[Editor's Note: This is a guest post from Lawrence Fassler at Realty Mogul. We have no financial relationship at this time.]
Credit markets are continually evolving. The peer-to-peer lending businesses like LendingClub and Prosper, which sprang up to better service some consumer credit markets, showed that profitable financial sub-markets (like credit card re-finance) still exist. Real estate credit markets offer a familiar appeal to individuals whose house is often their largest single asset. Mortgages might be securitized and bundled in multiple ways, but most individuals can still grasp the concept of a house, commercial building, or raw land as “real” collateral – something tangible that has a real (though still somewhat fluctuating) store of value.
This familiarity makes “crowdfunding” particularly viable as a financing source for real estate — and while the homeowner lending market has become more regulated in the wake of the problems encountered during the Great Recession, there remain plenty of other, less regulated sub-markets that are under-served by traditional financial institutions. “Hard money” lending to companies or individuals needing only short-term financing for renovation projects remains an attractive arena, and “crowdlending” is beginning to change the dynamics of that sector.
Real estate “crowdlending” is, at its core, just another way of pooling money together from a group of investors in order to make a loan. The difference now is that the ease of communications made possible by the internet has increased the potential reach of such pools so that they can extend out to investors across the country – investors who can review investment projects at their convenience. Crowdlending also allows for such investors to participate in larger commercial real estate projects – opportunities that were previously limited to financial institutions or a few very wealthy individuals – at lower minimum investment amounts than were ever before possible.
The Securities and Exchange Commission (SEC) still imposes some limitations on who can make these investments (unless an expensive registration statement is filed with that agency). Most commonly, this means that investors are limited to those who are “accredited,” meaning that they (generally) make over $200,000 in annual income, or have over $1 million in net worth (excluding their primary residence). This group, however, includes about 8 million Americans.
For such accredited investors, a single $100,000 investment into a large commercial real estate project (the minimum that is often otherwise required) might still be beyond their means, but a smaller investment of $10,000 may be quite workable. Crowdlending has brought to these investors not only increased accessibility to larger commercial loans, but it also gives them the ability to customize their real estate portfolios with interests in properties that they choose themselves (as opposed to investing in a “blind pool” portfolio) and to directly monitor those investments once made.
Hard Money Loans
Debt investments tied to secured real estate loans (similar to bank loans) can be quite attractive to investors. The hard money loan market usually involves loans of relatively short terms that can provide investors with consistent monthly income streams. While equity investments in real estate can be attractive for other reasons (namely, they generally provide greater anticipated rates of return), the debt investments involve less volatility and risk – and can offer rates of return that are still quite favorable when compared to bank CDs or other shorter-term investments.
The Realty Mogul Experience
In 2013, the real estate crowdfunding site that I lead began to show how crowdlending can really work. Entrepreneurs buying a fixer property at auction can now utilize crowdlending as their source of “bridge” financing to get funds needed until the property is stabilized and conventional bank financing can be installed. While individual hard money lenders may be plentiful in some regions, in others an entrepreneur may need more than the $100-200,000 that many individual lenders are accustomed to loaning. These larger commercial properties in need of renovation have turned out to be great candidates for alternative sources of financing.
Crowdlending investors have literally seized on these opportunities. We at Realty Mogul have had some debt investments in the $100,000 range sell out in 20 minutes after they appeared on our website. A larger loan of nearly $500,000 was fully funded within a few hours.
For entrepreneurs, the attraction of this speed is evident. Time is money, and the quicker they can get a loan processed then the faster they can get started on the planned renovation, get the stabilized property back on the market, and move on to the next project.
For investors that now have newfound access to these commercial lending opportunities, crowdlending also provides them with greatly increased investment transparency. Investors can view information about the specific property that is the subject of the loan – information in sufficient detail that they can make an informed investment decision about that particular property. To the extent they have funds sufficient to make several of such investments, they can themselves diversify their own lending portfolio — in multiple property types and across different geographical areas. Finally, they are now in a position to track their investments – our site, for example, allows them to stay abreast of their account value (divided between debt and equity investments), cumulative earnings, and cash and earnings activity.
[Editor's Note: I asked Lawrence to include this section as I thought readers would be interested. It may sound a bit more “advertisy” than I allow most of my guest posts to be. Feel free to blame me.] What have the results been like? The crowdfunding industry is still quite young, so there aren’t reams of data available − but at Realty Mogul, as of the end of January 2014, we’ve financed loans on 34 different properties, of which 14 have now been fully repaid. These lending opportunities have been offered to investors at interest rates varying from 8 to 10% annualized, with terms varying from 6 months to 2 years. None of the loans has defaulted or even threatened to default, so we haven’t yet had to deal with any foreclosure proceedings (which vary by state). Perhaps unlike other crowdfunding sites, though, we have historically curated the opportunities that are brought to us, so that proposed loans must meet certain criteria before we post them to our website.
2014 will likely see a greatly expanded use of crowdlending. House-flippers in Kansas will be able to access money originating from investors in Florida or Arizona. Hotel entrepreneurs buying a fixer property at auction may be able to utilize a crowdlending site as their source of “bridge” financing to get funds needed until their property is stabilized and conventional bank financing can be installed. In almost every market, crowdfunding sites like Realty Mogul are already disrupting the way that many real estate properties are financed – and 2014 will likely see a big ramp-up in crowdlending as a new financing source and investment opportunity.
What do you think? Have you done any hard-money lending, either on your own or through an organization like this one? What was your experience like? Comment below!