Today’s real estate investors have many financing options at their disposal. There are traditional options like government-backed loans, home equity lines of credit (HELOCs), and investment property mortgages. But on top of those, you also have new-age choices like crowdfunding and peer-to-peer (P2P) lending platforms.
If you haven’t heard of P2P lending and are looking to expand your portfolio, it’s an option worth considering. Peer-to-peer lending is an easy way to connect with cash-flush individuals without the need for picture-perfect credit or reams of red tape and paperwork.
As with any method of financing, though, they have some drawbacks. Before you head for the nearest P2P platform, make sure you know the full scope of what you’re getting into.
Peer-to-peer lending is done through designated P2P platforms. These services match borrowers with vetted, private investors. Though P2P loans are technically personal loans, there’s usually no direct contact between the lender and the borrower. The loan is approved and serviced through the platform and both the investor and the platform claim part of the loan’s earned interest.
The pros of P2P lending for real estate investing
There are many advantages to using a peer-to-peer lending platform to finance your investments.
For one, they make borrowing easy -- especially if you’re used to the antiquated systems of the traditional mortgage industry. Since there’s no bank (or associated federal regulations) involved, the paperwork is whittled down significantly. You fill out an application, provide some proof of identity and, in some cases, upload proof of your income or employment. You’ll usually see loan offers within a few days (sometimes even hours).
P2P loans are also more affordable than traditional financing options. They come with lower interest rates thanks to lower overhead costs than banks and official lenders. They also have fewer origination and closing fees.
The cons of P2P lending for real estate
The biggest downside is that P2P lending can be risky -- especially if you don’t plan ahead.
Although you can take out a large peer-to-peer loan without a deep dive into your financials or credit, doing so can be dangerous. You could overextend yourself and borrow more than you can afford, putting your financial security (and credit) in harm’s way in the process.
Additionally, some P2P lenders only allow low loan-to-value ratios (65% is a common limit). You may need to find other ways to supplement your loan and purchase your properties.
|Pros of P2P Loans||Cons of P2P Loans|
|Easy to apply and shop for||Can be risky if not done cautiously|
|Low interest rates||May not cover your full investment price|
|Low origination and closing fees|
The bottom line
The benefits of peer-to-peer loans are clear, but that doesn’t mean they're without fault. As with any financing option, there are risks.
If you’re considering a P2P loan for your next investment, carefully consider the amount you take out and make sure you have the long-term resources to repay your debt. Your credit will thank you for it.