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Investing in real estate is increasingly popular all over the world. For example, in Estonia merely 20% rent their apartments and the rest own at least one type of real estate. And crowdfunding brings real estate investment into focus by enabling anyone to invest in real estate as long as they have some available funds to invest.
What is the role of an SPV when investing in real estate?
Investing in real estate offers almost limitless opportunities with many different types of projects to select from the market. Here are a few examples:
- Pärnu street 457 – investors funded the purchase of a property with the goal of changing the detailed plan, increasing the value of the land plot and then sell it with a profit.
- With Sipelga 3 the objective was to fund the development of an apartment building. Investors have exited from this project and received their full expected payments.
- L. Koidula 32 project however sought investments to finish the design process for a building in need of renovations and then apply for a building permit. This project also had a 1st lien mortgage set in favor of the investors.
In short, crowdfunding enables investing in real estate that the investor itself could not afford. But one of the downsides is not having ownership of the property – it is quite usual for several hundred to a thousand investors to invest into a single project on Crowdestate platform. Taking all of the investors into notary and marking them as mortgage holders would be extremely costly (if not impossible), very time consuming and would result in a lower yield for the investment.
This is where an SPV (single purpose vechicle or special purpose vechicle) comes to aid. The investors signs a loan agreement with the SPV instead of the company seeking funding. This is legally speaking the simplest way to enable many investors to invest into one project. And because a new SPV is created for each project, it enables to keep control over the finances and separate risks between different projects on the platform. This also means that in case of an SPV, Crowdestate takes the role of the lead investor while also providing a thorough analysis and background research (due diligence) to the projects.
Secured loan, unsecured loan or equity investment?
The risks of real estate crowdfunding projects can vary by a great deal. There are secured or unsecured loans and even equity investments on the market. So, here is a short recap of what each of these means for the investor:
- Secured loan – a collateral is offered to secure the loan. The collateral can be real estate or some other asset, stock of goods or something else suitable. With this type of loan investor is the first in line to receive their payout, and in case of any problems the collateral can be sold to minimize losses. However, the existence of collateral means that the risk (and therefore the yield) is lower and one should definitely investigate the asset that is offered as collateral.
- Unsecured loan – while mortgage holders are usually first in line to receive payments, an unsecured loan means exactly that. It is not secured by collateral. This means that the interest rate offered should be higher than for a loan that is secured. When the project is unsuccessful, there are no assets to sell to recover any funds (i.e small loans). In this case one should pay a lot of attention to whom they are investing their funds in and how well the platform is equipped to handle problematic customers.
- Equity investment – with this type of investment one should note the structure of liabilities – the company will pay debts to employees and creditors first and only then investors may receive their payments from the remaining assets of the company. In case of failure, there is a real possibility that the earnings of the investor are reduced to a 0. When the project succeeds however, employees and creditors usually receive a fixed interest rate while the equity investor earns more. So, in this case one should make sure that they assess the probability of failure. Is the project understandable? Are the numbers presented in the project realistic?
As a rule of thumb, it is good for an investor to remember – the lower the risk of the project, the lower the expected yield. And if you are considering investing in real estate that offers a 20%+ yield per annum, be sure to be very critical about the contents of the project before investing. Most likely it is not a secured project meaning a significantly higher risk level for the investor.
So, be sure not to look at just the yield but rather the investment! It is important to always know where you are investing in, who you are trusting your money with and to be realistic in terms of expectations. All of these three types of projects can be found on Crowdestate plaform in our “Invest” section.