According to Bernardas Preikšaitis, CEO of the real estate investment platform “InRento,” before investing, it is important to evaluate not only the offered return and potential risk but also the period over which the invested amount is returned to the investor.
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Who is the money really lent to?
In the case of government bonds, the investor lends to the state, while purchasing corporate bonds means lending to businesses. Currently, the annual interest on government savings certificates (defense bonds) being issued is about 2.4–2.8%. Corporate bonds usually offer higher interest rates, but it is also important to assess what secures them and what would happen if the company fails to meet its obligations.
“Some corporate bonds on the market are unsecured by any assets or secured only by secondary collateral. The investor sees an attractive interest rate but does not always inquire about what happens if the issuer fails to pay. The answer is often simple: the holder of unsecured bonds joins the general creditor queue,” says one of the “InRento” leaders, B. Preikšaitis.
Regarding corporate bonds, secured bonds are backed by specific company assets, while unsecured bonds rely on the company’s overall solvency. Subordinated bonds carry even greater risk – if the company becomes insolvent, the claims of their holders are satisfied only after other creditors.
Redemption of bonds is also important. Since the principal amount is usually repaid only at the end of the term, it is worth evaluating from which funds the company plans to settle with investors.
“Before purchasing corporate bonds, it is worth answering several questions: whether the issue is secured by assets and in what order, what financial obligations are stipulated in the issue terms, and from which funds the issuer plans to redeem the bonds. If the answer to the last question is a future new issue, the investor assumes not only the issuer’s business risk but also refinancing risk,” notes B. Preikšaitis.
The biggest difference is not the interest but the collateral
According to the European Securities and Markets Authority (ESMA), more than half (58%) of all capital raised through European Union crowdfunding platforms goes to investments in loans for businesses and real estate projects.
On peer-to-peer lending platforms, investors’ funds are usually lent to individuals or small businesses. Such loans are often not secured by pledged assets, while in real estate crowdfunding, loans can be secured by pledging the financed real estate.
“The essential difference is not the size of the interest but the collateral. When a loan is secured by a primary mortgage on real estate, in case of borrower insolvency, investors’ claims are satisfied in priority order from the value of the pledged asset. Lending without collateral relies only on the borrower’s honesty and solvency,” explains B. Preikšaitis.
However, collateral itself does not eliminate risk – if the borrower fails to meet obligations, it is important at what price and within what time the pledged asset could be realized.
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“It is worth being open here: forced sale of pledged assets can take from several months to a couple of years, and the realization price depends on the market situation at that time. That is why a conservative loan-to-collateral value ratio is important – it creates a buffer in case the asset has to be sold under less favorable conditions,” he adds.
Return and liquidity
The risk of different investment instruments is also reflected in the expected return. Currently, the annual interest on government savings certificates is up to 2.8%, while the average historical return of real estate projects financed on the “InRento” platform is 11.68%. Interest is paid to investors monthly, but historical results do not guarantee the same return in the future.
Investment liquidity also varies. Savings certificates can be redeemed before maturity, while bonds or crowdfunding investments can be sold on the secondary market. However, the Baltic bond market is not very liquid, and most crowdfunding investments are usually held until the project ends. Some platforms, including “InRento,” offer the possibility to sell investments earlier. In the case of “InRento,” the number of transactions on the secondary market is not large; this is due not to a lack of buyers but limited supply – more often, there is a shortage of sellers willing to sell attractive investments than buyers willing to purchase them.
“None of these instruments is universally the best. Government bonds are suitable for a financial reserve, while asset-backed lending is a tool for those seeking higher returns but do not want to give up collateral protection. The most important thing is to understand what you are buying and not to lend all funds to one borrower, no matter how reliable they seem,” summarizes B. Preikšaitis.
What else is worth checking before investing?
According to ESMA data, 88% of investors through crowdfunding platforms are retail investors. These platforms operate under a unified ECSP (European Crowdfunding Service Providers) regulation in the EU, and in Lithuania, they are licensed and supervised by the Bank of Lithuania.
“For the investor, this means a simple rule: before investing, it is worth checking whether the platform has an ECSP license (EU crowdfunding service provider permit) and finding its publicly disclosed default rates. The license does not guarantee returns but ensures that the platform is subject to uniform information disclosure requirements and independent supervision,” says B. Preikšaitis.
However, regulation does not eliminate risk, so it is important to evaluate the investment itself and diversify invested funds.
About “InRento”
Since its launch in 2020, “InRento” has paid more than 11 million euros in profit to investors, and the total amount of investments financed through the platform has exceeded 105 million euros. All loans financed on the platform are secured by a primary mortgage on real estate.
Investing involves the risk of losing part or all of the invested amount, so it is recommended to diversify investments and invest responsibly before making investment decisions.
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