Do you want to become a real estate investor but do not have enough money to invest in property? We have a solution for you which is named as peer to peer real estate lending. It can help you in achieving your dream even if you have a small amount to invest in. In the past real estate investment was only for rich individuals who wanted to invest their money for a long period. But it is not the same anymore; over time, the trend has changed, and with the help of advanced and alternative financing, it has become easier for you to become a real estate investor.
In this guide, we are going to explain how you can become a real estate investor with the help of peer-to-peer lending. So read on to know how p2p real estate lending works and whether it is beneficial for you or not.
What Is P2p Real Estate Lending?
In the beginning, p2p platforms offered only personal loans to individuals facing difficulties securing a loan from traditional financial institutions. However, with the increase in demand for p2p loans, these platforms expanded their services, and now they offer different types of loans, including p2p property loans that are also known as p2p bridging loans or p2p real estate loans.
P2p real estate lending is a practice that matches investors directly with the borrowers who are looking for funds to invest in a real estate project. This project can be of any type, including new development, renovation of a property, or rental property investment. Borrowers take out a loan to complete their project and repay the loan amount according to predetermined loan terms.
How Does It Work?
Peer-to-peer platforms act as a middleman and match borrowers with the investors. A borrower can be anyone, including a landlord looking to renovate a property, a real estate developer, or a house flipper. These borrowers can turn to real estate p2p lending platforms to secure funds because these platforms are more lenient on credit as compared to banks or traditional financial institutions. In addition, platforms list all the applications on the website so that investors can select the one they want to fund according to their investment criteria and risk appetite.
Investors will look into the borrower’s credit profile and then set the loan terms according to that profile. If you accept a lender’s offer, you can quickly withdraw funds. The borrower then uses this amount to complete a project and has to repay the loan amount and the interest rate according to the predetermined terms.
What Are the Benefits Of P2p Real Estate Lending?
If you are a borrower, you can find that the p2p platforms offer you more flexibility than traditional lenders. For example, you can get a p2p bridging loan even when you have a below-average credit score. However, you have to pay a high-interest rate with a low credit score and vice versa. You can find a number of lenders on the same platform and can negotiate loan terms and interest rates. In addition, you will get quick access to funds and do not need to wait for weeks or months to get approval.
On the other hand, real estate lending also offers several benefits to investors. Investors can choose how much money they want to invest in a specific loan, what the interest rate is, and also invest according to a risk level they are comfortable with. Furthermore, you can earn a high-interest rate that is usually between 8% to 10%. The interest rate you can earn depends on the loan terms. You can earn better returns when you invest for a long time and keep on reinvesting.
Risks Associated With Real Estate P2p Lending
Like all other investments, p2p bridging loans or property loans also comes with some risks that you must be aware of. No doubt, p2p property loans are short-term loans, but it does not mean they start giving returns quickly. Short term in p2p bridging lending means anywhere between two to five years or more. It depends on the type of project and loan terms when you will start getting profit. Some borrowers start paying the loan amount and the interest rate immediately, while others pay it at the end of loan terms or when the project is completed.
Usually, the risks are for the investors, which include the risk of default, low profit, and low collateral. Now let’s have a closer look at each of these risks:
Risk Of Default
Most often, p2p platforms offer loans to those who have low credit scores and find it difficult to get a loan from a bank, which means that these borrowers have a poor credit history. You should be careful when investing in any type of p2p loan because there are chances of defaults. P2p platforms take all the necessary measures and assess the borrowers before the approval of loan applications. But still, there are chances that borrowers fail to repay the loan. This default can result in losing money.
Some platforms give grading to the borrowers on the basis of their affordability and creditworthiness of the borrower. These things are also used for determining the interest rate. It means that the riskier the loan is, the more profit you can get. However, if you want to invest in a safer way, you will not grant funds to borrowers who have more risk. But in this way, you can not make a higher profit. So we suggest you create a diversified portfolio that has borrowers with different credit grading. This way you can earn more profit.
Some platforms do not require collateral from the borrowers. In such a situation, it all depends on the borrower’s ability to repay the loan and whether you will get your money back or not. Therefore, you should not only rely on the platform’s security analyses but also read all the applications carefully when choosing a borrower.
Should you invest In P2p Real Estate Lending?
When investing in peer-to-peer bridging loans, you must keep in mind that it works on the classic risk and reward dichotomy. It means the riskier loans will reward more profit. P2p lending allows you to decide how much you want to invest, and you can also create a portfolio according to the returns you want to make. Unlike traditional real estate investment, p2p real estate lending does not require huge amounts, and you can start from a small amount. However, every platform has its own minimum investment criteria. If you invest by taking all the necessary measures to mitigate risks, you can earn regular income from p2p real estate investment. Above all, create a diversified portfolio and spread investment across multiple asset classes and borrowers to mitigate risks and get the most out of your investment.