Alternative assets have always been an investment typically reserved for the ultra high net worth individual and for institutional investors like hedge funds, private equity funds and venture capital funds. The retail investor has had little to no access to some of the most lucrative investment opportunities available. Instead of being able to be an early investor in a company like Facebook or Uber, retail investors have been stuck with taking risks on penny stocks. These stocks that have the ability to lose 99% of their value in one day. Private online lending through real estate crowdfunding can be the solution to this problem.
Disrupting the World of Finance
With any unfairness that affects a large amount of people, there are always going to be companies looking to disrupt the status quo. Take Lending Club for a great example. Back in 2007, their founder saw an opportunity to allow individual retail investors to take the role of a bank in the consumer loans equation. This concept of peer to peer (P2P) lending allowed consumers to borrow money for things like credit card refinance from other individuals that were looking for a greater yield than their savings account offered. The P2P lending phenomenon that kicked off in 2007 has only taken off over the past few years. Now it’s a multi-billion dollar industry, with the two top players (Prosper; being the other) having syndicated over $13 billion (#1and#2) in loans alone.
In December 2014, we even saw our first IPO in the industry with Lending Club going public (Ticker: LC). That $13 billion in origination equates to over$1 billion in interest paid to investors–investors that include both institutional, accredited (high net worth individuals) and non accredited investors.
Emergence of Marketplace Lending
With the success of these two peer to peer lending stars, an entire industry blossomed in only a few years, reaching multiple asset types. The P2P industry is also known as marketplace lending, direct lending or online lending–take your pick. Not only is this space making in a dent in the banking industry, it’s also transforming the private lending space. Previously, private (non-traditional) lending was only available to institutional investors and hard money lenders. Now, this new form of private lending is open to a much wider audience that includes accredited investors and non accredited investors. Let’s briefly define what an accredited investor is: An accredited investor is any individual with at least $1 million in net worth (excluding their primary residence) and/or $200k in annual income for the past two years and foreseeable future (or $300k per couple).
Since it is a new industry, some may think that it’s a full-out wild west scenario out there. It’s not. The Securities & Exchange Commission (SEC) regulates this space to an extent. Due to restrictions, some of these online lending platforms are limited to only institutional and accredited investors. Lending Club and Prosper are open to non accredited investors in most states due to certain filings that they had approved by the SEC (S1 filing). Most other online private lending platforms are only available to accredited and institutional investors. For a user to verify accreditation with any of these platforms, they are required to check a box upon registration, indicating that they are accredited.
FinTech in Many Forms
This type of online private lending, driven by consumer loans, has spread to other asset types including small business loans, solar loans, real estate loans and more. Soon after Lending Club debuted on the NYSE , a company called OnDeck Capital (Ticker: ONDK) started trading on the NASDAQ–the leaders in online lending for small business loans. If you’ve ever had student debt, you’ll be happy to know that there’s a company called Sofi that focuses on offering more competitive rates and refinancing options for student loans. And if you’ve got a green investment thumb, Open Energy Group offers an alternative investment for the debt financing of solar projects. These are just a few examples of what’s spawned from this online lending explosion. So many types of businesses are getting into or have already entered this space, but none is more exciting than real estate online lending–also referred to as real estate crowdfunding.
Real Estate Crowdfunding
Private lending for real estate has traditionally been referred to as hard money lending, so real estate crowdfunding can be considered hard money lending version 2.0. The idea is simple. A borrower who is a real estate owner, developer or rehabber applies for a loan or equity raise through an online platform. If approved, the project gets posted to a website for investors to invest small to large amounts of capital directly into the real estate project. It’s the age-old process of syndication, with a technology element to make it more efficient, easier and much sexier.Real estate crowdfunding has attracted tens of thousands of accredited investors (yes, most platforms are only open to accredited investors due to SEC regulations) to register and build their real estate portfolios. There are a few main reasons why many investors have made this investment the alternative asset of choice:
Projected net annual returns generally starting at 10% Collateralized asset Simple and passive investment strategy Transparency on each individual real estate project Minimums starting as low as $1000 Access to real estate investment opportunities that may have been previously inaccessible.
Benefits of Real Estate Crowdfunding for Borrowers
When it comes to borrowing money through a real estate crowdfunding platform, borrowers also reap a few key benefits that make it an attractive source of capital:
- Quick access to capital with ability to close a loan or equity raise in a few days.
- Competitive private lending rates Marketing benefits for projects that qualify.
In addition to real estate crowdfunding having an attractive investment profile, it also has the potential to be the largest asset type out of all online lending types (consumer debt, small business loans, etc). This is not only because it’s a larger market overall (real estate lending market is estimated at $10.8 trillion), but because it’s also a collateralized asset. There’s that extra layer of comfort knowing that a tangible asset is behind this type of investment.
Online Lending will Only Get Better
Online lending as an investment is here to stay. All in, there’s over $20 billion (rough estimate based on largest players whose statistics are publicly available) invested through online lending–consumer debt, small business debt, real estate debt, etc combined. As time goes on and the online lending industry continues to prove itself, more and more investors are going to allocate investment dollars into it. We’re already starting to see investment advisors (RIAs) steer their clients into this asset class. Within five years, online lending will be a part of the average investment portfolio, just like stocks and bonds. It’s only a matter of time.
Read the original article on Private Lender:http://issuu.com/aapl/docs/private_lender_julyaug_2015-final/1 (Page 26)
