Marketplace lending is an umbrella term used to describe a process of lending and investing online. A substantial slice of the marketplace lending industry is a niche focused on real estate (dubbed real estate crowdfunding), and for good reason — the process allows accredited individuals and institutions to invest in real estate online through the purchase of shares. No need to buy an entire building, become a landlord, etc., in order to make the high profits that real estate traditionally offers. This piece of the marketplace lending and investing market is revolutionizing the real estate industry. Let’s look at the evolution of real estate investing in order to understand the differences between marketplace lending (more specifically, real estate crowdfunding) and traditional real estate investment options.
A History of Real Estate Investing
To begin, let’s dissect the four main groups that real estate investments are categorized into by Investopedia:
- Direct real estate investments– When an individual or corporate investor purchases ownership interests and earns a return by issuing leasehold interests to tenants who, in turn, pay rent.
- Private equity real estate funds– An investable asset class that consists of debt and equity investments in the property markets allowing multiple investors to pool their funds.
- Real estate investment trusts (REITs)– A corporation, trust, or association that owns and, in most cases, operates income-producing real estate and/or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors.
- Marketplace lending (aka peer-to-peer lending and real estate crowdfunding)– A method of debt financing that enable individuals to borrow and lend money without the use of an official financial institution as an intermediary.
Direct real estate investing is the oldest RE investment type, and for many centuries it was the only way to invest in real estate. Not until the 19th century did we see the founding of a new model called Private Equity Real Estate Funds. Unfortunately, the majority of all transactions took place behind closed doors and only the wealthiest buyers were able to put their weight into these private funds.
In the 1960’s, Real Estate Investment Trusts (REITs) became available and were considered a new innovation in financial technology. These publicly-traded REITs opened the door for small investors to invest in real estate. Two issues plagued REIT investments: fund managers were not obligated to provide detailed information about a portfolio’s content, and up to 10% in fees could be deducted from an investor’s return.
Marketplace lending, or peer-to-peer lending, offers individual investors the opportunity to review all investment properties prior to investing. This investment style is a result of the marriage of finance and technology. Real estate crowdfunding investments are brought to the platform through qualified real estate developers. These developers must have a history of successful project completions as well as fulfill other strict requirements. There are many benefits investors and developers can expect to receive through marketplace lending.
Low Minimum Investment into Real Estate Deals
With Sharestates, the investment minimum is $1,000. Low minimum investments provide another implied advantage against other real estate investing types: accessibility. Although an investor may not have the funds to acquire an entire business center or shopping mall, they can purchase a share through crowdfunding.
Faster Real Estate Loan Approvals
In today’s dynamic market, every minute counts in order to access great real estate deals. Marketplace lending is the perfect complement to this fast-paced industry.
To the benefit of the borrower, online real estate investing platforms have robust underwriting systems. This is to allow underwriters an opportunity to analyze each deal and issue loans to worthy companies within a 2 to 20 day timeframe depending on deal complexity. To the benefit of the investor, approved projects are listed online as open investments. These investments tend to sell out quickly, so at the request of its investors, Sharestates has created an automation tool called ‘Auto-Invest’. This tool allows investors to automatically invest in projects that fulfill specific criteria of their choosing. As a result, there is more transparency in lending.
Transparency in P2P Lending
With peer to peer lending, investors have the opportunity to view each individual projects’ specifics and then invest on their terms. This allows investors the opportunity to diversify their portfolios by investing in many projects concurrently.
Reduced Fees with Marketplace Lending
Technology is the main force that drives marketplace lending forward and provides a line of advantages against traditional investment options. Together, with a changing regulatory environment, marketplace lending creates a more transparent, quick, and efficient investment environment for accredited individual investors.
Marketplace lending outperforms other investment types due to its low investment fees. Investments are usually charged 1-2% of total return. In comparison, REITs can charge up to 10% in investment fees and 5-6% in real estate equity fees.