Real estate crowdfunding: What is it and how does it work?

On other occasions we have talked about the importance of investing your retirement savings in lots or real estate projects, as these bring great returns and protect your capital from inflation and the passage of time.

Undoubtedly, to make the right financial decisions, it is necessary to carefully analyze the market options, even the most innovative ones such as crowdfunding, which is becoming more and more noticeable in the financial field.

Investing in Blue World City will always be the best option to safeguard your money, however, on many occasions you intend to invest but the lack of sufficient capital is a limitation, this is where a crowdfunding project can be the solution.

In this article we will talk to you in detail about what real estate crowdfunding is, what are its advantages and disadvantages, and if it is suitable for your investments in real estate.

What is real estate crowdfunding?

Also called collective financing or collective real estate funding, it is defined as a method of investment in real estate, made up of the capital contribution of a large number of people for a certain project.

It is done through online investment platforms; this allows users from anywhere in the world to invest in real estate projects. These fintech platforms thoroughly investigate the veracity of projects – and the real estate developer – before presenting them to users.

Crowdfunding emerged as a novel strategy managed through websites created for this purpose, such as the world-renowned Kickstarter or the Mexican Mondadori.

These sites encourage crowdfunding, or seeking micro patronage in Spanish- to finance a project in exchange for rewards, according to the percentage of investment they have made. Most of these translate into annual returns that will depend on the terms and conditions of the project.

Recently, in the real estate sector, this form of collective financing has been adopted as an alternative to requesting a grant or a loan from a financial institution, giving space to the appearance of real estate crowdfunding.

This type of financing allows a group of investors to participate in the acquisition of, for example, an investment land, contributing different percentages of capital for which they will obtain —in a given period of time— a return in the same proportion as the amount contributed.

This is very attractive for many investors, since the return on investment in the real estate business is high if the property to buy is chosen correctly.

Types of crowdfunding

Collective financing can be grouped into two types: financial, when the investor seeks to obtain returns, and non-financial, as in the case of altruistic donations.

When it comes to earning a return through real estate crowdfunding, there are several ways to participate in:

  • Capital investment. In this way, an investor contributes a percentage of the capital necessary to make the purchase of the real estate, with the benefit of obtaining profits.
  • Loan or crowdlending. In this case, money is provided on loan to those who wish to finance their purchase or real estate project, with the aim of recovering the investment in the future and with the advantage of receiving interest income as the debt is in force.
  • Recovery in shares. When participations or shares of the financed project are received.
  • Reward. It is about contributing money to obtain a later product or service.

What are the advantages and disadvantages of crowdfunding?

As it is a relatively new type of financing, it is advisable to review its pros and cons before deciding to venture into it.

Advantage

  • Wider word of mouth promotion. As there are several investors, they can share useful information about the project, which serves as “word of mouth” and works as free publicity for subsequent marketing, rental or sale.
  • Possibility of acquiring more than one piece of land to scale a business. Several investors allow a larger capital to be raised and therefore be able to acquire hectares or several lands together, which can later be divided or generate a greater return among investors. One option of land that lends itself to this is the macro lots.
  • Investing in real estate without going undercapitalized. Although each participant of the investment does not acquire the whole, it will obtain returns from it and will do so without having used large sums of money.
  • Avoid bank loans. As long as the legal certainty of the rights and obligations of those involved is maintained, a reliable real estate company – and with personalized financing plans – can adapt to the needs of the real estate project that will be developed.

Disadvantages

  • Tax confusion. In the case of collective financing, both the investment expenditure and subsequent returns must be declared as income, expressing their origin. It is important to have the advice of an expert accountant in the pertinent tax updates to declare this type of income.
  • Legal uncertainty. If a contract is not made in which the obligations, rights and subsequent returns of the participants are expressed, legal uncertainty can cause legal problems that can range from not knowing how to deed the assets and define who it belongs to, to knowing who should pay. taxes.
  • Difficulty reaching agreement among investors. Sometimes the hardest part is choosing where and in what to invest. When choosing the key points to invest in a commercial or residential land – in order to develop a real estate project – it is important to have the advice of experts on the subject.

Differences between crowdfunding and a bank loan

A loan is a financial instrument granted by a credit institution, which can be a bank or a Multiple Purpose Financial Company (SOFOM).

The main difference is that when acquiring a loan, the borrower is obliged – through a contract – to comply with a series of terms and clauses, usually inflexible, with possible penalties in case of non-compliance. In the case of crowdfunding, an agreement is made between individuals.

The high amount of capital, necessary to carry out the acquisition of an asset and development of the subsequent real estate project, is usually the factor that inclines the investor’s decision for collective financing options.

When making a shared investment through crowdfunding, it is not necessary to contract a loan with a financial institution avoiding, for example, the payment of high interest rates, but the realization of a contract between all participants should be considered.

Steps to invest in a real estate crowdfunding

Real estate crowdfunding exists thanks to web platforms, through which users access information about various projects to invest small amounts of money.

Here are the steps to follow to invest in a crowdfunding project:

1. Research the reputation of the platform

As we have mentioned in other articles on our blog, before making any type of financial investment, it is advisable to thoroughly investigate all the aspects involved, from the platform, the project, the international market, among others.

For this step you can review the reviews or recommendations of other users, since many real estate crowdfunding platforms promise great benefits, but their projects or developers are of dubious reputation.

To avoid going through bad times and the risk of losing your investment, the first step will always be to ensure the veracity of the data offered by the platform.

2. Analyze the investment model

In Mexico, the platforms offer different investment systems. With this as a basis, you should investigate which one is attached to the objectives you want to achieve with the operation.

Some examples of this are the types of crowdfunding that we talked about at the beginning of the article.

3. Check the goodwill

Once you have defined the investment model that suits you and you have ensured the reputation of the platform, the next step is to investigate the real estate project of your interest, since this can range from the construction of a commercial plaza to a private one residential or similar.

It takes into account the main aspects that the property must have to be profitable, and guarantee that the capital gain will increase. Some of them are:

  • Location
  • Accessibility
  • Services
  • Amenities
  • Infrastructure

4. Check the deadlines

Verifying the deadlines is of vital importance, because once the investment has been made, the money used in it will not be available for a period of time that may vary according to the model that has been chosen.

To do this, you must carry out an analysis of your personal finances, and invest an amount that does not affect your pocket.

Being aware of the deadlines implies having a higher or lower performance, and the dates on which it will be received.

5. Consider diversifying your investments

Within real estate crowdfunding there are various investment opportunities that will allow you to diversify your money in various projects.

Since investments from a thousand pesos can be made in some platforms, the opportunities to allocate small amounts to various projects increases.

Frequent questions

We collect the most frequent questions that users ask themselves when researching about crowdfunding.

Is crowdfunding safe?

To protect users and have greater control, as well as limit investment risk, these platforms must be regulated and supervised by the National Banking and Securities Commission (CNBV).

This institution is in charge of reviewing the investment protocols, commission collection and related services.

How much is the performance of real estate crowdfunding platforms?

On average, the performance of these platforms can be between 12% and 22%. This is subject to various factors such as the payment of commissions, the type of project and investment model, as well as the amount invested.

What is the Fintech Law?

This law published on March 9, 2008, is in charge of regulating financial technology institutions, in agreement with the National Banking and Securities Commission (CNBV).

Its objective is to improve the existing competition conditions in the country’s financial system, as well as to increase the level of financial inclusion. This includes crowdfunding institutions like real estate crowdfunding.

Investing with the experts is the best option

Although real estate crowdfunding offers attractive options for those who do not have a large capital to invest, the truth is that, for those who do not want to risk exposing their capital in this type of investment, the best option is to acquire land through financing.

There are serious real estate companies with a great history of success and market studies that back your money, and that give you the opportunity to obtain high returns with developments in the best areas of southeast Mexico.

At BMF Inversions we have a team of experts in real estate projects with extensive experience as developers , and the legal knowledge to clarify any questions you may have when deciding where and how to buy land.