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