An Investor Analyzes: Could Crowdfunding Disrupt the Hard Money Lending Industry?

An Investor Analyzes: Could Crowdfunding Disrupt the Hard Money Lending Industry?

2 min read
Sterling White

Sterling White is a multifamily investor, specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded, Sonder Investment Group, he owns just under 400 units.

Experience
Sterling is a seasoned real estate investor, philanthropist, speaker, host, mentor, and former world record attemptee, who was born and raised in Indianapolis. He is the author of the renowned book From Zero to 400 Units and the host of a phenomenal podcast, which hit the No. 1 spot on The Real Estate Experience Podcast‘s list of best shows in the investing category.

Living and breathing real estate since 2009, Sterling currently owns multiple businesses related to real estate, including Sterling White Enterprises, Sonder Investment Group, and other investment partnerships. Throughout the span of a decade, he has contributed to helping others become successful in the real estate industry. In addition, he has been directly involved with both buying and selling over 100 single family homes.

Sterling’s primary specialities include sales, marketing, crowdfunding, buy and hold investing, investment properties, and many more.

He was featured on the BiggerPockets Podcast episode #308 and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to mindset and scaling a business online. He has been featured on multiple other podcasts, too.

When he isn’t immersed in the real world, Sterling likes reading motivational books, including Maverick Mindset by Doug Hall, As a Man Thinketh by James Allen, and Sell or Be Sold by Grant Cardone.

As a thrill-seeker with an evident fear of heights, he somehow managed to jump off of a 65-foot cliff into deep water without flinching. (Okay, maybe a little bit…) Sterling is also an avid kale-eating traveller, but nothing is more important to him than family. His unusual habit is bird-watching, which he discovered he truly enjoyed during an Ornithology class from his college days.

Education
Sterling attended the University of Indianapolis.

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I’ve recently seen BiggerPockets members raise the question of whether crowdfunding will be the disruptor that ends the long run of riches that hard money lenders have enjoyed. So how do the two really stack up against each other? Do they necessarily have to compete, or is there a way these capital flows can work in harmony for everyone’s benefit?

There is no question that real estate crowdfunding is catching on. Billions were invested through crowdfunding platforms last year, and far more is expected in 2016. A part of this is due to the void the banks have left in the market. The banks just aren’t there to support consumers like they were. However, hard money has seen a resurgence in activity since the 2008 dip. Many took a break or tightened up so far that they were tougher to borrow from than conventional mortgage lenders. Now they have loosened up, capital isn’t flowing through other channels as it could, and hard money lenders appear to be flush with new business. This is certainly evidenced by the hundreds visiting conferences on the subject of hard money.

crowdfunding

Related: 4 Crowdfunding Benefits All Real Estate Investors Should Consider

The Drawbacks of Hard Money Lenders

However, there is no question that many investors don’t love the idea of borrowing from hard money lenders. While rates vary widely, most investors can expect to pay between 10% and 14% for a hard money loan, plus a substantial amount of points, on a short term note. The name itself also just doesn’t seem to resonate in today’s environment, where everyone wants better service.

Crowdfunding deals are often financed at significantly lower rates. But that isn’t always the case. For example, SoFi (click here to learn more about SoFi) advertises mortgages, student loans, and personal loans from 3.5% to 12.99%. Peer-to-peer lender Prosper markets borrowing from 5.99% to 36%. It’s unlikely you’ll ever see a hard money loan under 7.5%. In fact, they’ll probably hang up on you after a good ear beating if you even ask.

Most crowdfunding portals can deliver better returns to investors, as well as superior service, as they can operate more efficiently than older business models due to advancement in technology. That means lower costs for those receiving funds. 

funding-real-estate

Related: Real Estate Crowdfunding: What Investors Should Know About the Growing Trend

Could These Two Platforms Coexist Peacefully?

Still, there are ways that both hard money and other institutional investors can work in conjunction with crowdfunding. For example, investors using hard money to quickly acquire great deals could then open them up to the crowd to be renovated and operated as rentals. Or in the reverse, they could use hard money funds to cash out partners if they really need their capital back early. Banks and hard money lenders are also discovering that they can put their money into crowdfunding projects. On the surface, the rates may appear to be a little lower. Yet when these lenders factor in not having to market for deals, not dealing with the upfront compliance and regulation burden, the ability to diversify, and being able to run a streamlined operation with less risky loans, they may find they are far ahead when it comes to the bottom line.

What do you think? Will crowdfunding disrupt hard money? 

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Crowdfunding in real estate has undoubtedly been on the rise in the past few years -- but could it bring on a complete shift in how investors fund deals?