Our comprehensive list of real estate investment terms every investor should be familiar with!
GLOSSARY OF TERMS:
Accredited / Professional Investor
An investor who meets certain criteria typically based on education, professional experience, or income, and is allowed to invest in higher-risk securities with less oversight.
An increase in the property value over time. It depends on various aspects such as location, market demand for properties, etc.
Example: A project had a property value in 2019 that was €500,000. Thanks to its lucrative location and increased demand for housing, the value in 2020 was €600,000. The appreciation for this property from 2019 - 2020 is then €100,000.
Auto-Invest is becoming very common and can be already found on the majority of popular real estate crowdfunding platforms. This feature allows investors to select specific investment criteria, such as holding period and yield range. Then the platform automatically puts investors' money into projects that meet the criteria they selected.
A fixed-income investment where investors receive regular interest payments. Bonds are contracts between investors and developers, where investors act as lenders to the developers for a specific property project.
A common real estate investment strategy where a property is purchased with the purpose of renting out.
This is the amount of money invested into a project by an investor.
Capped Rate Interest
Investors of capped rate investments mean if the project performs well, the income can increase, but only to a certain extent (which is pre-agreed in the contract).
Commercial Real Estate (CRE)
Typically, these are properties meant for business purposes. These include office buildings, retail stores, industrial, and logistics.
When investing in debt, investors act as lenders to the property owner or developer, investing in a loan associated with the respective property project. Here, investors receive a fixed interest on a regular basis. Debt investments are further divided into senior and mezzanine debt with different risk profiles and rates of return.
Developer / Sponsor
The sponsor or project developer is an individual or an institution that plans to execute the real estate project and to whom investors entrust their money when investing in real estate.
Real estate investment projects that are a development project, or a project created or recreated by developers in order to create additional value. These projects are typically riskier, but more lucrative.
The process of spreading your investments around multiple projects within a portfolio. Instead of investing your money in a single property, you can divide the amount between multiple properties. This strategy significantly reduces the risk of losing your capital due to one poor investment choice
A form of income given to investors on a regular and timely basis from investments, typically in equity-based projects. It is usually based on the rental income the property is earning and can be fixed or uncapped returns, depending on the project.
An investigation or audit of a potential investment in order to assess risk and ensure that all facts are in order.
When investing in equity, investors own a proportional share of a property. The return on investment relies on a property's rental income and as well as on any change in the value of the property. Equity investments are further divided into common and preferred equity with different risk profiles and rates of return.
European Crowdfunding Service Provider (ECSP)
The term for all crowdfunding platforms as it relates to EU regulations. ECSP's are required to follow certain regulations as defined by the European Commission and are issued a license proving their compliance.
Real estate investment projects where there are properties that already exist and have no planned development. These projects are typically buy-to-let and involve purchasing an existing property for the purpose of renting it out.
The investor of a fixed-rate loan receives a predetermined return on their investment, regardless of how well or poorly the investment is doing.
A project is considered to be funded when all requested money for the project has been received by the property developer from investors.
Holding Period / Term
A holding period indicates the amount of time an investment is held by an investor. It also can be described as the period between the purchase and the sale/end of the investment. Debt/loan investments holding periods are typically between 6 - 24 months, while equity-based investments may last a couple of years.
An investor who is a business entity or organisation, such as a bank, family office, insurance company, or mutual fund. Typically invests much larger amounts of money than retail or accredited investors, and is given access to a larger amount of financial products due to their status.
A form of income given to investors on a regular and timely basis from investments, typically in debt-based projects. It is based on the contractual interest rate of the loan for the property and is typically a fixed rate in real estate crowdfunding.
The most common form of real estate crowdfunding investment (a debt investment). Investors act as lenders to the developers of a real estate project and agree to a contractually defined loan, facilitated by the real estate crowdfunding platform.
A financial metric that is typically expressed as a percentage. It is the ratio of a loan amount compared to the value of the asset the loan is for. It is calculated by dividing the loan amount by the (appraised) value of the property.
A financial metric is typically expressed as a percentage. It is the ratio of the loan compared to the value of the asset, after development. It is calculated by dividing the loan amount by the finished development value of the property.
Indicates how much time it takes to convert an investment into cash. Physical assets, such as properties, are not very liquid. However, this depends on the investment type. Debt-based projects are more liquid (6-24 months) than equity-based ones (3-10+ years).
The maximum amount of money that can be invested into a specific project. There is no fixed amount and it will vary depending on the platform / project.
The minimum amount of money that must be invested into a specific project. There is no fixed amount and it will vary depending on the platform / project.
A project is considered to be open when the project is still seeking additional funding from investors. Open projects are what is currently available to invest in.
Paid Out / Repaid / Closed Project
A project is considered to be paid out, repaid, or closed when the project has been completed and investors have been returned their capital investment + interest/dividends/etc. (depending on the investment).
The real estate investment opportunity offered by developers to investors via a real estate crowdfunding platform.
Real Estate Crowdfunding Platform (Platform)
The online investment platforms connect two parties: investors and developers. They provide investors with the opportunity to invest in individual real estate projects from developers seeking additional financing, sometimes from amounts as low as €100.
Residential Real Estate
The most common investment property for real estate crowdfunding. Typically, these are properties that someone will live in. This includes properties such as single-family homes, apartments, or condos.
Retail / Restricted Investor
The average, typical person who wishes to invest. A person with no accreditation or credentials for investing.
The money made or lost as an investor, on a specific investment, over a period of time.
Return On Investment (ROI)
The percentage increase (or decrease) of an investment over a set period of time. It's calculated [(projected value - current value) / current value] * 100.
Example: An investor invests €300 in a project with a holding period set to 3 years. After 3 years, the investment is projected to be worth €450. The ROI for this investment would be 50% = [(450 - 300) / 300] * 100
The chance that a project’s actual return differs from the expected return. It is the degree of uncertainty regarding an investor’s profit or loss.
Typically a letter grade is given to a project to communicate risk to investors. It is based on selected criteria determined by the real estate crowdfunding platform before presenting the project to investors.
A popular tool often offered by platforms, where investors can sell their investments to, or buy investments from, other investors on the platform. It makes real estate crowdfunding investments more liquid as investors can sell their investments before the holding period is over.
The ability for an investor to choose specific individual real estate properties for investment. Most real estate crowdfunding platforms offer this as the main method of investing, however, some also offer investments into preselected portfolios of properties (i.e. REITs) or automatic investments where the platform invests into real estate properties for you.
As real estate investments provide a form of income, depending on the country there will be a fee or tax levied by the government on returns generated by investors. This will vary based on the project, location, and laws.
Variable Interest Rate
Investments with an uncapped rate typically mean the income earned by investors solely depends on the performance of the project, with unlimited upside. It also means the reverse if the investment goes poorly, with all investor funds potentially being lost. This is typically found in very high-risk equity investments and comes from the appreciation of the property value.
The earnings generated on an investment over a particular period of time. It is expressed as a percentage and includes the interest earned or dividends received. It is calculated as Yield = Earnings / Investment
Example: €60 earnings / €1,000 investment = 6% yield.