What is Real Estate Crowdfunding and How Does it Work: A Comprehensive Guide

The real estate sector is no longer an exclusive domain for financial institutions and high-net-worth individuals. Thanks to digitalization and regulatory changes, real estate crowdfunding has emerged as an alternative that democratizes access to property and urban development. Below, we analyze the technical and operational fundamentals of this model.

What is Real Estate Crowdfunding?

Real estate crowdfunding is a collective financing mechanism in which a community of investors contributes capital to fund a project involving real assets (homes, commercial premises, or industrial warehouses) through a technological platform. The goal is to obtain a return derived from the property’s exploitation, whether through its sale after a renovation or through the collection of rental income.

It is imperative to emphasize that this model is not a risk-free investment. Although the underlying asset is real estate, profitability is subject to market variables, construction costs, and the developer’s management; therefore, the capital does not have a guarantee of absolute return.

Step-by-Step Operation

The real estate crowdfunding ecosystem is based on a four-stage structure that ensures capital traceability:

1. Project Origination and Filtering: A real estate developer (the party executing the construction or renovation) presents a proposal to a Crowdfunding Service Provider (CSP). The platform performs an audit or due diligence to verify technical and financial viability before publishing it.

2. Opening of the Investment Round: The project is published on the online marketplace. Registered investors can review quality reports and return estimates. At this stage, many users utilize fintech solutions to manage their liquidity; for example, to operate with greater agility on international platforms, some investors choose to buy Bitsa and use its reloadable cards to control their investment expenses.

3. Formalization of the Investment Vehicle: If the project reaches 100% of the necessary funding within the stipulated time, contracts are signed, and the money is released for the project. If the minimum target is not met, regulations usually mandate the full refund of contributions to investors without additional costs.

4. Exploitation and Liquidation: During the project’s life, the investor receives periodic updates. Upon completion (e.g., with the sale of the building), proportional profits are distributed, and the initial capital is returned.

Advantages, Disadvantages, and Risks

Like any financial instrument, real estate crowdfunding presents a balance of opportunity and exposure that must be evaluated with professional rigor.

Main Advantages

• Minimal Entry Barriers: It allows for investment in the real estate sector with fractional capital, avoiding the need for mortgages or large savings.
• Strategic Diversification: Investors can spread their budget across various assets (a hotel in Madrid, offices in Mexico City, or housing in Berlin), mitigating geographic and asset-type risks.
• Passive Management: The investor does not have to worry about finding tenants, building maintenance, or bureaucratic procedures; the developer handles this.

Disadvantages and Systemic Risks

• Capital Risk: There is a real possibility that the project suffers from budget deviations or drops in demand, which could lead to a partial or total loss of capital.
• Illiquidity: Unlike stocks or cryptocurrencies, it is not possible to withdraw money immediately. Capital is usually committed until the property is sold or the loan term expires.
• Platform and Developer Risk: Success depends on the ethical and financial solvency of the entities involved. According to the European Banking Authority (EBA), transparency in risk management is the critical factor in these models.

Real Estate Crowdfunding in Spain

In Spain, this sector operates under a strict legal framework designed to protect the retail investor. Law 5/2015 on the Promotion of Business Financing regulates Crowdfunding Platforms, which must be authorized and registered by the National Securities Market Commission (CNMV).

This regulation sets investment limits for non-accredited (retail) profiles to avoid overexposure to risk. This Spanish model has served as a reference for the expansion of the system in Latin America and aligns with Regulation (EU) 2020/1503 of the European Parliament, which seeks to unify the crowdfunding market across the EU to provide greater legal certainty.

Basic Taxation (Summary)

The tax treatment of profits varies according to the legal structure of the investment:

• Crowdlending (Loans): Interest is typically taxed as income from movable capital, with corresponding withholdings applied based on the savings tax bracket.
• Equity (Capital Participation): If participating as a shareholder in a company created for the project, profits may be taxed as dividends or capital gains from the sale of shares.

Legal Disclaimer: This section does not constitute financial or tax advice. Given the complexity of local regulations and double taxation treaties, it is essential to consult with a certified tax advisor before conducting operations of this type.

Quick FAQ

• How much minimum money is usually needed? While it varies by platform, it is common to find projects starting from €50 or €100.
• Can I lose all the money I invest? Yes. If the project becomes unfeasible or the developer goes bankrupt without assets to back the debt, the investor assumes the risk of total loss.
• How long does this type of investment usually last? The average duration is between 12 and 36 months.
• Is it suitable for everyone? No. it is intended for individuals who understand the real estate market, do not have an urgent need for liquidity, and seek to diversify an existing portfolio.