Peer to peer (p2p) lending allows investors to passively invest which means their investment income is separate from any important time commitments. This is how investing in stocks and bonds works which means you don’t actively work with the company you invest in and it is not your day job, but you just want to help finance their growth.
P2p real estate has paved away for those investors who want a bridge loan to help with their renovation plan on a ‘fixer’ property. In addition, an accredited investor who wants to finance that loan or wants to become a participant of the ownership position can use p2p real estate as well. With p2p lender get access to several types of commercial real estate which usually they don’t get access to, including office buildings, shopping centres, storage facilities, and other commercial property. Equity investment in such type of properties can provide p2p investors with all the tax benefits of real estate ownership with no hassle of associated management.
In this article, we are going to discuss how p2p investing has changed the way real estate finance works.
1. Borrowers get to work with great lenders
Often the active real estate property investors deal with property rehabs, where the financing meant for buying and restoring properties. Banks and other financial institutions are no longer a good alternative for these ‘flipper’ investors.
The p2p real estate market also uses modern technology which makes a fix and flip loans fast and simple. Most platforms have a straightforward application process, so the borrowers only need to provide some key parameters, the buying price, the location of the property, their budget, their own net worth and income along with a few other items. Then the technology will take care of the rest.
2. Lower minimum investment amounts
The commercial real estate projects usually involve comparatively large properties, office buildings, retail centres, and apartment buildings with over 50 units, etc. a big drawback which small investors face when competing in the market is the size of the investments which the sponsoring real estate companies may be looking for with such projects. For example, if a sponsor is looking to raise £5 million then they probably won’t be interested in an investor unless the investor can bring at least £100,000 to the project.
Therefore, the p2p real estate market allows investors to pool together small investment amounts in a single large investment which is more attractive to a sponsor. In short, the p2p loans market is making it easier for investors to “throw their hat in the ring” and become a participant of larger commercial projects which widens the scope of investor’s opportunities.
3. Tax benefits
The tax benefits obtained through direct participation in commercial real estate can be attractive. If the investment is properly structured then the interest cost, deductions related to the depreciation and other items can help in sheltering or deferring the taxes on cash distributions. Some or all these tax benefits might be recaptured at the time when a property is sold, however, in the meantime the investors might have tax free use of the distributed cash. P2p real estate also caters to those who might not want to invest actively. Those investors can participate in such tax benefits in ways which might not have been available to them before.
P2p real estate is a great source of financing for active investors. However, for passive investors, the control is given over to a sponsor real estate company just like the stock investments. The great thing about p2p real estate market is that it has brought benefits to all participants across the real estate spectrum which probably explains the rapid growth of this sector.
4. Avoiding banks and closing problems
Bank financing for commercial real estate is complicated and it involves a lot of paperwork. It is a slow process which often required comparatively long lead times in getting everything approved by the investment committee of the bank.
This is an area where leveraging the expertise of a professional might not be a bad idea. For the passive investors leveraging the expertise of those professional companies which have been down the financing road and are familiar with property reports which banks as for, is important. On the other hand, an active borrower who wants financing from p2p, the lender usually has a relation with ancillary providers which can speed up the closing process.
5. Passive investors get better access to deal flow
There are different sectors in the commercial real estate p2p investments help such as multifamily apartment buildings, retail shopping centres, office buildings, self-storage, etc. unless an investor specialises in one of these sectors, it will be hard to develop a good pipeline of potential projects.
For those who want to passively invest, the p2p market can provide a means of leveraging the expertise of professional in this respect. An established real estate company cannot just review closely the multiple listing services, but it also has strong relationships with the local banks and brokers. These ancillary professionals are continuously on the lookout for potential transactions for their client companies. It is hard for most people who are not so ‘plugged in’ to access potential deals which can make it hard to make comparisons of competing for possible transactions. Investing with established real estate companies can make a lot of sense. If investors partner up with an investment platform which features property listings and all the necessary stats that go with them then it can allow investors to participate in some of the most potentially ‘better’ deals instead of completely missing out on them.
6. No management headaches for passive investors
Let someone else deal with daily management issues! This goes to the heart of the passive investment. Property management basically means that you will have to be on-call and responsive. Because someone needs to deal with the tenant. If you cannot handle these chores own your own, then there is no harm is delegating these chores to someone else. It sometimes can be better to leave these matters to the people who get paid to be on top of them.
7. The investment remains auto invest for you while you rest
For any investment, you have to do some kind of diligence and sign a few legal documents at the outset. However, once cash flowing property is acquired it would be rare for all renters to move out. In general, renters continue to pay rent and the sponsors continue to work to enhance the overall operation of the property.
The income factor of the commercial real estate usually helps to temper its volatility compared to asset classes such as stocks where the price movements constitute a larger portion of overall return interest rates.