of real estate crowdfunding projects can vary by a great deal. There are secured or unsecured loans and even equity investments on the market. So, here is a short recap of what each of these means for the investor:
- Secured loan – a collateral is offered to secure the loan. The collateral can be real estate or some other asset, stock of goods or something else suitable. With this type of loan 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 – 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. When 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 investing 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 where you are investing in, who you are trusting your money with and to be realistic in terms of expectations.