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


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.


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 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. 


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? 

Weigh in with a comment!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record


  1. Dan White

    As a hard money lender I concur with the author’s premise that crowd funding and hard money are likely compliments in the space of private lending. Unfortunately traditional lending is so over regulated that credible borrowers with good business plans cannot get financing, thus the private lending business is booming. In the old days, the borrowers, collateral and business plans were sub-par, no so today.
    Crowdfunding and hard money both have room as long as traditional lenders are not a viable source of capital.

  2. Kevin A Sapp on

    Thanks for taking the time to provide a view on this new trend in lending. The new peer to peer trend allows access to different investments to more people. I know several folks who use prosper successfully as a small part of their portfolios and are p,eased with the results. They have their algorithm and stick to it.

    Similar to Dan White, I am a private lender. Ironically, one of the real estate peer lending platforms contacted me about purchasing my loans to pass the benefit on to their customers. From this perspective, the company is supporting hard/private money and the general consumer. They would purchase a portion of my loan, take a small percentage and break up the loan to the investors freeing up my capital to find and fund more deals. This model keeps private and peer based lending viable.

    The benefit, IMHO, of this model is the peer lender can leverage the experience of the private lenders evaluation criteria while keeping the peer lender, private lender and platform in business. For me, the model was compelling, but I prefer to work within my area and have no need to convert my retirement lending hobby/investments into full time employment. Very interesting in this model is the lending rates are the same, a peer lender would see a lower rate because the platform gets their piece and the private lender either sells at a lower rate or keeps a portion of the loan.


  3. Colin Specter

    Super timely post. From your research or experience are there a few that standout to you as better than others? A friend recommended Fundrise, but I know there are plenty others.

    When evaluating these crowdfunding deals, are there certain criteria or fees investors should pay extra attention to?

    • Sterling White

      Great questions Colin.

      1) It comes down to what you are personally looking to achieve & that will help with choosing a platform to invest with.

      2) I will not be able to answer this second question. However good news is there’re plenty of forums to check into on here where someone else maybe able to address it.

      Hope that helps

  4. Mike Flavin

    I do understand what makes a crowdfunded investment attractive to an accredited investor. My understanding is that crowd funding offers an equity investment with almost no liquidity, no tax benefits that exceed direct investment and very little control over the development process.

    Smaller construction projects generally have less experienced and well capitalized contractors and the equity investors have less capital. If a project has cost overruns their may not be any funds available to keep the project afloat. As a small investor you have very little control to negotiate a change in terms if needed and do not select the contractors and managers of the development. You also have effectively no liquidity and can not access your capital in the project is complete, The preferred equity structure offers limits the upside available to the true equity investors.

    I do not see why this would be more attractive than a high yielding REIT that likely has better access to reserves, provides 7%+ dividends, a stock price that can appreciate and the ability to sell on demand. If an investor has even more appetite for risk I would think funding a project yourself and getting the upside and control benefits would be preferable to crowd funding as well.

    In my mind crowd funding is where an investor goes to fill a gap in funding due to lack of equity or lack of ability to attract investors. My investment theories have been wrong before and could very well be wrong again. I guess only time will tell.

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