The New Source of Capital ALL Rehabbers Should Know About
Whether you're a buy and hold investor or a rehabber, oftentimes the most difficult part of a project is getting the financing in place. For investors who are buying for the long-term, the most preferred method has been traditional bank financing. Let's face it, with interest rates at historic lows and 30-year terms, you could do a whole lot worse.
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However, for investors who take a more active approach to their real estate investing, getting short-term financing can be tough. Many traditional lenders won’t loan on properties that need extensive work. It usually doesn’t make financial sense for rehabbers to go to a bank for a short-term loan, so they often are forced to look to alternative sources of capital. Rehabbers typically must turn to private money sources or hard money loans when funding a flip, while some of the more senior rehabbers have alliances with strategic partners that provide the necessary upfront funds.
How Technology is Changing Real Estate
But like with many other aspects of the economy, technology is changing the game of lending. Crowdfunding first started as a way for small businesses to get start-up funding via pre-sales of goods or the promise of a VIP experience for super passionate fans. This method then evolved to businesses offering small pieces of equity in return for investing in the company.
What started as a way of pre-selling, though, has paved the way to cutting out banks altogether. With crowdfunding growing in popularity, peer-to-peer (P2P) lending also took off; while the two are similar, they are not the same. The general population tends to use the two terms interchangeably, and it wasn’t until recently that I learned that there are distinguishing differences between the two.
Crowdfunding is equity-based, which means that investors will own a piece of the company. On the other hand, P2P lending is debt based: It is a loan with an interest rate and a repayment period. Once the loan is repaid, the borrower owns the asset free and clear. If you are one who seeks alternatives for your personal investment portfolio, you may already be familiar with peer-to-peer lending platforms like Prosper and LendingClub.
Who is GROUNDFLOOR?
GROUNDFLOOR is a real estate P2P lending platform, the first and only that has jumped through the myriad regulatory hoops in order to allow non-accredited investors to participate in their loans backed by real estate. For all you potential or experienced rehabbers reading this, that means more capital from investors seeking to add real estate exposure in their portfolio.
What Do They Do?
Here are some pertinent stats:
- Typical loan size between $50K to $500K (average $120K)
- Interest rates from 7-20% on a 6-12 month term
- Close in 21 days
- No personal guarantee required
- Fund up to 90% of the project cost
- Total cost of 4 points — 2.5% upfront, 1.5% at closing
Why Should I Care?
As a rehabber or developer, you are probably already working with private investors rather than big banks. You’ve had to go through the trouble of sourcing hard money lenders and raising money to finance your projects. Imagine how much time and money you could save in the process if you no longer had to hunt for those investors and they were instead looking for you.
What makes GROUNDFLOOR so unique is that they were the first real estate peer lending site to qualify under the amended Regulation A (read the press release here). Basically, this means that the non-accredited general population can still participate in these offerings on a fractional basis. This truly opens real estate investing to the crowd, meaning rehabbers have a much larger pool of capital to draw from.
Another distinction that sets real estate P2P lending apart from other P2P lenders is that these real estate loans are secured by property. In comparison, the loans on other, more general peer-to-peer lending sites are unsecured. As an investor, having your investment be secured by a lien on property means you have a legal claim on the property in case of default.
Where Do They Lend?
GROUNDFLOOR actively lends in the following states: New Jersey, Maryland, District of Columbia, Virginia, North Carolina, Tennessee, South Carolina, Georgia, Alabama, and Florida.
As a buy-and-hold investor and entrepreneur, I am glad to see changes in the marketplace that make it easier for real estate investors to borrow money. I don’t have many regrets when it comes to my pursuit of self-employment, except that not having a stable income makes it more difficult to get financing for my potential investment properties.
Investors: What kind of funding do you use for your rehab deals?
Let me know with a comment!