The concept of peer-to-peer lending has been popularized within the past decade as a way to connect qualified investors with qualified lenders in a controlled environment. This has effectively served to bypass the more cumbersome process that is associated with lending requirements at more traditional financial institutions, such as banks and credit unions. The concept is not new, but like many aspects of the Internet revolution, technology has made the reality of peer-to-peer lending more accessible than ever, contributing to its record growth.
This notion of peer-to-peer lending has now made its way to the real estate sector. With the advent of real estate crowdfunding platforms, investors are now able to make known their desire to have a bridge loan in order to gain the capital they need to renovate existing properties. Rather than going to a bank for financing, they are now going to a group of accredited investors that in many ways are similar to the person seeking the loan. It is this aspect of peer-to-peer lending that many are drawn to. The ability to help one another out with the money they need, while still generating a potential return on investment, is quite attractive. Commercial projects and residential areas have also become involved in this movement as well. Here are five factors that have contributed to the growth in real estate crowdfunding.
- Borrowers Can Work with Lenders Actively Involved in the Project
Many of the properties and projects that make their way to crowdfunding sites are renovations and rehabilitations. If you will, this is the concept of real estate flipping at its finest. It is often rather difficult to approach a bank for a loan designed for such purposes, and even more difficult to actually be approved. The underwriting requirements alone often disqualify these projects, but there are now loads of willing investors waiting on a crowdfunding platform ready to provide the assistance that these investors need.
Lending sites that specialize in peer-to-peer connections are quite attractive to longer-term investors, particularly to those who need access to financial capital quickly. The loans generated via real estate crowdfunding platforms often cover the cost of the renovation, plus the cost of the property purchase as well. This is designed as a mechanism to protect all parties involved in the financing. The technology in use today makes such renovation loans not only possible, but also rather simple and quick at the same time. The platform is simple to use, and investors from all walks of life are getting involved. The concept of multiple peer lenders pooling their money together online to help out investors that are need to quick financing is gaining in popularity.
- Much Lower Investment Amounts are Required
Most commercial real estate projects are inordinately expensive, so it has been prohibitive for all but the biggest major players to get involved in the past. This changes with real estate crowdfunding platforms, however, as even projects worth many millions of dollars can attract investors that have only a relatively small amount of money available to contribute to the overall amount that needs financing. Crowdfunding has made it possible for thousands of small investors to get involved with major projects on a scale that many never dreamed would be possible.
- No Bank Hassles
Real estate financing executed by a financial institution is not only a time consuming proposition, but it is also one that is historically known for its cumbersome paperwork and regulatory requirements. The closing on a property alone can take weeks to complete, costing the investor both time and money in order to execute properly. All of these factors are only made possible if the bank actually approves the loan in the first place, and that is a big if.
- No Tenants, Toilets and Trash
Let’s face it: managing a property is a time consuming and often frustrating affair. It is a thorn in the side of many a real estate investor throughout the country, and indeed the world. Not only does such a situation involve needing to provide upkeep on the property, but one must also deal with issues related to tenants, repairs, collecting rent, and a host of other factors that simply takes away the joy of why many people entered the real estate market in the first place.
Real estate crowdfunding has provided a mechanism by which individual investors, or peers if you will, can all come together in unity to provide the financial capital necessary for a project to get off the ground. They become passive investors that do not need to be involved in property management, yet they still reap the benefits of the returns that are generated. No headaches, and no hassles. The more properties that one chooses to invest in via crowdfunding, the more opportunity for a significant return on the investment, all again with none of the property management headaches associated with traditional real estate investing.
- Tax Benefits
One of the reasons that so many investors have long been involved in the real estate market is related to the tax benefits that can be realized. When such investments are structured correctly, there can be enormous tax deductions as the result of depreciation, expenses associated with interest payments, and numerous other areas that can be used to either shelter or defer the taxes that need to be paid on any cash distributions that are paid. These benefits are not only available to the owner of a property, as crowdfunding platforms can enable individual investors to also be a part of many of the tax write offs just mentioned. It is truly a win-win situation.
So, there you have it. The advent of peer-to-peer lending has come to the real estate market and it is growing in popularity at an exponential rate. If you have ever considered getting involved in the real estate market, but felt that you do not have the money necessary to make an impact, consider crowdfunding as a great way to get involved and further diversify your investment portfolio.
Matthew Sullivan is the Founder and CEO of Crowdventure.com, a real estate investment platform.