5 mistakes when investing in real estate crowdfunding
Crowdfunding has made a significant impact on the real estate sector. This investment model, which allows any investor – large or small – to diversify their holdings across various properties or types of real estate, has grown exponentially in recent years. In our country alone, in 2017, the volume of investment was 42 million euros, 110% more than the previous year. A trend that, according to experts, is expected to continue in the coming years. This investment option is gaining followers but remains unknown to a part of society. Therefore, at Urbanitae, we clarify some doubts and mistakes that may arise when investing in real estate crowdfunding for the first time.
1. Not choosing the right platform
There are several platforms, but not all operate the same way. It is crucial to choose a company with a team of experts who advise the user at all stages of the process. Additionally, the platform should offer assets that meet the investors’ needs, whether by type or project differentiation.
2. Making too small an investment
The real disruption of crowdfunding is that any citizen can invest in large real estate projects, typically reserved for professional investors with large capitals. Therefore, although crowdfunding allows for investing in an asset with a small amount, it is advisable to invest an amount that allows for optimal profitability of the product within our means. Despite the risks, the investment is backed by a tangible asset, which is the property itself. Moreover, logically, a larger investment in a crowdfunding project makes you the owner of a larger percentage of the asset.
3. Not fully understanding the product
Not knowing how the investment process works, specifically the timelines to make a profit and recover the invested money, is a common mistake when making a first investment. Therefore, it is crucial to be informed and clear about the project’s strategy, exit timelines, and how it will generate money for you.
For example, a project aiming to generate income through rentals might start generating money from the first month of investment (in the case of acquiring an already rented property, for instance). However, generally, the principal recovery period will be longer. At Urbanitae, usually, rental projects have an investment period of at least 3 years, after which the property is sold, and the invested money and any profits (if any) are recovered. It’s important to note that the initial investment cannot be recovered until the asset is sold.
In the case of capital gain projects, profitability is sought solely through the sale of the asset, and no money is generated during the investment. A basic example of this type would be acquiring an old property to renovate and sell. This would typically have a timeframe of between 10 and 24 months, depending on the complexity of the renovation.
4. Not knowing the risks of each investment well
You must ensure that the platform you invest in is transparent about the risks of each project. A serious real estate crowdfunding company will always keep the user informed and provide advice at all times.
5. Believing that returns are always fixed
It is also a mistake to think that merely investing will always yield a fixed return. Returns are only guaranteed in loans with a predefined interest rate, such as financing a developer’s project. Returns in real estate crowdfunding projects are estimated and depend on market conditions at the time of sale. Remember what we mentioned in point number 4, if the crowdfunding company specifies otherwise, you may face unpleasant surprises.