Earlier investors had a single option of bank loans for financing their real estate investing ventures. But now peer-to-peer lending is the new financial technology in the block that eases the process. So, individuals can lend money to other individuals with the help of an intermediary website.
Hence, peer-to-peer lending or P2P lending is also called social lending, real estate crowdlending, or real estate crowdfunding. The very first P2P lending business was put to use in the UK in the year 2005. Since then this financial method has grown quite significantly around the globe.
How does Peer to Peer lending work?
P2P lenders and borrowers work under one roof. Borrowers can directly submit their requirements to their choice of P2P website.
Furthermore, the P2P platform will assess your application through due diligence and with the help of a FICO score.
It is software used to analyze your available public records, financial history, personal loans, credit cards debt, etc to establish your credit rating or the risk involved in giving a loan.
Hence, after the application is accepted, the P2P platform will match your application to peer-to-peer lenders who are willing to offer you a p2p real estate loan based on your criteria.
After getting the loan you need to make regular payments for paying back. Some crowdfunding sites do not even charge prepayment penalties.
Some lenders charge prepayment penalties to avoid cases where investors might pay off the loan faster.
Advantages of peer to peer lending in real estate
Here are some benefits of peer-to-peer lending in real estate.
1. Peer to peer lending enables borrowers to secure loans easily
Banks or other financial institutes generally take a lot of time to approve a loan, and most of the time the loan doesn’t get approved if your credit score is not good enough according to them.
But in peer-to-peer lending, you can easily apply for a loan without any hassles. Also, a P2P platform can even find lenders who are willing to lend even if your credit rating is poor.
However, a poor credit rating may affect the interest rate and terms of your peer-to-peer loan.
2. Lower Interest Rates for borrowers having a good credit score.
In addition to this, peer-to-peer loans demand lower interest rates than banks and financial institutes.
And, borrowers with good credit ratings can easily secure a loan due to the absence of competition between p2p lenders.
Also, the direct online connection between borrower and lender makes it possible to cut overhead costs.
Hence, with lesser originating and closing fees, borrowers can get a loan with lower interests and a higher return on investment than a traditional loan.
3. Diversification of portfolio for investors with peer to peer lending
Diversification is seen as one of the key ways to reduce and mitigate risk. Therefore, spreading your investments across different asset classes reduces your risks of losses in the highs and lows of investing.
When investing in a P2P, the platform will divide the whole loan amount into small slices called notes. For example, if you invest a total of $1000 you can purchase shares in 10 individual loans.
4. Small investments
Generally, commercial real estate requires a huge amount of money to invest in commercial properties.
Hence, small businesses cannot compete in this sheer size of investments that sponsoring companies are looking for.
With the help of peer to peer real estate marketplace, smaller investors can group with accredited investors and pool their small investments into large investments.
So, multiple investors lower the level of risk.
Hence, peer to peer helps smaller investors participate in large investment property and diversify their portfolios.
5. Unsecured Personal loans for borrowers
Banks and other financial institutions will not allow you any loan without collateral. However, P2P loans are unsecured, borrowers don’t need to provide any collateral.
Thus, such loans are very lucrative for borrowers who don’t have any kind of possessions to offer.
6. Passive Income for investors
Investors/lenders receive money back from borrowers as a form of regular monthly payments which includes both principal and interests.
The transactions take place with the help of peer-to-peer platforms where the borrower repays monthly payment and the platform adds it to the lender’s escrow account.
Further, the lender can either choose to withdraw it or reinvest it. Studies show that by reinvesting lenders can gain up to 10% more returns on their investment. Also, some P2P platforms provide automated reinvestment options. As a result, this saves a lot of time and energy required to build a portfolio.
Moreover, an automated investment enables you to add your funds in auto-invest where you select various parameters based on your goals and risk tolerance.
In addition to this, the algorithm will automatically build your portfolio. Besides, it will find you borrowers whose criteria align with your lending strategy.
7. Better deal flow for Passive Investor
The commercial real estate marketplace has different sectors that require individual expertise.
So, unless an investor has the experience, they cannot manage a regular inflow of projects and real estate deals. Hence,
Peer to peer marketplace provides passive investors a platform for leveraging their expertise.
Renowned real estate companies always keep a close watch on the multiple listing services along with maintaining a strong relationship with local banks and brokers. These professionals are constantly on a hunt for potential transactions. Without this deep connection, it is not possible to get a hold of such potential deals.
Partnership with investment platforms providing property listing features and necessary stats allows investors to participate in better deals.
8. No Hassles of property management
Peer-to-peer or Crowdfunding platforms allow you to invest in real estate without taking up the hassles of property management. Having someone else deal with all the problems while you sit back and relax and watch your return come in monthly.
9. Tax benefits.
There are multiple ways of tax deductions in real state crowdfunding platforms.
Depreciation expense offsets the original cost of a property. Investors receive distribution with depreciation expenses already deducted resulting in reduced distribution. This frees the investor from dealing with Depreciation calculations. With the book value of the property is reduced the profit on sale will be higher creating a larger tax obligation.
Interest expense –
interest paid mortgages and other financial institutions are also deductible. It reduces the further burden on your net tax.
Operating expense –
Owning a property has a lot of expenses such as maintenance, property tax, management charges. All these expenses are deductible.
Key things to remember while choosing a peer to peer website
Different websites specialize in different aspects. You must look for the one curated to your needs. A few pointers to keep in mind while selecting a P2P website are
● Minimum Investments
● Platform fees
● Total number of participating investor
● Annual returns
● Transparency of websites
● Repayment terms and conditions
● Reviews and business ratings
● Client service
The Lilypads Bottomline
Peer-to-peer platforms offer a reasonable financing option for both lenders as well as borrowers. With its easy-to-use and fast platform, it outperforms traditional financing options anytime. But as usual with any kind of investment before opting for a peer-to-peer platform you must keep in mind certain things and do needful research choosing the peer-to-peer lending website that matches your criteria.