Guide to Real Estate Crowdfunding for Income

Income Real Estate Vs. Development Real Estate: main differences

In the real estate investment landscape, two main strategies emerge for investors: development real estate and income real estate.

Development Real Estate focuses on creating value through the construction, renovation, or redevelopment of real estate with the goal of selling at a higher price in the short to medium term, averaging 1 to 3 years.

Income Property, on the other hand, aims to generate a steady cash flow over time through the acquisition of an ownership interest in a property intended to generate rental income and appreciation in the value of the property over time (capital gain). This strategy is ideal for those who want a passive and stable source of income over the long term, averaging 5 to 10 years, as it relies on regular cash flows rather than just gain from sale.

Income-based real estate crowdfunding: how it works

Income-based real estate crowdfunding is based on the purchase and management of properties that generate regular cash flow through rentals. The structure of crowdfunding allows many investors to contribute small amounts of money to finance the purchase of a property, receiving in return a share of the income generated through the rental of the property, minus costs, and later from the sale of the property itself.

The main features of this type of investment include:

1. Purchase of the Property: Investors contribute capital that is aggregated to purchase an already leased property. Investment opportunities may have different uses: residential, commercial, industrial, or mixed-use.
2. Generation of Rental Income: The property is leased to sound and verified individuals who lease properties or portions of them to carry out their activities, thus generating a regular income stream. The profit generated on the company owning the property is then distributed annually among the investors in proportion to their holdings, in the form of a dividend.
3. Passive Management of the Investment: The management of the property is entrusted to a specialized company with a proven track record of more than a decade, which takes care of all aspects, from the maintenance of the property to the management of leases and their collection. This allows investors to benefit from passive management of the investment.
4. Accessibility and Diversification: Thanks to Mamacrowd, even investors with limited capital can access the real estate market of income products that is usually the preserve of large professional and institutional investors.With Income Properties, the investor has the opportunity to diversify his or her portfolio with a product that has a more limited riskiness than real estate development projects.
5. Exit Windows: although this is a medium-term investment, some early exit options from the investment are usually reserved for investors, with repayment of principal and an increasing return based on how long the investment is held.

How to earn from Income Real Estate: IRR and Annual Dividend

The return on an income property project is typically given by the sum of two elements:

1. Annual Dividend: Investors receive a regular cash flow in the form of a dividend that is distributed annually. The annual dividend yield can vary depending on the type of property, its location, and real estate market conditions.
2. Property Appreciation (Capital Gain): In addition to the dividend income, investors can benefit from the appreciation of the property's value over time. The goal of the project developer is to resell the property within a certain time frame, typically between 5 and 10 years, at a higher price than the purchase price. Investors in this way receive an additional return given by the gain on the sale, which is added to the dividend yield. The total return is measured by theIRR (Internal Rate of Return, or Internal Rate of Return), which represents the annualized return on investment and takes into account both rental income and capital appreciation.

IRR is a key indicator for assessing the profitability of a long-term investment, as it considers all future cash flows discounted to present value. In the context of income-producing real estate crowdfunding, a high IRR indicates good total return potential, considering both periodic dividends and any gain generated from the resale of the property (capital gain).

Unlike ROI, which represents the total return on investment calculated as the ratio of the net gain obtained to the capital initially invested, IRR calculates the annual return by considering the time flow of returns, providing a more granular view of the annual return on investment.

Example: comparison of a 10,000 euro investment at an annual ROI of 10% and an annual IRR of 10%:

• Annual ROI of 10%: Value of the investment after 10 years = €20,000
• Annual IRR of 10%: Value of the investment after 10 years = €27,130

Income-based real estate: investment duration and early exit

In income real estate crowdfunding, the default investment term is usually between 5 and 10 years. During the period, it is possible to liquidate the investment early upon the occurrence of one or more of these conditions:

• the early sale of the property in the years prior to maturity. The property can also be sold by the promoter before the stipulated term, providing an early opportunity to liquidate the investment.
• the promoter typically provides some early exit "windows" (e.g., at the third, sixth, tenth year), with repayment of principal and an increasing return based on how long the investment has been held. This mechanism is usually through put options that allow investors to sell their units back to the promoter before the term.

Conclusion

Income-based real estate crowdfunding represents an opportunity for investors seeking stable income and long-term capital growth. While the development real estate market can offer attractive returns in the short term but with higher risk and complexity, income real estate via crowdfunding provides an ideal approach for those who prefer more stability and passive income. With the right strategy, income property crowdfunding can be an effective diversification tool in building a solid portfolio that performs well over time.

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