Thanks to Bandit555 blog, I discovered the Reinvest24 crowdfunding platform*. Reinvest24 is unique in a way that investors invest in real estate by investing through special purpose vehicles (SPVs), that manage the real estate object. The property shareholders claim both rental and capital growth income.
This form of investment is new to me, so I collected data for this post from a blog on the Reinvest24 website, Reinvest24 YouTube channel, and an interview with Reinvest24 CEO Tanel Orro that is published in second part of the article.
It was easy to register on Reinvest24 platform – I filled in the basic data and uploaded a copy of my personal document to the system. My identity has been confirmed over a few hours and I could start investing on the platform. My money from Paysera STO returned only the day after registration so I transferred it to the Estonian account of Swedbank to Reinvest24 and the next day the money was on my Reinvest24 account.
Strenghts of Reinvest24
Capital gain and rental income
Unlike other crowdfunding platforms, at Reinvest24 investors are not just a creditor of the project – they become shareholders of the RE project. RE then is rented out upon completion of the repair. On average, rental income on the platform currently stands at around 8% per annum and capital gains are around 6%, so the total expected return on investment is 14%. Given that property prices tend to grow in the long run, rental income should generate solid annual return on investment.
In most cases, you need to accumulate a considerable amount of money to buy RE either for the initial payment or the entire purchase. Reinvest24 platform allows you to invest from €100 to one project and become the full owner of your part of the project.
Each project is pledged to the SPV company with a first-rank mortgage. This means that each project works individually and will not be affected by possible failures of other projects.
Investors interests are represented by an independent mortgage lawyer (collateral agent). This is especially important if something unexpected happens to real estate or to the Reinvest24 platform.
Real estate is managed by professionals
Investing in real estate requires knowledge of this area. I have little knowledge of it, but the platform is searching for an attractive properties for me and then maintains them. I like passive income. The less I have to do – the better.
Reinvest24 specializes in acquiring objects below market price, so capital gains often occur immediately after real estate acquisition.
Rental income during economy downturn
During the economic downturn, RE prices tend to decline sharply. At this point, it becomes very important that part of the investment return comes from rental income. According to Reinvest24 CEO, during 2008 RE prices in Estonia dropped by 50% while rental cash flow dropped by only 15%. That shows rental income could be a stable source of income even during a downturn. People have to live somewhere and if they can’t buy their own home they will rent it.
What is on Offer Now?
Currently, investors are offered three investment opportunities – a plot of land with a rental warehouse, a development project and three apartments complex near Riga’s university. I have already put € 1,000 on the platform for testing, and I intend to distribute them through these three projects. By investing this amount, I get a 1% cashback that will cover half the platform fees. We have agreed with Tanel to have an extension of the cashback offer period until 3 June 2019 so readers of my blog can use it.
Three appartments close to University of Riga
Reinvest24 buys 3 flats in the Boltozoli project at 10% below market price, so the value of the investment immediately increases by 10%. The apartments will be furnished and two weeks after purchase is made they are planned to be rented out what will make earn me passive income. I plan to invest €350 in this project, with an expected annual return of 6% and a 5% capital gain. At the moment, the project is only 17% funded, so I intend to make the investment later on.
Plot with leased warehouses in Tallinn
This plot is based at technology start-up area in Vinkli. A preliminary contract has already been signed for a sale after a two-year periodwith a 13% increase in price. The warehouses at the plot are rented and investors will receive rental income starting June 1st 2019. The expected annual return of the investment is about 12.5% and I have invested €735 for this project.
Financing of a residential building construction project in Tallinn
Majaka 54 project is executed in several stages. The apartment is 10 minutes from the airport and easily accessible by public transport. At this stage, Reinvest24 finances the construction work already under way in the house and is planning to upgrade the outside of the building in the next six months to increase its value. Reinvest24 guarantees 14% fixed annual interest for 6 months loan first-rank-mortgaging an apartment in the building. This is a classic mortgage loan. I did not come to this platform because of such loans, but I invested €250 for testing it out as the interest rate is good.
Weaknesses of Reinvest24
The platform is very fresh and started operating in 2018. Investors take higher risk using Reinvest24 rather than time-tested platform. The investment structure itself is also long-term oriented, so it is important that the platform is stable in order to achieve the best possible returns.
Limited income of platform itself
The platform receives 2% of the primary funding and 10% of the rental income. Reinvest24 cooperates with Tina Kinnisvarabüroo real estate agency. According to Reinvest24 CEO commision is shared between seller and the platform. I don’t think it is realistic to run the platform out of 1% commision 10% of rental income. It’s interesting to see how Reinvest24 is planning to build a profitable business over the long term.
The platform usually funds a six-digit amount projects. According to the CEO most projects are funded within 1-2 months, although there were projects that were funded in 6 days only. Thus, investing in the early stage of fundraising freezes capital for quite a long time, so it makes more sense to invest in the projects towards the end of the financing round.
Lack of liquidity
Currently there is no secondary market on the platform. However, Tanel mentioned that it will be launched in June. However, I was surprised that the 2% transfer fee would be paid by the buyer and not by the seller.
Currently only one employee officially works in the company. That does not look very reliable. Although Tanel mentioned that he is the only full-time working person in the copy. Other staff is working part-time or they are shareholders and work for free.
Also, the head of the company graduated from the university two years ago and before that worked at LHV Bank, where he worked as a sales rep for four years and sales team manager for a year. He is not highly experienced and it will be interesting to observe where youthful enthusiasm can lead this platform.
Interview with Reinvest24 CEO Tanel Orro
I’m glad Tanel agreed to share his thoughts about the platform with me and the HonestFIRE blog readers. This is the first interview we have had here and I am excited and delighted to share the chat we have had with you.
How long does it usually take to fund a project? Do the investors start earning once it’s fully funded?
It depends, mostly regarding to the funding target and the potential returns. The fastest we have fully funded a project was 6 days, but in most case 1-2 months. So far all our development projects offer interest from the day one. It is a lot harder to achieve this with our rental projects (since the returns are coming from the rental yield), but we have achieved this with Vinkli 10, which is currently 68% funded – the rental income for our investors will start from 01.06 (first payout in July).
Landplot project states that earnings start June 2019, does it mean the investors get part of the profits even if it is not fully funded? What happens if the project is not funded by July and an investor invests then? Does the investor gets income from June too without taking the risk?
Yes you are correct, but we are more then sure that this property will get fully funded within June.
Reinvest24 is not regulated. How do you ensure the transparency for the investors of the platform and SPVs?
Like other crowdfunding platforms in Estonia, we don’t have or need to be regulated. There are no obligations for audits, but it is our free will to have regular audits conducted by licensed auditors. Transparency is very important to us and we are constantly seeking ways to improve it. All our properties are operated through separate SPV ́s, these Estonian company’s have annual reports publicly available, which we will also upload to the property documents. The regulations will most likely come in the near future and we are already preparing for that.
I would rather not want to speculate about the upcoming regulations. But I am more than sure that it will bring investment caps per projects for the investors. For platforms it will bring a lot more reporting and most likely obligation for audits. All together we hope that it will bring more transparency and confidence for the investors.
Most of the projects have no exit date. Is it the shareholders who make the decision when to exit the platform? How does the process work? If there was a scenario that the real estate prices drop and majority of the shareholders would want to sell the property at the worst time do to panic in the market would the minority must follow the decision inflicted by panic?
The main purpose for not having exit dates for our rental properties is that these projects will withstand market fluctuations, ensuring a stable monthly income even in the time of crises. For example, at the peak of the last housing crisis in 2008-2009, the real estate prices in Estonia dropped up to 50-60%. Meanwhile, rental prices remained more stable, dropping only around 10-15%. And the real estate market always recovers overtime. If someone wants to exit, then they can do so through our secondary market (will be launched in June). Otherwise we could considerate exiting property if we see some red flags or just manage to get a profitable deal for our investors.
What happens in case of a defaulted developmental project (f.e. Majaka 54-9)? Is it the same as real estate backed loan?
These development projects are originally created as an equity investments, but we did not want to confuse the investors as most of P2P investors are more familiar with loans with fixed interests. For all our Majaka development projects, Reinvest24 takes the market risks and guarantees the annual interest rates for our investors. So you could consider it development loan. In case of default, collateral agent holds 1st range mortgage in favor of all investors. Collateral agent will sell the property and distripute the funds between our users.
I struggle to understand the difference between developmental project and rental project. Could you please explain it to me? Does Reinvest24 take the risk for the development project?
At the moment the development projects are more like real estate loans with fixed interests. We thought that it would be too confusing to leave the returns estimated and dependant on the market for our investors. So we decided to take the market risk and guarantee the interest rates stated. Once we have proven ourselves, that we are able to make profits from development projects, we will start to offer equity type investments also into our development projects.
Do I understand it right, that each project is a different juridical person that is connected to the real estate that was funded by its shareholders? Does that juridical person legally owns the real estate and technically hires Reinvest24 to manage the property?
SPV – the juridical person owns the property and is obligated to operate it and to pay out all the profits back to the platform, where the funds will be distriputed between the property share holders. The collateral agent does not allow any transactions with the property and also makes sure that the profits are being paid out to the investors.
You mention secondary market. I was not able to locate it on the website. Is it live yet? What are the fees?
We been working on for months now and we hope to get the secondary market live within June. There will be 2% entry fee for the buyer (same as initial funding) and no fees for the seller. There will be no minimum amount for buy/sell orders, while min. investments in funding round is 100 eur. We hope that this will bring more liquity to our secondary market, as investors are able to reinvest their monthly rental income.
Are the projected yields guaranteed? If not, do you not see that as a reputational risk if the platform gets them wrong?
For development projects it is guaranteed. For rental properties it is estimated income (some properties already come with long term rental contracts), but we are rather conservative with our calculations, leaving some room for vacancy and maintenance works.
If any repairs are required and there is nobody renting the property how are the repairs funded? Are the repair and operating costs audited? If not, how do you ensure transparency?
This is something we look into already before listing any property on the platform. If we see that the property requires some repairing works in the near future, we either calculate the cost in the inital funding target. For any unexpected repairing works we save a small amount from the rental yield.
How are the repair operators chosen? It’s a longshot, but is it possible that Reinvest24 would hire friend’s company to make the repairs for double market price?
Our team has been working with high profile real estate projects for more than 10 years, during that time a lot of good connections with developers and construction companies in Baltics have been achieved. We use these connections to benefit our users, not the other way around. So far all our properties and 3rd party works have come under market price and we plan to keep it that way. Otherwise we would not be able to provide ~14% combined returns for our investors. We are in for a long run and we still have a long way to go to prove ourselves. Doing something like that would definitely not serve our long term goals.
Are all the projects backed with first rank mortgage?
Yes, all our properties are backed with first rank mortgage, with a valuation of +20% from initial funding target.
Does it mean LTV is 80%? What are the default procedures in Estonia? In Lithuania it is 80% price at the auction in the first round of sale and if nobody buys it it goes down to 60%. 80% LTV in this case seems risky.
Your mentioned procedures are most likely what banks or law enforcement officers use. The difference here is that they don’t have any interest to act in favour of the property owner, while collateral agent works in favour of our investors. That means that the property will be sold not on auction, but on open market with best possible price.
Do you make preliminary contracts with the seller prior offering to fund the property (f.e. Baltozoli property)? Or do you purchase the property and then finance it?
We always achieve agreement (preliminary contract) with the seller, before listing any properties on the platform. Usually we make ~10% deposit with our own money to give some guarantee to the seller for the funding period. The properties we list on the platform are not being sold publically and in most cases our owners (real estate agency Tina KVB) has warm relationship with the seller. This helps us to achieve more flexible terms.
Who makes the valuations? How can you assure their accuracy?
We will use established real estate agency´s (Uusmaa / Domus), their appraisal reports are being accepted by all the banks here in Estonia.
On the website you mention that the project has handled projects over 10M euros, but on the website there are projects with just over 3M euros value, 2 of which is probably test projects not open to the investors? Is it correct?
These are the projects that our team has succesfully completed in the past 10 years before launching Reinvest24 platform. The projects were funded by private investors, in same way as crowdfunding, but offline.
According to teetmik Reinvest24 only has 1 employee. Is it only you working in the company?
At the moment I am the only one officially working full time in Reinvest24. Rest of the team is working part time or have some shares of Reinvest24 and work for free. For example the whole Tina KVB real estate team, who are employees there, also work for Reinvest24. Same goes for the lawyers, IT team, accountant, designer and copywritter. There is a funny video about me beign the only employee in Reinvest24 (link above).
Is 2% from each project 10% from rental income enough to run your platform? If you use Tina KVB, you probably pay 2% fees to them as the agent would the rental fees alone be enough to run Reinvest24? Do you earn shares or cash as the commision?
The agent fee is usually divided between us and the seller, that means 1% fee from us. As most of our properties come with more than -10% discount, this 1% is already included in the funding cost. Otherwise we would be able to have any cashback campaigns or pay commissions for our affiliates.
Are the investors taxed for dividend income or interest?
The investors will get taxed for interest not dividend income, as legally it is a loan with open interest rate (the SPV profit).
I have invested a small part of my portfolio that I can afford to lose. I want to test this platform and take a deeper look at its operating principles and monitor the results.
I like the fact that Reinvest24 offers different crowdfunding than elsewhere – the ability to earn both rental income and capital gains seems intriguing to me.
However, so far, there are only a few projects on the platform, that are funded quite slowly. The company offers a 1% cashback for the investors on for the amount invested by June 3rd. So if you are interested in investing in the Reinvest24 platform, feel free to use my referral link (you will get €10 bonus when you register on the platform I will get a small commission that will contribute to the blog maintenance). You can access all the rules of the cashback campaign on the platform’s website.
P.s. Be sure to check the platform yourself before you making any investment decisions. This article is only sharing of my personal experience of the platform and is not a recommendation to make investment decisions. Do your own research.
*By clicking on the link you will be able to register on the platform and receive cashback until June 3rd, and I will receive a small commission that will contribute to blog’s maintenance.