The real estate crowdfunding is a specific tool within crowdfunding that has naturally distinguished itself over time to the point of deserving a separate label from generic ones. In essence, however, it is still Equity or lending crowdfunding applied to real estate projects. 

Why has real estate crowdfunding become increasingly used by real estate firms, development companies and investors to finance construction, renovation or redevelopment operations? Crowdfunding responds to specific needs of operators seeking more agile, targeted and scalable financial solutions.

Let's find out what opportunities underlie the success of the real estate crowdfunding, but also the risks to watch out for when planning and conducting your own capital raising in real estate.

Real estate crowdfunding: equity and lending

They fall within the scope of the real estate crowdfunding projects such as:

• The purchase of a property for the purpose of income-generating purposes
• The purchase of property for the purpose of resale
• the renovation of one or more properties
• energy upgrading of one or more properties
• the conversion of a property
• ...

These are time-consuming and expensive operations, to support which a company may decide to launch a crowdfunding capital raising, choosing between the two main ways:

• Equity crowdfunding: investors become partners in the company-or more often the special purpose vehicle (SPV)-that manages the project. They will share in the gains (if any) from the sale or lease of the property.
  
• Lending crowdfunding: investors lend capital to the company and receive a fixed-rate return over a defined time frame, usually between 12 and 36 months.
  

The choice between the two models is not just a financial issue, but a strategic one: we discussed this in theArticle dedicated to the comparison of equity and lending in real estate.

Traditionally, this sector has been characterized by high barriers to entry, mainly due to large capital requirements. For businesses, The democratization of access to the housing market and the fractionalization of ownership or credit enabled by crowdfunding result in the ability to tap into a larger and more diverse base of lenders, accessing alternative financing channels than traditional banking channels.

But the Real estate crowdfunding opportunities for enterprises do not boil down to this: let us delve into all of them.

Crowdfunding opportunities for the real estate industry

1. Raising complementary funding

A real estate transaction requires large investments, which can be sought from several different sources. In a real estate transaction, for example, a bank finances perhaps only 60-70% of the value: crowdfunding can cover the equity portion required to access a bank housing loan, allowing the remaining capital to be raised flexibly and with greater control than seeking financing partners or investment funds.

Lending crowdfunding, on the other hand, can be used as a tool to obtain liquidity in a short time waiting for other sources of financing. This speed is a crucial enabling factor for the initial stages of real estate projects, such as acquiring land, covering design costs or starting construction.

The two crowdfunding options available result in greater flexibility and financial autonomy, due to the ability to build capital raising on the terms of the company, which can decide whether and how to give away shares, set timing, calculate costs independently and accurately, etc.

2. Speeding up the operation time

The use of crowdfunding as complementary financing makes it possible to speed up the timetable and send certain phases of the operation forward, without blocking it in its entirety: for example, to avoid letting licenses or permits expire or to build a first lot and demonstrate a certain level of construction progress in order to obtain tax benefits or to start the sales campaign.

In real estate, timelines are important, and projects can often be divided into multiple phases that with multiple successive crowdfunding campaigns can be funded and implemented one at a time according to specific project needs.

3. Access small investors and engage potential customers

A real estate crowdfunding campaign can be very attractive to small investors, offering basic entry tickets of even €500 or €1,000. This also allows local stakeholders or end customers (e.g., future residents or buyers of the property) to be involved in the financing phase as well. Personal involvement can thus accelerate the sale of housing units.

4. Validate the project 

Raising capital in equity crowdfunding also functions as an indirect validation of the project: if dozens or hundreds of investors believe in the business plan and projected margins, the project also gains more credibility with suppliers, lenders, or business partners.

5. Increasing marginality 

For real estate transactions with total capital between 1 and 5 million-typical of many local developers-crowdfunding is an affordable tool to increase leverage, improve profitability and reduce risk to the business. 

6. Territorial marketing tool

A well-communicated real estate crowdfunding campaign can turn into a Branding campaign for the real estate operation: generates visibility, creates community and improves the reputational positioning of the promoter in the local market.

7. Replicability at scale

A successful campaign builds a community of loyal investors. This asset can be reactivated for future deals, accelerating the time to raise and reducing capital acquisition costs.

8. The opportunities of tokenization

With the emergence of the tokenization in the world of crowdfunding, new opportunities are opening up for real estate. The ability to digitally represent, in the form of tokens on blockchain, ownership shares or economic rights attached to a real estate asset can make real estate crowdfunding campaigns even more attractive.

Tokenization, for example, would enable the following. digitally fractionating a property - or a corporate vehicle that holds it - making it accessible even to retail investors with very little minimum capital (e.g., 100-500 euros), eliminating bureaucratic and notary intermediation and making the stock more liquid.

More generally, the convergence of crowdfunding and tokenization can make real estate fractionation more efficient and scalable, not only for projects under construction for sale but also for fractional management of income properties, opening up new forms of participation, governance, and value distribution.

The potential risks of real estate crowdfunding

1. Regulatory constraints and management of SPVs

In the case of equity, the establishment of a special purpose vehicle (SPV) is almost always necessary to isolate the risk, separating the real estate project from any other activities of the company, and to provide investors with more transparency regarding the use of their capital. This involves civil, tax and notary requirements, as well as independent accounting management. In addition, bylaws must be constructed with clauses that protect the enterprise, for example by providing for non-voting shares or aggregator vehicles in the case of equity crowdfunding.

2. Repayment obligations and reputational risk 

With lending crowdfunding, the company commits to pay back the principal with interest in a set time frame. Delays in work, problems with building permits, or slowdowns in property sales are not uncommon eventualities and expose the company to the risk of late payments to investors, which damages reputation and can jeopardize future collections.

3. Overt costs and hidden costs

Notary fees, legal advice for structuring the transaction, platform fees, costs of communication and marketing... an effective campaign requires an initial budget; you don't start from scratch. For example, for a 1-2 million real estate transaction, the budget can start at 20,000.

It should also be considered that the interest rate of lending crowdfunding is generally higher than the average bank rate.

4. Difficulties in managing investors

In equity crowdfunding, even though members have no administrative rights, it is critical to maintain a transparent relationship with regular updates. The platform generally offers communication tools, but legal and operational responsibility remains with the company.

5. Margin of uncertainty

Crowdfunding is a mode of raising capital that has a greater margin of uncertainty than traditional funding sources. Making financial commitments to your real estate project by relying on capital raised in crowdfunding exposes you to the risk of running out of needed resources at the time they are needed due to campaign failure.

In the case of equity crowdfunding, moreover, technical time must be considered, which is significantly longer than in lending crowdfunding.

6. Market risk

A real estate transaction can take years to complete, and over time there can be a devaluation of the property, due to market crises or valuation errors, with negative consequences for the return on investment or the sustainability of the debt incurred.

Conclusions

Enterprises must conceive real estate crowdfunding as a building block within a financial strategy broader and more articulated, planning how and when to integrate other sources of capital, such as bank financing or equity from institutional investors. The crowdfunding campaign must therefore be orchestrated not in isolation, but in synergy with the other sources, within the framework of the operation as a whole, so as to avoid hiccups and study a sustainable strategy.

In our articles on the examples of equity campaigns and of lending crowdfunding you can also find cases of successful real estate crowdfunding.