Crowdinvesting: high-yield real estate financing for private investors?
Low interest rates on the capital market are gradually becoming a threat for savers.
Investment in tangible assets seems advisable – real estate in particular is often recommended by financial experts.
With the help of crowdinvesting, even small amounts of capital can be invested in real estate. In addition to a lush return, however, some dangers await the savers.
Everything you need to know about crowdinvesting in real estate, and what advantages and disadvantages it offers private investors, you will learn in this article.
Historically low interest rates: the savers' dilemma
Low interest rates on investments
Anyone hoping for a sufficient return cannot continue to rely on fixed-interest financial products such as fixed-term deposits or overnight money.
These are still safe investments, but the low interest rates ensure that a creeping expropriation of savers is taking place – the return is lower than the inflation that is slowly picking up again.
Endowment life insurance policies also appear to be hardly suitable for making sensible provisions for old age. The guaranteed interest rate has been gradually adjusted downward in recent years; experts doubt that life insurers will even be able to generate this low interest rate if the low-interest period continues.
Experts give a clear answer as to how investors should invest their money:
Real assets have the decisive advantage of being able to decouple themselves from the general interest rate development of the capital market – the value development depends almost exclusively on the demand. Real estate in particular has seen high value growth over the past few years. For private investors, this is only a small consolation, because there is usually not enough capital available to be able to make larger real estate deals.
Until now, anyone who wanted to invest "concrete gold" had to opt for real estate funds – and accept at least two disadvantages:
- A considerable part of the generated return remained with the banks.
- The selection of the concrete real estate projects took place by the credit institute.
At this point, the so-called crowdinvesting opens up new opportunities for investors.
For the first time it is possible to invest comparatively small amounts starting from 500 euro into real estates. For private investors this option is thus already interesting, if the financial means are manageable.
Crowdinvesting is an association of investors who finance a specific real estate project at least partially. The developer usually resorts to mixed financing, including bank loans. Potential investors can view the expose of specific projects via an online platform and invest accordingly.
One of the advantages is that the project selection can also be made a little idealistically. For example, it is possible to fund the construction or renovation of a property in one's own hometown.
Screenshot from exporo.de – Here: Portfolio of different construction projects
The advantage of the Crowdinvesting platform is that the risks are classified in different categories.
The categorization is made thereby from "AA" for an almost safe repayment up to "F" for a high-risk project. Because also with a comparatively solid real estate investment must be calculated with a loss risk not to be underestimated.
The maturities are mostly at least 12 months, the annual interest rates are around 5 to 6 percent. In view of the current interest rate environment, these are therefore quite dreamlike returns.
Retirement provision via crowdinvesting? Experts urge caution
Is crowdinvesting a good investment?
However, experts hardly assume that the entire capital for retirement provision should be invested in real estate via crowdinvesting.
The main problem is the fact that the loans are usually subordinated loans. As the name already indicates, these are loans that are repaid only with a very low priority in the event of possible insolvency of the developer. The obligations are so low that banks will even accept such a subordinated loan as equity capital.
For this reason, the paradoxical situation arises that capital generated through crowdinvesting actually leads to an increase in the creditworthiness for the construction project. The developers buy this improved credit rating through a higher interest rate, which is granted in the context of crowdinvesting.
If the loans are repaid reliably and on time, this is a win-win situation. If, on the other hand, the developer runs out of money, the investors can assume with some certainty that they will suffer a total loss. Consequently, it hardly seems surprising that many experts also only advise investing as much money as seems bearable in the event of a loss.
In addition, it is advisable – as with any other investment – to diversify the investments. If different projects are supported, the return on one construction project can possibly compensate for the possible loss of another real estate project. In addition, it is not a forced advantage that the selection is made by the investor. Those with little expertise in the real estate business are likely to have difficulties in selecting the right projects.
Last but not least, of course, there is still the risk that the currently booming real estate market will lose momentum. At present it seems still exaggerated to speak of a real estate bubble, ever more frequently the present value development is seen particularly in Toplagen critically.
Crowdinvesting for startups: experts advise against it
Investing in startups?
Not only an investment in real estate is possible, also companies can be financed via crowdinvesting.
Unlike the better-known crowdfunding, however, the focus here is also on the return on investment. This is by no means a "donation", as is usually the case with crowdfunding. It is much more a matter of promoting a thoroughly desirable and promising project and at the same time generating a handsome return on investment.
In principle, however, it is high-risk capital, which was still reserved for companies a few years ago. Here, too, it is difficult to assess the extent to which crowdinvesting benefits investors and companies.
Apart from the comparatively high interest rate, the funded start-ups must take into account that many new co-owners also mean that a higher degree of co-determination is demanded.
In addition, transparency is also required, which may not appeal to every idea generator: In order to promote one's own product or service to investors, the business idea must be presented quite openly – which is not likely to escape the attention of competitors either.
In addition, experts consider the risk of failure to be particularly high in the case of start-ups. At the same time, financiers hardly profit in the event of a possible success; the profit sharing of shares is far greater here.
Experts advise in any case to study the investment contracts more closely. Unlike conventional financial contracts, crowdinvesting is still a little-known form of financing, at least in this country, and the contractual arrangements vary widely among different providers.
Successful growth market: crowdinvesting is becoming increasingly popular in Germany
In the USA, crowdinvesting has already established itself as a completely new form of financing.
The construction of a high-rise building, which was realized via the "Prodigy Network", is often cited as a successful example in this context. In the process, 3.800 private investors for raising the equivalent of around 155 million euros. In global terms, this is the largest single amount raised for a real estate project via crowdinvesting.
In Germany, experts likewise believe that growth is likely to continue for some time – currently, the volume of funding generated via crowdinvesting is increasing rapidly: while only €20.1 million was raised in 2014, the figure rose to €45.9 million in 2015, before even reaching €63.8 million in 2016, €40.3 million of which was in real estate investments.
One cause that inspires some optimism among financial experts: crowdinvesting platforms are seen as transparent and simple – which are not necessarily qualities previously attributed to the finance industry.
Many people express genuine dissatisfaction when asked about the quality of past financial market products. Especially if the interest rate situation does not change soon, the run on crowdinvesting is likely to intensify further.