Idle cash in real estate crowdfunding: the return you lose without realising
A project has just paid you back with interest, and you log in to the platform to look for somewhere to reinvest it. Nothing is open, so the balance sits there for a week, then three, and when something is finally published the round fills up before you get there.
IN THIS ARTICLE 6 sections
The time your money spends standing still does not appear on any project page or in any report, but it has a real cost: the return you see published only holds while the money is working, and in real estate crowdfunding money spends quite a lot more time not working than most people reckon.
There are two ways for your money to sit idle
It is worth telling them apart because they are not alike and are not solved in the same way.
The first is locked-up money: the money invested in a project, which you cannot withdraw until it finishes. That money is earning a return, but it is not available. The second is waiting money: the money sitting uninvested in your platform account, between one project and the next. That money is available, but it earns nothing.
The former is a feature of this type of investment that you have to accept from the outset. The latter is a silent loss that depends far more on how you organise yourself.
Locked-up money: accept the term before you invest
When you commit money to a project, you commit it until the end.
Typical terms range from one to three years depending on the type of deal, and during that time there is no button to get your capital back. Some platforms let you sell your position to other investors, but only to a limited extent and with no guarantee of finding a buyer. If the project is also extended, the lock-up runs beyond the date you had noted down.
The rule that follows is simple: the only money that makes sense here is money you won't need for years, not money you might need if something unexpected comes up.
Waiting money: the cost nobody tells you about
This is the part that surprises people most, because it builds up in several places at once.
There is the time between being repaid by one project and finding another. There is the time from when you commit money to a round until the round closes and the loan starts earning interest, which can be days or weeks. There are the rounds that don't reach their target and return the money to your balance. And there are early repayments, when the developer finishes ahead of schedule and pays your capital back on a date you weren't expecting, leaving your balance idle again.
Your balance on the platform is held in safekeeping by a payment institution, which protects you, but it normally earns no return while it sits there.
What it does to your real return
The sum is very easy to do and rather uncomfortable to look at.
Imagine, as a purely illustrative example, a twelve-month loan with an estimated return of 10% a year. If your money has spent two months waiting before going in and, once it ends, spends another two months idle before being reinvested, you have needed sixteen months to obtain what the project yields in twelve. Your real return over that period is no longer 10% a year, but something closer to 7.5%.
Nothing has gone wrong in the project: the developer has met its obligations and so has the platform. It is simply that your portfolio's return is not that of each project, but that of each project multiplied by the time your money actually spends invested.
What reduces the waiting time
It cannot be eliminated entirely, but there are three things that shorten it a lot.
The first is having access to more opportunities. A single platform publishes projects when it can, sometimes with gaps of weeks between one and the next. Several platforms together publish much more often, and that reduces the time your balance spends waiting.
The second is staggering maturities. If all your projects end in the same quarter, all your capital is freed up at once and it is impossible to reinvest it quickly. Spread out over time, the money comes back in instalments that can actually be redeployed.
The third is finding out sooner. Many rounds fill up quickly, so knowing when the next one opens, instead of discovering it when it has already closed, makes quite a difference to how long your money spends not working.
