Before reading an article, please understand that I’m not in any way providing investment advice in any form. All below mentioned information are my personal opinion only. Also, make sure that you understand the impact of possible recession caused by interruption of economic activity due to corona virus, especially in the market of alternative investments which can cause the real estate to decrease in value.
Everyone wants to own a property as an investment. But in the market where prices are skyrocketing every single year, it is almost an impossible goal. What if I tell you that you don’t need to pay the full amount for the property and you don’t even have to bother to collect the rent, be responsible for any problems with the apartment and simultaneously you can diversify your real estate portfolio very easily? The answer for you is real estate crowdfunding. It is a way of raising money for real estate investments by reaching out to a pool of investors to contribute a small amount of cash towards a project. Simply put, it is a form of raising funds that allow small real estate investors to fund costly opportunities. The first one of the platforms, offering such opportunities presented here is BitOfProperty.
BitOfProperty. What Is It?
BitOfProperty is a blockchain based real estate crowdfunding platform, making property investing affordable and increasing liquidity of the investments by maintaining secondary market. The company is headquartered in Singapore and has a subsidiary in Estonia. It was founded in 2017 by Karl Vään and Taavi Pettai. They both have around 9 years of combined experience in project management and trading. The rest of the team consists of developers and advisors which are from venture capital and consulting firms. BitOfProperty is not very well known in the crowdfunding community, but it surely brings a few innovative aspects into the field. Let’s talk about those.
Why Is BitOfProperty Interesting Option To Invest
The platform proudly says that it’s one of the first companies bringing blockchain into the crowdfunding field. It might be more related to their internal technology as I cannot see blockchain usage from the investor’s point of view though. The platform indeed makes real estate investing simple. You can choose what share of the property you want to own, you don’t have to fill any paperwork, deal with mortgage, deal with developer of anything like that. Instead, you can just register, verify your account, deposit money and you’re good to go. Time is in the end the most valuable resource of each investor.
There is also the important question of security. Your investment is backed by the real estate at all times through the Security Agent. This is a separate limited liability company whose primary purpose is to hold the collateral for the benefit of BitOfProperty’s investors. In the event which would make the platform go bankrupt, real estate would be still owned by the Security Agent in the name of the investors.
The platform offers the investor 2 types of income – rental and capital gains. Rental is received each month since the apartment is ready and tenants are settled in. Capital gain is earned after you sell your share on the secondary market with the premium or after a few years when the whole apartment is sold by the platform.
Strengths And Weaknesses
The main competitive advantage of the platform is transparent and reasonable fees and existence of secondary market which is helping a lot with liquidity. Both of those advantages are also disadvantages though. Fees which are in my opinion really low for the service you’re getting are causing me to question the profitability of the platform considering the fact that only 4 properties are listed in there. We’ll talk about the fees later.
Secondary market exists, but the liquidity is questionable at the moment. Number of investors is not very high and the pricing is nowhere near ideal. This weakness of the platform brings also an interesting opportunity. You can speculate that if you buy the share in an apartment for the same price as in 2017, you can get higher capital appreciation in a few months when the apartment will be sold. You can sometimes find even more discounted shares with 2 – 6% discount compared to the original price. Indicator that the apartment will not be sold for a price from 2017 or an opportunity to earn easy money? That’s up to you.
I consider the availability of financial information to be crucial for alternative investments. BitOfProperty is really behind in this manner. It is not publicly known even if the company is audited by external auditor or not. Thus, I cannot conclude in any way about the financial situation of the company, sustainability of the business model and stuff like that. Moreover, I didn’t find any Facebook group where investors are grouped and are discussing the latest development due to only a limited number of investors.
The platform surprised me with some unexpected manual tasks. After I wanted to buy the share on secondary market, only order was placed even though the offer was definitely visible in the market. After placing the order, I got an e-mail after a while whether I really want to purchase the share and if so, I have to confirm by answering this e-mail. It took only a few hours but still, kind of weird.
What Are The Risks
All investments are backed by real estate. For each property, new SPV (separate company) is created which holds the real estate in its books. At the moment, there are 4 properties to invest in (funding of 5th is in progress). There are no defaults in the history of the company, but no defaults are expected anyway under such business model. The main risk of the investor is that the real estate will depreciate in value and investor will realize a capital loss when the property will be sold (usually after 3-5 years) or if the property will be unoccupied and no rental income will be received by investor.
As the new company is created for each apartment, investors should be safe even if the platform will go bankrupt. In that case, new management company would have to be found to take care of the property and business can continue as usual.
Remember that with crowdfunding, your capital is at risk. BitOfProperty is not covered by the Deposit Guarantee Scheme or the Investor Compensation Scheme. This is a standard practice in the industry as currently crowdfunding in general doesn’t require any license from the regulator.
What Are The Possible Returns
BitOfProperty promotes a long-term return of around 9% p.a. and more – consisting of 6-7% of rental income and 3-4% capital appreciation. It is not using any own grading system as all the apartments are selected based on predefined criteria to purchase the properties close to the city where demand for rental is sufficiently high.
From my own personal experience, I can confirm that my rental income is around 6.5% p.a. received on a monthly basis at the beginning of each month. It is not possible to set up any auto investment strategy, but to be honest, it is not needed. As there are currently only 4 properties at the platform, everything can be managed manually.
BitOfProperty uses the standard business model in the real estate crowdfunding sector. It charges 3 types of fees to the investors. All of the are considered to be indirect as without further investigation, you’ll never find out they charged them to you (except for an administration fee which is visibly stated on the website).
First of all, there is an arrangement fee of 2-4% of the acquisition price of the investment + EUR 300 for notary and state fees. This is directly included in the acquisition price of the property. Therefore, you can assume that if the original price per share was EUR 50, the real price without fee was around EUR 48-49 per share. It is important to keep this in mind when you want to purchase the share on the secondary market. Is the share offered for EUR 47? Nice, you pay no initial fee and you immediately bought the apartment with a discount of at least 1 EURO per share.
Note: It seems that arrangement fee was not yet charged for 4 properties stated on website. Either that or it’s not incorporated in the calculation of the price attached in the prospect to each investment. Only notary, state fees and SPV creation fee were charged according to available documentation.
Second fee is property management or administration fee of 10% of rental income charged to cover the costs of dealing with tenants and solving any issues occurred. Fair enough, no additional comment needed. Just a note here – the income received is netto, after this fee.
The success fee will be relevant when the property will be sold. The platform will take 15% of realized capital gain after the sale. From my perspective, fair enough as this keeps the platform motivated to look for the highest selling price possible which is in the interest of all investors.
The platform is operated by company BitOfProperty OÜ registered in Estonia. I can find this information is a public register, however, I’m not able to look up any financial figures. I can, however, conclude that the turnover is not very high currently. The platform didn’t exit any of the opportunities yet and therefore only arrangement and administration fees were charged to investors year. Considering that the average price of an apartment is around EUR 75 thousands and average monthly rental is around EUR 450, I expect that total arrangement fee was around EUR 6,000 (it seems like it was not charged to attract the investors for first properties as mentioned above). Each year, the platform should earn around EUR 2,000 in administration fees. Thus, the company will be profitable only it the management will be able to list many more properties and scale up the operations. I don’t think that at the moment the company is able to cover at least some fixed costs such as rental of their own offices and so on. And we’re not speaking about any payroll costs yet.
Lack of transparency towards investors is a little unfortunate as I would expect complex and up-to date communication of financial results to investors. Since the referral program is currently terminated, I assume this has something to do with the initiative of cost cutting. Platforms like these need new investors so they can list properties. Without investors, business cannot expand. It’s really simple as that.
Summary And Recommendation
|Market Position||Rental apartment crowdfunding is not very developed yet. The market doesn’t have any significant market leader. Currently the platform operates as the property management firm of 4 apartments only. Thus the market position is insignificant.|
|Rate of Return||6-7% of rental income. 3-4% of promised capital appreciation.|
|Risk||– Insufficient value of real estate when exiting the investment|
– Occupancy of apartments
|Loan Performance||Not applicable as the portfolio consist only of 4 apartments. Occupancy is 100% as for most of the apartments, it has been granted by the developer.|
|Loan Details||Prospect of each property (location, market analysis, price breakdown)|
|Secondary Market||Yes (questionable pricing and liquidity though)|
|Financial Performance||– Financial statements not publicly disclosed|
– No information about an external auditor
– Questionable business sustainability under current scale of operations
BitOfProperty offers investing in real estate when you become the partial owner of the property. Investors are able to receive around 6.5% p.a. of rental income and are entitled to any capital gains realized after the sale of the apartment.
I’m quite disappointed about the lack of transparency in regards to financial statements and I have some concerns about the sustainability of the business model. Any platform for alternative investments need to hire specialists so they can manage investor’s money. And you are not able to hire any experienced specialists without an income. Let’s just say that maybe there is a big investor behind the operations who doesn’t care about short-term profitability. But even in that case I would expect he would care about the scale of operations, which is currently miserable as only 4 properties are managed and the last one was purchased in 2018.
For me personally BitOfProperty is in my portfolio was a few months and my exposure is around EUR 500. I plan further investments only if a great opportunity will come to the secondary market (discount of 6% and more compared to the original price). Even though I have some doubts, I still like the simplicity of the platform. If it attracts investors and increase the portfolio of properties, it can definitely go big. And if not, I think my money is relatively safe there.
If you would like to participate in real estate crowdfunding as well and you understand the risks and uncertainties involved, you can join me and thousands of others and SIGN-UP HERE.