You've probably heard of real estate crowdfunding, an innovative way to invest in real estate that is becoming increasingly popular. But do you really know what real estate crowdfunding is and how it works?

Crowdfunding is a form of micro-patronage that allows individuals with personal or professional projects to secure funding without resorting to banks or financial institutions. The system is very simple: the person who needs funds explains their project and what they need to bring it to fruition, and tens, hundreds, or thousands of micro-patrons contribute their small part to make it possible. These contributions can be charitable or be rewarded in some way in the future.

That same logic, applied to the real estate market, gives rise to real estate crowdfunding: a collaborative investment system that allows for the purchase of properties or investment in real estate developments by pooling contributions from several individuals. This cooperative investment will generate capital gains in the future, when the property is sold or rented.

What is real estate crowdfunding?

Real estate crowdfunding is an increasingly popular system among investors because it allows them to invest in real estate with little capital. In fact, it enables participation in real estate investment projects starting from just 50 euros through so-called real estate startups or proptech, which are digital platforms that act as intermediaries between investors and real estate developers.

These platforms typically operate entirely online, meaning they handle market analysis and find the best investment opportunities so that the client (the investor) doesn't have to worry about anything. This allows individuals who are not very familiar with the real estate market to invest with a certain degree of security and convenience.

Although it is still a very new real estate investment system, real estate crowdfunding is certainly gaining significant traction. According to Statista data, in 2021 alone, real estate crowdfunding moved a total of 822 million dollars in Europe. In Spain, real estate investment accounts for 17.55% of the total money moved by crowdfunding.

Given that real estate crowdfunding is simple, profitable, and accessible to everyone, it is expected that more and more people will venture into real estate investment using this system. Real estate consultancy Facts Factors, for example, predicts that by 2027 the figure will grow by more than 30%.

How does real estate crowdfunding work?

Now that we know what real estate crowdfunding is, let's look at how it works: the operation of real estate crowdfunding follows the same premises as crowdfunding for personal or professional projects.

The starting point is a project that requires funding. This could be a real estate developer who wants to build or renovate a property, or a company that wants to buy an abandoned village and convert it into a tourist resort, or any other project. It just needs to catch the attention of a real estate startup that believes it could interest its clients. This company selects the project and publishes it as an offering.

The investor accesses this offering completely digitally, from a computer or mobile device, and makes an investment. This investment can take the form of a loan with a specific interest rate or involve a share in the developer's future profits.

Typically, real estate crowdfunding allows investments from very small amounts, affordable for anyone, and there are also limits. In Spain, the law sets the investment limit for non-professional investors at 1000 euros for a single project and 10,000 euros in total, divided among 10 or more projects.

Afterward, you just have to wait to receive the profits. The profitability in real estate crowdfunding ranges between 8% and 15% annually.

Advantages of real estate crowdfunding

Real estate crowdfunding, as we are seeing, offers certain advantages over traditional real estate investment models. These advantages are as follows:

• It is possible to invest without large capital. While traditional investment methods required significant capital (at least enough to acquire a property), real estate crowdfunding allows for very low investments, in some cases as little as 50 euros.
• The ability to invest with very little capital makes investment accessible to middle and even low-income individuals, democratizing access to the real estate market. Furthermore, investing through a real estate crowdfunding startup allows you to invest without extensive knowledge.
• Facilitates the fundraising process for real estate companies and developers. Thanks to real estate crowdfunding, small projects can be launched without bank support, or real estate crowdfunding can be combined with bank loans. Both financing methods are compatible and can be complementary.
• Simplifies contact between small investors and developers and real estate companies. Proptech companies perform the market prospecting work, searching for projects that investors previously had to find themselves. This way, anyone who wants to invest can do so by accessing a pre-selected and reviewed project offering.
• Allows investment in other markets. Real estate crowdfunding operates transnationally, meaning you can invest in real estate projects worldwide without leaving your home. This was not previously accessible to small investors, as it required studying the market in question.
• Allows for investment diversification. By not requiring the purchase of a property or a large capital outlay, real estate crowdfunding allows invested capital to be spread across different projects. This generally leads to greater investment security, as potential losses from one project could be absorbed by profits from another.
• Lowers the financial costs associated with the operation.

Disadvantages of real estate crowdfunding

Obviously, real estate crowdfunding also has some disadvantages compared to traditional investments, and it's worth keeping them in mind. The most important ones are:

• It is still a form of investment and, therefore, carries risk.
• It is a very recent form of investment, so it is not properly regulated everywhere. The regulations governing it in Spain are very recent, dating from 2015, and likely still have some flaws, which can generate some uncertainty.

Different types of real estate crowdfunding

Although they all follow the same parameter, there are different types of real estate crowdfunding. These are:

• Donation. In this case, there is no investment in exchange for profitability, but rather a non-profit donation of funds. It is the simplest type of crowdfunding for obvious reasons.
• Crowdfunding. Investors contribute an amount for which they expect to receive a product or service in the future. It is not very common in the real estate market, but it is similar to buying a home off-plan or purchasing a condominium. Probably the most popular model of real estate crowdfunding, it resembles a loan where, once the project is completed, the contributed capital plus the agreed interest is received.
• ‍Equity participation in the company. Very similar to buying shares. Returns depend on future profits and can be variable.
• ‍Crowdfacturing. In this case, the investment is usually short-term, and the invested capital entitles the investor to receive the amount of a deferred invoice from the company. That is, the company sells its product when it's available, but the investor advances the money from the sale.

Tips for investing in real estate crowdfunding

Now that you understand what real estate crowdfunding is and how it works, it might have caught your attention. But before you start, it's crucial to be aware that even though it allows for a low and convenient investment, it is still an investment system and carries risks. Therefore, it's important to follow some basic tips to reduce them:

• Inform yourselves properly about the different real estate crowdfunding platforms, since, as we saw in the previous section, not all of them are the same. Knowing how each one works and the exact investment conditions will prevent you from encountering "unforeseen" problems in the future.
• Do not concentrate your investment in a single project. The specific characteristics of this type of real estate investment allow a small investor to spread their investment across several projects without needing a large amount of capital. Diversification reduces the total risk in operations and has other advantages, such as being able to operate simultaneously in different currencies.
• Carefully study each project offered. While it's true that one of the advantages of real estate crowdfunding is that it allows investing without extensive market knowledge, information is always valuable. As we said, every investment carries risk.

Who can benefit from crowdfunding?

Crowdfunding can be utilized by a wide variety of individuals and organizations. Here are some examples:

1. Entrepreneurs and Startups:
   • Seed Capital: Entrepreneurs can use crowdfunding to raise initial funds to launch their businesses.
   • Product Validation: Test market acceptance for a new product or service before launch.
2. Small and Medium-sized Enterprises (SMEs):
   • Expansion: SMEs can use crowdfunding to finance the expansion of their operations, develop new products, or enter new markets.
3. Investors:
   • Diversification: Investors can diversify their portfolio by investing in different projects through crowdfunding platforms.
   • Access to Opportunities: It allows investors to access opportunities previously reserved for large investors or institutions.
4. Creatives and Artists:
   • Artistic Projects: Artists, musicians, filmmakers, and other creatives can fund their projects, such as albums, films, exhibitions, and more.
   • Engagement: Build a community of followers who feel part of the project.
5. Non-Profit Organizations:
   • Fundraising: NGOs and charitable organizations can use crowdfunding to finance specific projects, aid campaigns, and other initiatives.
   • Awareness: Increase the visibility of their causes and attract new donors.
6. Real Estate Projects:
   • Developers: Developers can use real estate crowdfunding to finance new developments, renovations, and other real estate-related projects.
7. Innovators and Technology Developers:
   • New Technologies: Innovators can fund the development of new technologies, applications, and other tech products.
   • Prototypes and Development: Fund prototype creation and initial development before seeking larger investments.
8. Community and Social Projects:
   • Community Initiatives: Projects that aim to improve local communities, such as the construction of parks, community centers, and other social projects, can raise funds through crowdfunding.
   • Social Movements: Support for social movements and campaigns that seek to bring about positive changes in society.

Generally, any individual or organization with an idea or project that needs funding and can attract public interest can leverage crowdfunding to achieve their goals.

Main real estate crowdfunding platforms in Spain

Although real estate crowdfunding is still a very new investment system, quite a few real estate startups are already operating in Spain. In fact, the number of these platforms has only increased in recent years. In 2020, there were 327, with a total of 8,700 employees. According to the 2020 Proptech Observatory, 87% of them are B2B.

While they all follow the same system, they do have certain differentiating characteristics, so if you're still unsure which one suits you best, below we explain some of the most interesting ones.

URBANITAE

Urbanitae is probably the simplest, most accessible, and most open proptech to small investors among those operating in Spain.

It is a crowdlending platform specializing in the residential and commercial real estate market. It allows investments from 500 euros and works with both rentals and properties intended for quick sale.

Its advantages include having very good projects with high profitability and a good level of customer service.

REINVEST24

Among real estate startups focused on the rental market, Reinvest24 is one of the most interesting. It has many properties spread across Europe, with a high return on investments.

STOCKCROWD IN

Unlike other real estate crowdfunding platforms, Stockcrowd In focuses on new construction development. It works with highly reputable developers and offers a good risk-return-diversification ratio.

BRICKSTARTER

Brickstarter primarily operates in the tourist rental market, seeking opportunities through Big Data analysis from platforms like AirBnB or Booking. The profitability of its projects derives from both the rental of properties and their sale.

One of the major advantages of this proptech over similar ones is that it allows investments from just 50 euros. Therefore, it is the perfect real estate crowdfunding option for small private investors looking for an extra monthly income. Furthermore, being geared towards small investors, many of whom are not professionals, it provides extensive and detailed information about each of its investment proposals.

It's the perfect platform to get started in real estate crowdfunding without taking on much risk.

ESTRATEGURU

Estrateguru focuses on the market for buying and selling loans secured by mortgages. It also allows investments starting from 50 euros, like Brickstarter, and offers properties in several countries where one can invest from Spain. Furthermore, it boasts an average return of over 10%. One of its major advantages is that its history of unrecovered loans is virtually empty. Since these are mortgage-backed loans, the property can always be foreclosed upon to recover the investment.

Other interesting real estate crowdfunding platforms include Housers, Bricks&People, Inveslar, and Inviertis.

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How much do crowdfunding platforms charge?

Crowdfunding platforms charge different types of fees depending on their business models and the services they offer. Below are the approximate fees for the platforms mentioned:

1. Urbanitae:
   • Management fee: Urbanitae charges a project management fee, which can vary but generally ranges from 2-5% of the capital raised.
   • Success fee: Upon project completion and distribution of profits, Urbanitae typically charges a success fee, which can range from 5-10% of the profits earned.
2. Reinvest24:
   • Investment fee: Reinvest24 charges an initial investment fee of 2% of the invested amount.
   • Management fee: They also apply an ongoing management fee, which can be around 1% annually of the investment value.
   • Exit fee: In some cases, there may be an exit fee when the investment is sold, typically around 2-3%.
3. StockCrowd IN:
   • Platform Fee: StockCrowd IN charges a platform fee that can range from 3-5% of the capital raised.
   • Success Fee: Additionally, they may charge a success fee upon project completion, which can be 5-10% of the profits generated.
4. Brickstarter:
   • Investment Fee: Brickstarter may charge an upfront investment fee, which is usually 2%.
   • Management Fee: They also apply a management fee that can be 1% annually of the investment value.
   • Success Fee: Upon project completion, they may charge a success fee of around 10% of the profits earned.
5. Estrateguru:
   • Platform Fee: Estrateguru may have a platform fee of 3-5% of the capital raised.
   • Management Fee: There may also be an ongoing management fee, typically around 1% per year.
   • Success Fee: Like other platforms, they may charge a success fee, which is usually 5-10% of the profits.

It's important to note that these fees can vary depending on the nature of the project, the amount of capital raised, and other factors specific to each platform. Therefore, it's advisable to review the terms and conditions of each platform before investing.

How to improve real estate crowdfunding with blockchain?

The technological evolution of recent decades has opened new avenues for the economy, and the real estate market is no stranger to this. New financing systems based on the collaborative economy and asset tokenization have emerged. These new systems facilitate real estate crowdfunding, making the market more accessible for small investors, as we will see later.

How does asset tokenization work?

Tokenizing means linking a "real" asset, such as real estate, to a token or digital asset that can be fractionalized. Simply put, it's similar to companies issuing shares, but starting from tangible or intangible assets.

These tokens are stored on the Blockchain, which acts like a gigantic ledger in the cloud. This allows for traceability: at all times, it is known when and how the token originated and who owns it. Once created, they are traded through a public offering, known as a Security Tokens Offering.

Advantages of tokenization in real estate crowdfunding

As we mentioned, tokens can be linked to any asset, including real estate, which allows for fractional ownership of properties without going through the cumbersome bureaucratic process of dividing ownership. However, when applied to real estate crowdfunding, they also offer other advantages:

• Improved liquidity levels. Provided the invested project is successful, tokenization makes assets potentially more liquid. Tokens are easy to sell through secondary markets, which allows for easier liquidation.
• Once registered on the Blockchain, the token cannot be deleted. Its traceability is excellent, and its link to its owner cannot be altered. This makes the investment much more secure and allows the investor to consult and verify their ownership rights at any time.
• Information about the asset, ownership, or transactions it has undergone is available in real-time at all times. This allows for checking compliance with legal regulations at any moment, which is crucial in a market where money laundering often occurs. Furthermore, if you work with platforms that use this system, such as Domoblock, all documents associated with the operation will also be available to you.
• Elimination of intermediaries. Blockchain enables peer-to-peer transactions, meaning it does not require intermediaries for buying and selling tokens. This simplifies processes and, consequently, associated costs.
• By dividing the asset into low-value tokens**, investment portfolio diversification is encouraged.**

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DOMOBLOCK, a pioneering company in real estate asset tokenization

The first Spanish company dedicated to real estate crowdfunding through the tokenization of properties specializing in house-flipping is Domoblock. This proptech, founded in 2021, specializes in acquiring real estate assets in poor condition or very old properties in areas of high tourist interest. The goal is to rehabilitate and renovate these properties, which have a very low purchase price, and return them to the market within an average of 6 months with a much higher value, either for sale or rent.

To carry out the renovations, this company fractionalizes the value of each real estate investment into a series of tokens, making real estate investment accessible to anyone, anywhere in the world. The minimum investment capital in Domoblock is 200 euros.

Two types of projects are offered:

-Value add: properties are purchased in prime areas (high purchasing power), renovated, and sold at a much higher price.

-Core Plus: properties are acquired in strategic areas, meaning those with high growth potential or very touristy, undergo a more basic renovation, and are aimed at quick profit. They can be quickly put up for sale (home staging), commercially exploited, or rented out.

In both cases, these are very well-located properties that are sold or rented to solvent individuals, so profitability is usually high, above 10% annually. However, the second option is generally less risky for the investor.

Therefore, if you are looking for a simple, accessible, and profitable way to invest in the real estate sector and are attracted to the idea of using Blockchain technology and its many advantages, look no further. Domoblock is the most suitable real estate startup to get started. If you're ready, you can start here in the new era of real estate investment.

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