The ongoing low interest environment has caused many Swiss savers and investors to turn to real estate as a more profitable alternative to savings accounts and medium-term notes which still provides a relatively secure investment. The high prices of real estate in Switzerland has, so far, kept many private investors out of the market. It is not surprising then that a fair number of real estate crowdfunding platforms have become established in Switzerland. Crowdhouse, Crowdli, Swiss Crowd and Immoyou are just some examples of Swiss real estate crowdfunding platforms.
How does real estate crowdfunding work?
Swiss platforms generally use the co-ownership model in which investors actually purchase a share of ownership, becoming co-owners of specific properties and obtaining title deeds. This differentiates crowdinvestments from real estate investment funds, through which investors buy shares and receive dividends based on fund profits but do not actually own property.
The crowdinvestment platform researches eligible properties with good rental potential based on strict criteria. Some platforms charge a specialized third-party service with the task of selecting and appraising investment properties. Platform then list these properties for prospective investors. Condominiums are the preferred category of investment property as the risk of vacancy is spread between all apartments making up the condominium.
When an investor makes an investment in a property the money is placed in an escrow account. Only if the full amount needed to complete the investment is pledged does the transaction move on to the next state. When a crowdinvestment project fails to attract enough investors to reach the investment target, some platforms simply cancel the investment project and return invested capital to investors. Others (such as Immoyou) will make up the difference and purchase the property as planned, but will continue to search for investors to make up that difference.
Typically, a certain portion of the cost of a property (50%, for example) must be covered by investment capital, while the remaining portion is covered by a fixed rate mortgage. Important: When crowdinvestment real estate is financed using a mortgage, it is a leveraged investment.
The platform facilitates the title deed transaction and the investor obtains a co-ownership share proportionate to the investment they made. Ownership is transferred directly from the previous owner to investors, with the crowdinvesting platform simply facilitating the transaction in much the same way as a real estate agency.
Swiss crowdinvestment service providers typically participate in the management of the property on an ongoing basis in order to ensure the proper maintenance of the property. Property management is normally delegate to partner property management firms. The collection of rents is normally handled by property management firms. Relatively little involvement on the part of co-owners (investors) is required.
Costs associated with real estate crowdinvestment
In exchange for its services in connecting investors to investment properties and facilitating the purchase of co-ownership shares, platforms charge a number of different fees. As a general rule, investors can create an account and access property listings at no cost. Investors do not normally pay a fee to pledge capital towards investments.
Only when investment targets are met and a property is purchased are investors required to pay fees. All Swiss crowdinvestment platforms charge a commission based on the purchase price of the property. Crowdhouse and Crowdli both charge a basic platform fee equal to 3% of the purchase price. Swiss Crowd, which specializes in luxury properties, takes a 5% commission.
Additional fees may be charged separately. Crowdli, for example, charge a fee equal to 0.6% of the purchase price to cover the costs of escrow services, legal services, appraisal services and the cost of creating co-ownership statutes and issuing title deeds. Crowdhouse figures all supplementary fees and its platform fee into the total purchase price of the property rather than billing them separately.
Notary fees and possible taxes associated with the transfer of property ownership must be covered by investors. Most other incidental costs must also be covered by investors.
Crowdinvesting platforms which participate in property management after properties are purchased normally charge an ongoing fee towards the cost of managing the property and collecting rent on your behalf. Crowdhouse charges an ongoing property management fee of between 5% and 7.5% of profits, but only if a target of at least 75% of projected annual rental revenues is attained. Crowdli charges an ongoing fee equal to 1.5% of net rental income.
How are returns calculated?
The returns you earn as an investor are based on your co-ownership share. For example, if you own 5% of a property, then you receive 5% of the profits generated by the property.
Mortgage interest payments and amortization payments are deducted from rental revenues, as are contributions to renovation funds and property management fees. The remaining rental income is divided up between co-owners. Annual returns of between 4% and 6% of invested capital are typical. Dividends are normally paid out by the crowdinvestment platform on a quarterly basis.
Minimum investment amount
The minimum amount which you can invest varies between platforms. Some platforms require a minimum investment of 100,000 Swiss francs, while others allow you to invest from just 25,000 francs. The purchase price of the property in question normally plays a role in determining the minimum investment. In the typical model, 50% of the property is funded by a mortgage while the remaining 50% is divided into 20 equal shares. The cost of one of these shares defines the minimum investment amount. Investors may purchase more than one of these shares.
Example: A property has a purchase price of 2 million Swiss francs. Of that amount, 1 million francs are financed by a mortgage. The remaining 1 million francs are divided into 20 increments of 50,000 francs each. In this case the minimum investment amount for the property would be 50,000 francs. If the purchase price of the property were lower, the minimum would be lower, with the lowest possible investment being the general minimum investment required by the platform.
Maximum investment amount
Platforms generally set a limit on how large a share of a property can be purchased by a single owner (30% or 35%, for example). The primary reason for this is that investing large amounts of money in a single property puts you as an investor at a higher risk of losing money if no suitable tenant is found. The downside of these limits is that if you have large amounts of capital which you want to invest, you will have to purchase portions of many different properties and each purchase will command its own set of notary fees and other incidental charges. However, these costs are generally low. Platform fees and maintenance fees are typically charged on a percentage basis, so you do not pay more when you own multiple properties than you do when you own a single property.
Minimum investment term
Some platforms require investors to hold their co-ownership shares for a minimum amount of time (7 or 10 years, for example) before they can sell them through the same crowdinvestment platform. This allows for the amortization of all or part of mortgages and (ideally) growth in property values. However, as the legal owner of the property, you are not obligated to maintain your contract with the crowdinvestment platform, and you can sell your share independently if you so choose, as long as a majority of the property’s co-owners are in agreement.
Is crowdinvestment secure?
In Switzerland, crowdinvestment platforms are not regulated by the financial regulatory authority FINMA because they do not provide financial services but simply broker real estate deals (much like real estate agents). Crowdinvestment platforms in other country may be more tightly or more loosely regulated than Swiss platforms. The internet is alive with disreputable crowdinvestment platforms and even outright scams, and it is important to exercise caution.
Before you use a crowdfunding platform to invest in property, make sure to research the following factors:
1. Who is behind a platform? Reputable companies should clearly state their address and contact information (including telephone numbers) on the website. Photographs, names and positions of all key employees should also be provided. Crowdinvestment platforms perform much the same task as real estate agents, and they should be ready to provide similar services upon request – including guided tours of investment properties, answering complicated questions about the design and construction of properties, providing legal information and offering statistics and reports on applicable property price developments. If the company hides entirely behind its online platform and does not provide consultation or in-person services upon request, you may be better off using another platform.
2. Does the platform have access to money at any time? Reputable platforms use a reputable bank or other escrow agent to manage and distribute investment capital and rental income. The platform should not have access to finances at any time as crowdinvestment platforms are not registered financial services providers.
3. How are properties selected? The criteria used to determine whether properties are good investments are key because performance of investments are directly linked to the properties which you buy into. Ideally, platforms should use reputable, independent real estate appraisal services to select properties and determine purchase prices. As a prospective investor, it is ultimately up to you to perform due diligence and research whether demand for the type and location of the property in question is strong enough to ensure steady rental income.
Risks of real estate crowdinvestment
Like any investment, there is a certain amount of risk attached to real estate crowdinvestment. Because you buy into specific properties, the performance of your investment is linked to the supply and demand for property in a specific location. If demand for housing in that category or area declines, you may find it difficult to attract tenants or tenants may not be willing to pay the expected rent. If all or part of a property stands empty for long periods of time, co-owners may end up spending more on maintenance, buildings insurance premiums, property management fees, mortgage payments and contributions to the renovation fund than they earn through rental income. If, in a worst-case scenario, co-owners are unable to cover the cost of mortgage payments, the bank may force a sale of the building – possibly at a major loss.
Real estate is not a liquid investment, and owning just a share of a property compounds this problem. You normally will not be able to quickly sell your property ownership shares if market conditions or your financial situation changes.
Leverage in the form of mortgages poses another risk. As a co-owner you are partially responsible for mortgages. If real estate prices fall rapidly, the value of properties may no longer be sufficient to cover mortgage debt, and you will be liable to cover your share of the difference.
For all of these reasons, selecting the right properties and spreading your investment across multiple properties in different categories and regions is key to profiting off real estate crowdinvestments.
Alternatives to crowdinvestment
Crowdinvestment platforms provide a convenient way to invest in real estate, but there are other options. Consider these alternatives:
1. Real estate investment funds. This investment vehicle offers more flexibility in that you do not actually buy or own real estate. You simply invest in a fund which invests in real estate, and receive dividends on potential profits in relation to your investment. In the case of open-end investment funds, you can sell your shares back to the fund at any time, which makes them a highly liquid investment vehicle. You do not need to put in any effort to select properties for investment or handle the costs and paperwork associated with purchasing property. Real estate investment funds typically invest in numerous pieces of real estate in many different categories, so risk is spread much wider than would normally be possible through crowdinvestment. The downside is that you pay ongoing annual fees in the form of the total expense ratio (TER). You may also pay a commission (the front-end load) when you buy fund shares and another commission (the back-end load) when you sell fund shares. Over time, the ongoing cost of the TER can surpass the fee you pay to crowdinvestment platforms when you invest in a property. Real estate crowdinvestments are secured in that you still own property which you can sell or rent out (even if at a loss). Shares in a real estate investment fund, on the other hand, can become worthless if the investment fund fails.
2. Real estate stocks. Numerous real estate holdings operate in Switzerland, and the stocks of many of these are listed on the SIX Swiss Exchange or the Berne Exchange. Buying shares in real estate corporations, as opposed to real estate investment funds, gives you an actual share of ownership in a company which in turn owns real estate. You do not need large amounts of investment capital in order to begin investing in real estate stocks. You can buy shares through an affordable online broker (the moneyland.ch online broker comparison makes it easy to find the best deal). Pay attention to brokerage fees and custody fees. Some Swiss brokers do not charge custodial fees, or waive these when you meet certain conditions, and using one of these can save you money if you plan to invest over a long period of time. The downside of owning stocks is that you still do not own a physical security. If the real estate holding goes bankrupt, you could lose your investment.
3. Cooperative housing. This form of real estate investment is popular in Switzerland. A cooperative company owns the title deeds of properties, and private investors can buy shares in the cooperative. However, many cooperative housing companies only sell shares to individuals who purchase property for use as a primary residence. Some place additional stipulations on shareholders, such as active participation in the cooperative housing community, making them a somewhat unattractive option for those who are only interested in investing.
4. Go at it alone. If you have the time and inclination, you can seek out investment properties on your own. Finding co-ownership shares in properties for sale is more difficult than finding full title properties, and it can be a tedious process without using a specialized real estate agent. Handling appraisals, negotiations, legal procedures and financial transactions can also be time consuming. A great deal of caution must be exercised in selecting investment properties and a good knowledge of the real estate business is a must. If you are able to perform all of these tasks alone, you can avoid paying commissions to real estate agents, crowdinvestment platforms, real estate funds, or stock brokers.
Crowdinvestments in real estate can add a relatively secure and passive element to your investment portfolio. As with other investments, exercising due diligence in selecting your individual investment projects and your brokerage service (the crowdinvestment platform in this case) is crucial to a secure and trouble-free investment experience.
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