Are you looking to get into real estate but don’t have the money to buy an investment property? There is a variety of investment loans that investors can use. However, there’s a relatively new method of financing real estate investments that is quite different from the traditional options. It’s called peer to peer real estate lending. Have you heard about it?
In the past few years, this financing option has grown significantly and is getting even more popular. But how exactly does it work and is it a good financing option for you? Read on to get the full scope of this unique method of financing rental properties.
What Is Peer to Peer Real Estate Lending?
Peer to peer real estate lending is a method of financing in which lenders are connected with real estate borrowers through online platforms. Instead of a traditional financial institution lending money, the P2P lending platform matches accredited investors directly with people or entities that want to borrow money. The online platform sets the rates and terms (typically with investor input), vets the borrowers, approves the loans, and services them.
However, applications for P2P loans are quite similar to other investment property loans. You fill out an electronic application, which usually includes a credit inquiry. You may also need to upload some key documents including proof of identity, copies of your tax returns, recent bank statements, pay tabs, and other proof of income.
The peer to peer real estate lending platform will then give you a risk grade, which will determine your interest rate and terms of payment. If the offer fits your situation and investment goals, you can opt to move forward. After you have accepted the loan, you could receive the funds as soon as the same day or within a week depending on the P2P lending platform. You will then begin to make your monthly payments until you finish paying up your loan.
Is Peer to Peer Real Estate Lending a Good Idea?
Here are some of the reasons why you should consider real estate peer to peer lending:
1. Easier to Qualify
Peer to peer real estate lending can be a great alternative for borrowers who have poor credit history and can’t get approved for traditional investment property loans. Banks and other financing institutions usually have more stringent qualification requirements, making it difficult for some people to get approved.
However, even if your credit is not very good, you can still get approved for a loan through P2P lending platforms. If you are looking for money to fund your real estate investment but have exhausted traditional financing options, you should definitely consider P2P lending.
Having said that, it doesn’t mean that anyone can qualify for peer to peer real estate financing. You still need to have a decent credit history to be eligible. While qualifying requirements will vary widely, you’ll typically be required to have a credit score of above 600. P2P lenders will also consider your income and debt to income ratio.
Bear in mind that, even if you qualify for a loan, like with other lenders, these factors will also determine your loan rate and terms. If you are considering peer to peer real estate lending, you might want to improve your credit to improve your chances of finding a good loan deal.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
2. Faster Access to Funds
Financing real estate investments through banks can be complicated and usually involves a lot of paperwork before a loan is approved. This can make the closing process relatively slow.
On the other hand, online loans usually take a shorter time to process, typically within a week. Apart from having less bureaucracy, peer to peer real estate lending platforms leverage technology to make rental property financing faster and more efficient. Borrowers simply provide a few key details and processing algorithms take care of the rest.
As a result, peer to peer lending can be an ideal financing method for borrowers who need fast financing and want to avoid the hassle of getting a loan from a bank.
Related: How to Compete Against Cash Buyers for Real Estate
3. Lower Rates
Another thing that makes peer to peer lending an attractive option for borrowers is their relatively lower rates.
Direct online connection of lenders and borrowers means that P2P lending companies have lower overhead costs than traditional financing institutions. Origination and closing fees are also fewer. Consequently, borrowers can get loans at lower interest rates and enjoy a higher return on investment than they would with a conventional loan.
Before you buy an investment property, make sure you use Mashvisor’s investment property calculator to estimate your cash on cash return. This is the most accurate way of determining how your financing method influences your return on investment.
Related: How to Get the Best Rental Property Mortgage Rates 2020
Choosing a Peer to Peer Real Estate Lending Platform
Peer to peer real estate lending is gaining momentum due to technological advancement, increased prevalence of internet use, and improved security in online money transactions. Today, the variety of P2P lending platforms is considerable.
While they all work in the same basic way, they also have some differences. They may differ in terms of their target clientele, eligibility criteria, amounts, loan rates, etc. With many P2P lending sites coming up, it’s also possible that some may not be legitimate or transparent.
Therefore, before you apply for a P2P loan, it’s important to shop around for the best deal. Research several P2P lending options and select a P2P lending company that best meets your needs.
Here are some of the things you should consider when deciding whether a P2P real estate website is a good fit:
- Qualification requirements
- Minimum/maximum amount you can borrow
- Interest rates
- Origination fees
- Repayment terms
- Customer support
- The time it takes to receive funds
- Restrictions
- Flexibility
The Bottom Line
Peer to peer lending for real estate can be a viable financing option for real estate investors, particularly those who can’t qualify with conventional lenders. It is simple, fast, and convenient. However, as with all investment property financing methods, it comes with risks. You must do your research if you want to get a deal that matches your situation and investment goals.