Real estate crowdfunding (RECF) benefits the real estate market by helping those in need to raise capital for property acquisition and specific project goals. It also opens the real estate investment space to smaller private investors while expanding opportunities for large private and institutional investors. Direct lending no longer lies in the hands of banks and traditional financial institutions. RECF makes capital available to project sponsors and helps individual investors access opportunities previously closed off to them.
How Real Estate Crowdfunding Benefits Developers, Flippers, and other Real Estate Pros
The benefits of online capital fundraising for real estate projects include:
- Borrowing Speed – Bank loans can take several months to clear, while online direct lending takes place in days or weeks. Online platforms also give borrowers access to capital through phones and other devices. Loan applications are often approved the same day.
- Favorable Terms – By eliminating middlemen (bankers), crowdfunding platforms can offer higher rates of return to investors and lower interest rates to borrowers. Technology adds value to parties on both ends of the process while cutting costs.
- Ability to Fund Various Project Types – Real estate debt instruments make investment opportunities available in a variety of residential and commercial projects from corner cafés to skyscrapers.
- Ability to Lend and Borrow without Intermediaries – Online direct lending puts investors and borrowers together in the same “room.” Institutional and private investors can find deals through the marketplace while borrowers can speak directly with their funders. Also, they don’t have to meet all of the exacting criteria imposed by banks and traditional lenders, and crowdfunding platforms more readily supply rehab loans for “flippers” than most traditional lenders.
The Online Lending Model’s Benefits to Lenders
Online lending makes the real estate investing process easy. Technology streamlines many of the processes that keep it simple for the borrower and lender alike. It also offers a greater potential borrower pool, a quicker return on investment since many of the opportunities are short term, and the ability to choose which types of projects the investor prefers. Lenders also benefit from better returns and lower fees.
The Online Lending Vetting Process
- Borrowers vetting the platform
Vetting investors involve due diligence and are often the responsibility of the platform, but borrowers exercise some control over how they structure projects when presenting them to the platform. Borrowers should spend some time performing due diligence on the platform itself. What are its underwriting procedures? Does it work with accredited or unaccredited investors or both? What kinds of projects does it accept? Does it add its own money to an investment or simply as a marketplace? These are a few of the questions borrowers should ask before choosing a platform.
- Platforms vetting borrowers
One metric a platform looks at is the ARV (after repair value). Some real estate investing platforms sign loans for no more than 80 percent of the ARV, but others might go with the industry standard of 70 percent ARV. Other platforms bypass ARV for LTV (loan-to-value) loans, which consider only the present value of a property. Platforms generally look at borrower experience, track record, and credit, as well as whether or not the borrower can back their own projects and put “skin in the game.”
- Platforms vetting investors
Securities laws require investment platforms to distinguish between accredited and non-accredited investors. Depending on how the platform is set up, they may only accept accredited investors, while other platforms may be open to both accredited and non-accredited investors. In some cases, platforms are limited in the number of non-accredited investors that can get in on an opportunity.
- Investors vetting the platform
Investors, too, should perform due diligence on the platform. How many successfully-funded projects has it funded? What is the average ROI? What about fees? Are the investment long-term or short-term? Does the platform offer residential, commercial, or industrial opportunities, and how are they selected?
As traditional real estate lenders pulled back in the last decade, legislation and innovation led to crowdfunding as an option. As real estate crowdfunding opportunities grow, online direct lending will continue to offer capital raising opportunities for project sponsors ready to borrow. Whether you are a borrower, broker or lender, Sharestates offers a program for you.