Historically, money lenders have enjoyed stretches of riches, but will crowdfunding disrupt this industry? BiggerPockets members are constantly raising the question of what, and how, will crowdfunding disrupt the lending industry as we know it. The question to be asked is— how does crowdfunding and money lending pair compare and compete against each other, and are the two industries “required” to compete? Is it possible for these very different capital flows to work together, harmoniously, for everyone’s benefit? Let's take a look
How ‘Hot’ Is Real Estate Crowdfunding?
It’s obvious that real estate crowdfunding is becoming a trend. Crowdfunding platforms raised billions of dollars in 2015— with continued growth seen in 2016 and expected this year. Banks have left a void in the market which has (partly) led to the opportunity available for crowdfunding to take “its share.” Banks do not support customers the way that they once did especially after things went south during 2008. We’ve reached a point in time where an entrepreneur will tap into the “crowd” versus going the old traditional route in getting a loan from a bank. Not only are loans being provided by the crowd, but business owners are offering equity within their company (which gives the investor more upside in the event the venture does well).
Hard Money Lenders & Their Dark Sides
Many real estate investors are not fond of the idea of borrowing from hard money lending institutions. Although rates are quite diverse— a spectrum of percentages— real estate investors can expect to pay between 10 percent to 14 percent for all hard money loans. In addition, one needs to expect to fork-out a substantial amount of points up front on a short-term note. Service is so important to people in this era of investing and business that the way lenders operate, doesn’t connect well.
Crowdfunding: Contrasted
Noticeably lower rates exist in higher quantities for crowdfunding deals, but not 100 percent of the time. For example, SoFi boasts mortgages, student and personal loans, ranging from 3.5 percent to 12.99 percent. Prosper— a peer-to-peer lender— borrows between the rates of 5.99 percent to 36 percent. From my experience, it’s highly unlikely that you will ever find a hard money loan under 7.5 percent. The truth is, they will most likely ‘shut the door in your face’ (i.e. hang up on you) if you ask for a rate less than the one mentioned in the previous sentence.
The majority of crowdfunding portals can offer better returns and service to investors. These entities work on a more efficient level than archaic business models due to their agile ability to keep up with advancements in technology. Technological advancements and keeping up with trends trickles down to an investor; how funds are received and the lower costs associated with those funds.
Can Hard Money Lending And Crowdfunding “Be Friends?”
So, is it possible that the platforms of crowdfunding and hard money lending coexist peacefully? Investors could first use hard money to acquire great deals and then take the opportunity to open them up to “the crowd” to be updated and operated as rentals. Or, one could reverse that scenario and investors could use hard money funds to cash out partners— in the event they needed their capital back in the beginning stages of a project. Interestingly enough, banks and hard money lenders are also utilizing the existence of crowdfunding by putting their money into crowdfunding projects.
Summary
There’s still room for both models to work in the marketplace, however the hard money lenders must remain competitive in order to not be disrupted by the new opportunities that are available to raise capital. Crowdfunding’s rise meets a market lost by traditional lending institutions and in the future, the business entities that are most successful will learn to adapt and meet the changes in demand within a market. As an investor, remember— you have options. It is essential that you do your due diligence; researching what tools exist around you that will help be the foundation to building your dreams.
