“Passive” investing is when your investment income is separated from any significant time commitments – for example when you’re not actively working on the project, like you are at your “day job.” Peer-to-peer marketplaces give many investors a chance to invest passively, just as they would with investments in stocks and bonds. Active investors, on the other hand, may want a new source of financing — one that is familiar with their business.
Peer-to-peer real estate marketplaces now can solve for each of these situations. Real estate investors who need a bridge loan to help with their renovation project on that "fixer" can turn to these marketplaces to get their financing — with the knowledge that, oftentimes, the money comes from people a lot like them. Accredited investors who simply want to help finance that loan, or to participate in ownership positions (and thus the potential equity upside) in commercial properties, can do that too. Commercial properties can include shopping centers, self-storage facilities, office buildings, and other commercial real estate types — properties that many investors don’t normally have access to. Equity investments in such properties can provide peer-to-peer investors with all the associated tax benefits of real estate ownership, without the associated management headaches.
Here are several reasons why peer-to-peer marketplaces are changing the way that real estate financing works.
#1 – Borrowers Can Work with Great Lenders
Active real estate investors are often dealing with property rehabs – where the financing is meant for purchasing and renovating properties. Major banks and financial institutions are just not a good alternative for these "flipper" investors; those lenders often follow underwriting guidelines that don’t fit with these projects, and also typically fund only the property’s purchase (so that renovation money still needs to come out of the investor’s own pocket). Peer-to-peer lenders often specialize in these types of loans, and can be extremely useful to long-term investors who need fast financing now before turning to a more traditional source later on. These rehab loans generally cover rehab costs as well the property’s purchase; to protect both sides, oftentimes the rehab amounts are disbursed over time, as the borrower completes the repairs.
The better peer-to-peer marketplaces also use technology to make fix-and-flip rehab loans simple and fast. The application process of some online lenders is straightforward and simple; borrowers simply provide a few key parameters – the location of the property, the purchase price, the rehab budget, their own income & net worth, and a few other items – and technology helps take care of the rest. Processing algorithms take the inputs provided and can immediately generate a letter of intent. Underwriters promptly review the application and work with the investor to speedily get any additional needed information — and then work to close that loan quickly.
#2 — Passive Investors Have Better Access to Deal Flow
In commercial real estate, there are many different sectors – multi-family apartment buildings, retail shopping centers, self-storage facilities, and office buildings, to name a few – that offer opportunities for investment. Unless an investor specializes in one of these areas, though, and has developed good deal sources, it’ll be tough to develop a good pipeline of potential projects.
For investors looking to invest passively, peer-to-peer marketplaces provide a means of leveraging the expertise of professionals in this respect. Established real estate companies not only review closely the multiple listing services, but also tend to have developed strong relationships with brokers and local banks. These ancillary professionals are constantly on the lookout for potential transactions for their client companies. It’s difficult for most people not so “plugged in” to be able to access such potential deals, and this lack of access itself makes it difficult to make knowledgeable comparisons of competing possible transactions.
Investing alongside established real estate companies can make a lot of sense. Partnering up with an investment platform that features property listings and the necessary stats that go with them can allow investors to participate in some of these potentially “better” deals, rather than missing out on them completely.
#3 – Lower Minimum Investment Amounts
Commercial real estate projects tends to involve relatively large properties – retail centers, office buildings, apartments buildings with more than 50 units, etc. A major disadvantage for smaller investors find when competing in the market is the sheer size of investments that sponsoring real estate companies might be looking for with such projects. A sponsor looking to raise $5 million, for example, is likely to not be interested in an investor unless that investor can bring $100,000 to the project.
Peer-to-peer real estate marketplaces allow investors to pool together smaller investment amounts into a single larger investment that is attractive to a sponsor. A smaller individual investment amount means that a greater number of investors will be able to participate in these larger property transactions. Alternatively, even those who might be able to afford a larger investment amount may instead prefer to diversify their investments across different properties.
Peer-to-peer real estate marketplaces make it easier for investors to “throw their hat in the ring” and to participate in these larger commercial projects, thus widening the scope of the investor’s opportunities.
#4 – Avoiding Banks and Closing Issues
In addition to the difficulties involved with finding suitable properties, the closing process isn’t so easy either. Bank financing on commercial properties can be complicated and involve a fair amount of paperwork. It’s a relatively slow process, often requiring relatively lengthy lead times in getting everything approved by the bank’s investment committee.
This is another area where leveraging the expertise of professionals may not be a bad idea. For passive investors leveraging the expertise of professional real estate companies, those companies have been down the financing / closing road many times and are familiar with the property reports that the banks will likely ask for; many have pre-existing relationships with some lenders. Where an active borrower, on the other hand, is seeking financing from a peer-to-peer marketplace, that lender often has relationships with ancillary service providers that can greatly speed the closing process along.
#5 – For Passive Investors, No Management Headaches
This goes to the heart of passive investing – let someone else deal with the day-to-day management issues! Are you really in a position to deal with 2am calls about leaky faucets or broken gates? Do you really want to have to meet the handyman when he comes by to let him into the problem apartment?
Property management means being on-call and responsive (or else there will be unhappy tenants). Tenants, toilets, and trash; someone has to deal with them. If you’re up for the tasks, more power to you; but it’s no crime to not want to delegate these chores to someone else. Again, it’s sometimes better to leave these matters to people who are paid to be on top of them.
#6 – The Investment Continues to Work for You While You Sleep
For any investment, you need to do some diligence and sign legal agreements at the outset. Once a cash-flowing property has been acquired, however, it’d be unusual for all the tenants to move out or for similar catastrophes to occur. Generally, tenants continue to pay rent and the sponsor continues to work to improve the property’s overall operations.
This income component of commercial real estate generally helps to temper its volatility as compared to asset classes like stocks, where price movements constitute a bigger portion of overall return rates. Despite the Great Recession, commercial real estate business cycles are often less pronounced; rental lease terms generally help to mitigate economic fluctuations and their impact on income. Over time, commercial real estate has generally exhibited relatively good stability — more akin to bonds than to stocks or even publicly traded REITS.
#7 — Tax Benefits
The tax benefits of direct participation interests in commercial real estate can be attractive. If properly structured, deductions related to depreciation, interest expense, and other items help to shelter or defer the taxes on cash distributions. Some or all of these tax benefits may be recaptured at the time of the property’s sale, but in the meantime investors may have tax-free use of the distributed cash. For persons not wanting to invest actively, peer-to-peer real estate marketplaces can let them participate in such tax benefits in ways that may not have been available to them before.
Peer-to-peer real estate marketplaces are great financing sources for active investors looking for rehab or bridge financing. For passive investors, control is given over to a sponsoring real estate company, similar to how stock investments work where the company’s management are the ones on the "front lines" of running the company. Peer-to-peer real estate marketplaces are bringing benefits to participants all across the real estate spectrum — which probably explains the rapid growth of the sector.