How to Diversify Risk When Investing Through Crowdfunding Platforms
It is important to diversify your investment portfolio between different asset classes and to take advantage of the risk-spreading opportunities offered by one or another investment method. In this essay, we will discuss the general principles of investment diversification and the risk mitigation techniques offered by real estate crowdfunding platforms.
Portfolio diversification is a risk management approach that involves the inclusion in a portfolio of a number of different asset classes that are unrelated to each other, or where losses in one asset class can be offset by gains in another asset class. For this reason, it is advisable to include not only stocks and bonds in the portfolio but also other asset classes such as real estate (RE) or gold.
"A person who is resilient to larger fluctuations in their investments can allocate more of their funds to equities and choose index funds (ETFs), where management fees are lower," notes Martynas Kairys, founder of the blog "Finansai paprastai". - However, every investor, regardless of their risk tolerance, should consider real estate in their investment portfolio."
If a person is investing in rental housing, a significant amount of money will need to be allocated to this area. But real estate crowdfunding platforms offer the possibility to invest in real estate in small amounts. These investments are secured by collateral and in many cases will offer better annual returns, simpler administration and shorter investment terms.
Flow-generating Investments
The volume of investment attracted through the crowdfunding platform continued to grow in the first half of 2023. Compared to the same period last year, the growth is 63% to EUR 118 million. The amount invested in real estate projects through the crowdfunding platform grew at a slower pace - 35%, to EUR 50 million.
Investors in Röntgen's platform can diversify their funds by choosing projects at different stages of development and in different locations.
"Our platform offers investments in high-quality, lower-risk projects developed by experienced developers, as well as the opportunity to invest in new asset classes, such as aviation maintenance projects or bonds," notes Greta Zarembiene, Head of Investor Relations at Röntgen. This is relevant for Röntgen's investor community, which includes both small and beginner investors, as well as professionals who manage portfolios of EUR 3-4 million on the platform. They can diversify their investments by choosing between residential or commercial properties, projects that have just been launched or projects that have already been completed and no longer have construction risks. Investors choose according to their preference for the completeness of the collateral and the potential construction risks. A completed project is significantly more liquid than a project that is still in the planning stage or has just started development and this may influence investors' decisions.
According to G. Zarembiene, more conservative investors particularly value projects that are already generating income. These can be either rented apartments, which generate a steady flow of funds sufficient to service the loan, or commercial or administrative premises in major Lithuanian cities.
On the other hand, such objects are often mortgaged not for their own development but for other business projects of the owner in real estate or other areas. Such investment projects can be best understood as a business loan with a pledge of a stable income-generating asset.
Possibility to Invest in a Basket of Loans
"Responding to investors' expectations of lower risk, we have been applying the loan basket principle in investment projects for some time now, where we structure several or more real estate projects from the same developer in one loan. In this way, investors invest their money in, for example, five properties of the same project owner in a single investment and diversify their investment widely, Röntgen representative notes. - If one of the projects were to face temporary difficulties, the loan would then be serviced to the investors from the other pledged properties in the basket."
Important Criteria
Aurimas Satkunas, Head of Investor Relations at SFP Profitus, points out that it is important to take into account the investor's experience and risk tolerance when allocating the risks of investing through real estate crowdfunding platforms. It is important to consider that an investment may be delayed and the money invested may have to wait additional six months rather than the planned 12 months. It is also important to consider the size of the investment and the periodicity of the investment.
"For first-time investors, it is better to spread these sums over a larger number of projects," comments Satk?nas. - If, for example, EUR 1,000 is allocated from savings for such an investment, it is advisable to divide these funds between at least four projects." This tactic will slightly reduce the return, as the amount of interest on the Profitus platform also depends on the amount invested in the project. These scissors can be, say, between 9% and 11%.
According to Profitus' Investor Relations Manager, EUR 1,000 is not a significant amount for one person, while for another it is an entire month's income. Therefore, the former will probably invest the whole EUR 1,000 in one project, while the latter will divide it into several smaller portions and choose projects with low risk but lower return. Many investors look at investing through crowdfunding platforms as a way of saving a certain amount of money per month, be it EUR 100 or EUR 1,500.
Collateral Protects the Funds
"If you grow your portfolio by EUR 100 or 200 per month, the amount invested is automatically divided into many projects, because once a month you choose one project and invest EUR 100 or 200 in it," notes A. Satk?nas. If a person only invests when one can afford to spend a larger amount, then he or she is likely to invest in a few of the projects he or she likes the most. The more widely spread out the investment, the lower the risk, but the degree of completion of the project itself or its location does not have a significant impact on the investor, according to A. Satkunas.
"Our platform lends for different phases of a project - some borrow for the start of a project and, once a certain part of the project is built, collect the rest from sales advances. Others, on the other hand, borrow for the completion of the project," says Profitus' Head of Investor Relations. - In both cases, the investors' funds are protected because the developers pledge the property they are borrowing to build, and the loan amount cannot exceed 70% of the project's value at the time." Other developers might borrow for the whole project, with the amount being paid out in several or more phases. The investor is likely to invest in one phase of the project.
Project Location and Ratings
"Profitus' Head of Investor Relations points out that the location of a project is more important for the platform itself when assessing the riskiness of a project and deciding whether or not to fund it.
"Once we have evaluated the project and made a decision, the investor does not have to worry about the location of the real estate project, because one sees the riskiness of the project - from A to D rating - and decides whether he prefers the safest, A-rated projects, or the higher medium-risk ones," explains A. Satkunas.
Investors can choose between projects with different risks, in different cities and countries. Profitus currently offers investments in projects located in Lithuania, Latvia, Estonia and Spain. It also offers a choice of commercial and residential projects. Each month Profitus offers around 45 projects for investment.
A New Direction – Aviation
The Röntgen platform also allows investments in non-real estate asset classes such as aviation (aircraft parts repair and sales business projects), corporate bonds, wind and solar energy projects.
"Röntgen's biggest differentiator is aviation projects. Last year, the aircraft engine repair and sales project of UAB Colibri Aero, an aircraft repair and maintenance company, was successfully financed and has already been completed, and this September Röntgen took another step in the aviation sector by presenting to investors a similar EUR 0.8 million project of the Swedish aircraft repair and maintenance company Advantage Aviation Services," G. Zarembiene says about the new opportunities.
According to her, today Röntgen is the only platform in Europe that opens the closed, conservative but promising aviation market to a small or medium-sized investor.
"We are driven to expand in aviation by factors such as investors' need to diversify their portfolios, the standardised international legal framework for aviation and the industry's capital-intensive nature," notes Röntgen’s representative. The financing structure for aviation projects is similar to real estate: a large amount of capital is required at the start of a project, but valuable assets can already be pledged. The funds are then used to improve the quality of the asset, and at the end of the project, a large sum is returned from the sale.
In such projects, aircraft engines, landing gear and other valuable parts are pledged as first mortgages in favour of investors - movable assets, but highly sought-after and therefore globally liquid.
"The aviation sector itself is successfully recovering from the pandemic and has maintained its growth this year despite the global economic challenges," comments G. Zarembiene. The Röntgen team has been working on aviation for more than a year and a half and only proposed the investment opportunities after being convinced of their reliability and the robustness of the collateral.
"Unlike many other platforms, we offer real estate projects only in Lithuania. We do not finance real estate abroad, because in order to provide quality services in other markets, you need to have a very good understanding of the country's legal framework, which is significantly different from Lithuania's," G. Zarembiene explains the platform's choice.
Mistakes and Risks
When asked to name the mistakes made by investors, Profitus' Head of Investor Relations points out that sometimes investors, lacking experience, invest in only one or two projects.
"It's hard to call it a mistake, they simply underestimate the risk," comments A. Satk?nas. - The number of delayed projects on the Profitus platform does not exceed 6%, and if a project is delayed and the developers do not pay on time, the investor's funds may come back to him/her not after 12 months, as one had planned when he/she invested, but after, say, 18 or 24 months." For some people, the timeframe for withdrawal is important, and it is therefore necessary to assess how much risk a person can tolerate. According to A. Satkunas, it is even possible to earn more from a delayed project because of the additional interest.
M. Kairys, founder of the blog "Finansai paprastai", points out that the higher the interest offered by a project, the higher the risk. If the interest offered by a project is 15% or more, the risk of late payment increases. This does not mean, he says, that a project with a higher interest rate will necessarily fail. The risk increases because attractive projects receive funds quickly and do not need to offer higher interest rates.
"Although real estate crowdfunding platforms have been around for some time, they have not yet been tested by a major crisis such as in 2008, so it is difficult to estimate what proportion of projects would be delayed, when the funds would be returned and what the return on such investments would be," M. Kairys points out.
How to Diversify Risk When Investing Through Crowdfunding Platforms
It is important to diversify your investment portfolio between different asset classes and to take advantage of the risk-spreading opportunities offered by one or another investment method. In this essay, we will discuss the general principles of investment diversification and the risk mitigation techniques offered by real estate crowdfunding platforms.
Portfolio diversification is a risk management approach that involves the inclusion in a portfolio of a number of different asset classes that are unrelated to each other, or where losses in one asset class can be offset by gains in another asset class. For this reason, it is advisable to include not only stocks and bonds in the portfolio but also other asset classes such as real estate (RE) or gold.
"A person who is resilient to larger fluctuations in their investments can allocate more of their funds to equities and choose index funds (ETFs), where management fees are lower," notes Martynas Kairys, founder of the blog "Finansai paprastai". - However, every investor, regardless of their risk tolerance, should consider real estate in their investment portfolio."
If a person is investing in rental housing, a significant amount of money will need to be allocated to this area. But real estate crowdfunding platforms offer the possibility to invest in real estate in small amounts. These investments are secured by collateral and in many cases will offer better annual returns, simpler administration and shorter investment terms.
Flow-generating Investments
The volume of investment attracted through the crowdfunding platform continued to grow in the first half of 2023. Compared to the same period last year, the growth is 63% to EUR 118 million. The amount invested in real estate projects through the crowdfunding platform grew at a slower pace - 35%, to EUR 50 million.
Investors in Röntgen's platform can diversify their funds by choosing projects at different stages of development and in different locations.
"Our platform offers investments in high-quality, lower-risk projects developed by experienced developers, as well as the opportunity to invest in new asset classes, such as aviation maintenance projects or bonds," notes Greta Zarembiene, Head of Investor Relations at Röntgen. This is relevant for Röntgen's investor community, which includes both small and beginner investors, as well as professionals who manage portfolios of EUR 3-4 million on the platform. They can diversify their investments by choosing between residential or commercial properties, projects that have just been launched or projects that have already been completed and no longer have construction risks. Investors choose according to their preference for the completeness of the collateral and the potential construction risks. A completed project is significantly more liquid than a project that is still in the planning stage or has just started development and this may influence investors' decisions.
According to G. Zarembiene, more conservative investors particularly value projects that are already generating income. These can be either rented apartments, which generate a steady flow of funds sufficient to service the loan, or commercial or administrative premises in major Lithuanian cities.
On the other hand, such objects are often mortgaged not for their own development but for other business projects of the owner in real estate or other areas. Such investment projects can be best understood as a business loan with a pledge of a stable income-generating asset.
Possibility to Invest in a Basket of Loans
"Responding to investors' expectations of lower risk, we have been applying the loan basket principle in investment projects for some time now, where we structure several or more real estate projects from the same developer in one loan. In this way, investors invest their money in, for example, five properties of the same project owner in a single investment and diversify their investment widely, Röntgen representative notes. - If one of the projects were to face temporary difficulties, the loan would then be serviced to the investors from the other pledged properties in the basket."
Important Criteria
Aurimas Satkunas, Head of Investor Relations at SFP Profitus, points out that it is important to take into account the investor's experience and risk tolerance when allocating the risks of investing through real estate crowdfunding platforms. It is important to consider that an investment may be delayed and the money invested may have to wait additional six months rather than the planned 12 months. It is also important to consider the size of the investment and the periodicity of the investment.
"For first-time investors, it is better to spread these sums over a larger number of projects," comments Satk?nas. - If, for example, EUR 1,000 is allocated from savings for such an investment, it is advisable to divide these funds between at least four projects." This tactic will slightly reduce the return, as the amount of interest on the Profitus platform also depends on the amount invested in the project. These scissors can be, say, between 9% and 11%.
According to Profitus' Investor Relations Manager, EUR 1,000 is not a significant amount for one person, while for another it is an entire month's income. Therefore, the former will probably invest the whole EUR 1,000 in one project, while the latter will divide it into several smaller portions and choose projects with low risk but lower return. Many investors look at investing through crowdfunding platforms as a way of saving a certain amount of money per month, be it EUR 100 or EUR 1,500.
Collateral Protects the Funds
"If you grow your portfolio by EUR 100 or 200 per month, the amount invested is automatically divided into many projects, because once a month you choose one project and invest EUR 100 or 200 in it," notes A. Satk?nas. If a person only invests when one can afford to spend a larger amount, then he or she is likely to invest in a few of the projects he or she likes the most. The more widely spread out the investment, the lower the risk, but the degree of completion of the project itself or its location does not have a significant impact on the investor, according to A. Satkunas.
"Our platform lends for different phases of a project - some borrow for the start of a project and, once a certain part of the project is built, collect the rest from sales advances. Others, on the other hand, borrow for the completion of the project," says Profitus' Head of Investor Relations. - In both cases, the investors' funds are protected because the developers pledge the property they are borrowing to build, and the loan amount cannot exceed 70% of the project's value at the time." Other developers might borrow for the whole project, with the amount being paid out in several or more phases. The investor is likely to invest in one phase of the project.
Project Location and Ratings
"Profitus' Head of Investor Relations points out that the location of a project is more important for the platform itself when assessing the riskiness of a project and deciding whether or not to fund it.
"Once we have evaluated the project and made a decision, the investor does not have to worry about the location of the real estate project, because one sees the riskiness of the project - from A to D rating - and decides whether he prefers the safest, A-rated projects, or the higher medium-risk ones," explains A. Satkunas.
Investors can choose between projects with different risks, in different cities and countries. Profitus currently offers investments in projects located in Lithuania, Latvia, Estonia and Spain. It also offers a choice of commercial and residential projects. Each month Profitus offers around 45 projects for investment.
A New Direction – Aviation
The Röntgen platform also allows investments in non-real estate asset classes such as aviation (aircraft parts repair and sales business projects), corporate bonds, wind and solar energy projects.
"Röntgen's biggest differentiator is aviation projects. Last year, the aircraft engine repair and sales project of UAB Colibri Aero, an aircraft repair and maintenance company, was successfully financed and has already been completed, and this September Röntgen took another step in the aviation sector by presenting to investors a similar EUR 0.8 million project of the Swedish aircraft repair and maintenance company Advantage Aviation Services," G. Zarembiene says about the new opportunities.
According to her, today Röntgen is the only platform in Europe that opens the closed, conservative but promising aviation market to a small or medium-sized investor.
"We are driven to expand in aviation by factors such as investors' need to diversify their portfolios, the standardised international legal framework for aviation and the industry's capital-intensive nature," notes Röntgen’s representative. The financing structure for aviation projects is similar to real estate: a large amount of capital is required at the start of a project, but valuable assets can already be pledged. The funds are then used to improve the quality of the asset, and at the end of the project, a large sum is returned from the sale.
In such projects, aircraft engines, landing gear and other valuable parts are pledged as first mortgages in favour of investors - movable assets, but highly sought-after and therefore globally liquid.
"The aviation sector itself is successfully recovering from the pandemic and has maintained its growth this year despite the global economic challenges," comments G. Zarembiene. The Röntgen team has been working on aviation for more than a year and a half and only proposed the investment opportunities after being convinced of their reliability and the robustness of the collateral.
"Unlike many other platforms, we offer real estate projects only in Lithuania. We do not finance real estate abroad, because in order to provide quality services in other markets, you need to have a very good understanding of the country's legal framework, which is significantly different from Lithuania's," G. Zarembiene explains the platform's choice.
Mistakes and Risks
When asked to name the mistakes made by investors, Profitus' Head of Investor Relations points out that sometimes investors, lacking experience, invest in only one or two projects.
"It's hard to call it a mistake, they simply underestimate the risk," comments A. Satk?nas. - The number of delayed projects on the Profitus platform does not exceed 6%, and if a project is delayed and the developers do not pay on time, the investor's funds may come back to him/her not after 12 months, as one had planned when he/she invested, but after, say, 18 or 24 months." For some people, the timeframe for withdrawal is important, and it is therefore necessary to assess how much risk a person can tolerate. According to A. Satkunas, it is even possible to earn more from a delayed project because of the additional interest.
M. Kairys, founder of the blog "Finansai paprastai", points out that the higher the interest offered by a project, the higher the risk. If the interest offered by a project is 15% or more, the risk of late payment increases. This does not mean, he says, that a project with a higher interest rate will necessarily fail. The risk increases because attractive projects receive funds quickly and do not need to offer higher interest rates.
"Although real estate crowdfunding platforms have been around for some time, they have not yet been tested by a major crisis such as in 2008, so it is difficult to estimate what proportion of projects would be delayed, when the funds would be returned and what the return on such investments would be," M. Kairys points out.
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