Real estate crowdfunding: the new frontier for investments in the sector
16 March 2023 - Insights

Real estate crowdfunding: the new frontier for investments in the sector

Real estate crowdfunding is revolutionizing the way people invest in real estate, demolishing traditional barriers and creating fresh opportunities for profit. But how does it work exactly? And what should you expect?

In today's economy, where protecting one's savings from inflation is more important than ever, the real estate sector can provide a relatively safe and profitable channel to invest. But alongside traditional methods such as purchasing property or buying shares in real estate funds, a new form of real estate investment has emerged that allows individuals with smaller capital to generate income: real estate crowdfunding.

This is a type of investment where multiple parties come together to fund a real estate project, without all the bureaucracy typically associated with purchasing a property. It's a significant innovation that presents interesting opportunities to invest one's savings digitally and straightforwardly, though not without risks.

What is real estate crowdfunding?

Real estate crowdfunding is a type of alternative investment that enables individuals to participate in real estate projects alongside other investors through online fundraising, without requiring substantial amounts of capital.

This way, investors can earn a profitable return, while real estate operators have the chance to obtain funds from investors without relying solely on banks.

Apart from its simplicity, the real strength of real estate crowdfunding is its ability to democratize access to investment opportunities: anyone can participate regardless of their financial capabilities or level of expertise.

Real estate crowdfunding was introduced in Italy a few years after its launch in the United States in 2012. According to the Crowdfunding Buzz Observatory, this investment model has raised more than €145 million in our market in 2022, with a 47% surge from the previous year, which confirms the significant interest it has generated.

How to participate in a real estate crowdfunding project

There are essentially two ways to invest in real estate through crowdfunding, each with different objectives and regulations.

Debt real estate crowdfunding allows investors to finance real estate projects and recover their invested capital plus interest, often at higher rates than those offered by traditional types of investment.

Equity real estate crowdfunding, on the other hand, offers investors the opportunity to buy shares in a real estate project and become a partner in the development company. This partnership allows investors to participate in profit distribution.

If you're interested in real estate crowdfunding, there are several online platforms that offer a variety of carefully selected projects. If you're interested in real estate crowdfunding, there are several online platforms that offer a variety of carefully selected projects. Some notable platforms include Rendimento Etico, which raised over €21 million last year, Recrowd, which specializes in debt real estate crowdfunding with a minimum investment of €250, and Build Around, which focuses on equity real estate crowdfunding.

Advantages of real estate crowdfunding

It is undeniable that this type of real estate investment offers several advantages for both investors and operators in the sector.

Firstly, through this form of investment, it is possible to participate in large projects with relatively small amounts of capital, enabling portfolio diversification across multiple operations. Additionally, returns on investment are potentially high, averaging around 10%.

Furthermore, investors do not require any particular expertise in real estate, as crowdfunding platforms conduct comprehensive analyses for each project. Not to mention the absence of all the bureaucracy that those who purchase an asset must deal with.

For operators in the real estate sector, crowdfunding offers an ideal solution to raise funds for their projects without relying on traditional banking institutions. But there’s more: crowdfunding also serves as a valuable marketing channel, enabling operators to reach a broader audience, increase the visibility of their activities, and showcase their business opportunities.

The potential risks of real estate crowdfunding

While investing in real estate crowdfunding can offer a great opportunity to diversify your portfolio, it's important to acknowledge that it comes with certain risks.

First of all, it’s crucial to keep in mind that the asset you’re investing in may lose value, and this can occur unexpectedly for various reasons. The potential for devaluation exists throughout the investment process, including the initial stages.

It is also important to take into account the risk of not being able to recover the funds within the anticipated timeline due to potential project delays, which can lead to liquidity risk.

And then there’s the risk of bankruptcy, which can complicate things even further. And then there’s the risk of bankruptcy, which can complicate things even further. While in debt real estate crowdfunding investors act as creditors and have the right to demand repayment of their funds (though with various inconveniences), in equity crowdfunding, investors are partners and may be required to contribute their own capital in case of financial difficulties.

So, is real estate crowdfunding a good investment?

Real estate crowdfunding can be considered an attractive alternative to traditional investment tools, due to its low entry thresholds and potential for high returns (at least in theory).

In addition to being a means of investing, crowdfunding can also serve as a tool to support urban redevelopment initiatives that benefit both the community and the country's real estate heritage. This is evident through the success of various debt real estate crowdfunding campaigns aimed at revitalizing small Italian villages.

However, it is important to bear in mind that real estate crowdfunding, like any other type of investment, comes with inherent risks. Therefore, it is advisable to use it as a means of diversifying your portfolio by allocating smaller amounts to multiple real estate projects across different sectors and asset classes, thus reducing the exposure to risk.