Whenever a concept is catching on, there will be a lot of Internet chatter about it. There are quite a few articles on financial and investing sites these days about peer-to-peer lending. It's a good thing, as investors are constantly searching for affordable funding sources for their projects, particularly fix & flip deals.
Peer-to-Peer lending addresses three challenges in the investment world:
1. Investors who want passive involvement, less time and hands-on activity. 2. Small investors who do not have large sums to commit to real estate. 3. Investors who want ready access to funds for their projects from less restrictive lending sources.
This concept is particularly suited to commercial properties including shopping centers, office buildings, self-storage facilities, and other real estate types. In the past the lenders involved in these projects were institutional and major banks. That's changing with more peer-to-peer lending entering the marketplace.
Small investors who want passive involvement with limited capital:
Peer-to-Peer opens up real estate lending to the masses by allowing individual small investors to buy into deals with less money and take a passive role in management and income generation. One peer-to-peer online lender puts it this way in bullet points:
• Purchase a whole loan or a fractional interest • Terms range from 6 months to 5 years • Start with as little as $5,000 • Investments pre-vetted by industry experts
Now individuals with limited capital can own a piece of a major commercial property and share in the rental income and tax advantages offered by rental real estate ownership on a large scale. These are passive investments without management headaches, taking advantage of professionals. Tenant issues, rent collection, and marketing are all handled by people with experience in these areas.
Over time, commercial real estate has performed more like bonds than stocks or even REITS (Real Estate Investment Trusts). Different lease types allow owner/investors to tailor their leases to the tenants' type of business and revenue flow. This helps to reduce fluctuations and risks, as well as in structuring a win-win situation for both the owners and the tenants. This creates a more stable cost structure for the tenant which maintains better occupancy over time.
Investors want better access to money with less hassle and fewer limitations:
Investors, particularly those doing rehab work, find the closing procedures of banks and institutional lenders to be cumbersome and limiting. Too much paperwork and other underwriter requirements make it a real hassle to fund projects. The time to put together the application and prove to these lenders the deal is a good one can be too long to keep the purchase alive.
Here are the bullet points on this side of the peer-to-peer process:
• Finance your real estate investment project fast • Flexible terms • Non-standard financing is our specialty • Competitive, transparent pricing • Funding for all 50 states
Those are all nice features in lending if you're a fix & flip investor who needs to fund not only the purchase of a property but the rehab as well. For large commercial projects it can bring together hundreds of smaller investors to fund a project with less paperwork and in a shorter approval time frame.
Cash distributions to the investors in a peer-to-peer situation can enjoy some tax benefits depending on structure. It's possible to offset the income distributions with depreciation and interest expense in some cases. At some point there will be tax benefits, even if they are delayed until the sale of the property.
Whether you're a small investor who would like to own a piece of a major project or an investor seeking financing, peer-to-peer lending can be an attractive investment option.