A P2P Real Estate Crowdfunding Comparison Guide

Daniel Penzing
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Website Features, Menus, and Options

Kickstarter, perhaps the most established real estate crowdfunding platform, has a fairly clean and simple website. With the menu bar taking up the top of the page, the most noticeable feature on the site is the program banner featuring the most active and popular projects on the site.

The page is not overly crowded but it can take a moment to search through the plethora of projects on the site. Unlike many other crowdfunding sites, Kickstarter does not have a designated filter for real estate projects.

RealCrowd

RealCrowd aims to provide crowdfunding for a diverse gamut of real estate opportunities; the site touts commercial, multifamily, and residential offerings. Like Kickstarter, the home page focuses on program promotion, although the program is searchable by category, which can help users find projects more easily.

RealCrowd does allow users to filter their projects by category, including: commercial, development, investment, and acquisition. RealCrowd also provides a search engine on their home page to help users find projects.

Sponsor Forum

Sponsor Forum is a niche crowdfunding site aimed specifically at sponsors searching for sponsorships in real estate, sports, and other markets. The user interface is clean and easy to navigate, and the site has a good search feature.

Sign-up Process

Customer Service and Communication

The first obligation to the investor is to have customer service. Even with the rising popularity of crowdfunding, P2P investing is still a challenger to the current model and so-called “trusted third party guidelines”.

Because of this some investors (no matter how much research they have done) are still weary of the long-term viability of newer models. It is important to have a strong customer service presence to ease any fears.

We can categorize customer service into two areas:

  • Initial crowdfunding platform Customer support of the product (service) furnished by the platform
  • Initial Crowdfunding Platform

The initial platform of crowdfunding is the one you build an account on. They will act as the middle man and the mediator between investors and the business.

Communication:

The communication of the initial platform is key. Their communication channels should be accessible and clear. This will help answer any questions that the potential investor may have.

The initial platform should also provide a way for investors to provide feedback to improve the product. The simpler this is the better.

We have all heard the nightmare stories of investor’s money vanishing or disappearing along with the product and its management. One frustrating situation can send investors back to the traditional markets and investors will be hard pressed to be drawn back to this model.

Platform Responsiveness:

Financial Backing

Just like in every business, in real estate, there is a financial backing required to get it moving and to tackle problems that may surface during the development of the project. In real estate, this backing is called equity. Usually, a real estate project will start with a large quantity of equity. This means that a large number of people will be in charge of investing a sum of money in the venture. At the same time, they will be entitled to get a part of the returns it will provide. We have seen that in the past few years, equity has had a large number of eager investors. This has mainly been because, for a long time, successful real estate projects were developed by banks. This meant that only people with large sums of money had the chance to invest in the real estate. With this in mind, it became very easy to see why so many people were eager to gain access to real estate investments. Now, the real estate market is ready to enter a new, and more diverse phase. This means that everyone will have the chance to gain access to real estate investments. To help with this, several platforms have been developed. These could be classified as crowdfunders. These platforms have brought back the concept of equity, and they have taken into account the needs of the modern world.

Fees for Investors

All three of the P2P real estate platforms currently have annual fees for both individual and institutional investors. These fees range from 2.2% to 3.0%, based on the size of a loan. So, for example, a larger investment would cost more. There is also a fee charged for submitting your application and funding an investment loan. That fee is approximately 0.6% for Funding Circle (0.4% for Biz2Credit, 0.7% For Patch of Land).

With regard to additional fees, the numbers depend on the company but there are some general indications. Patch of Land, for instance, will charge an annual servicing fee that is 1.0% of the original loan amount. However, they also have an opportunity to drop that number significantly, based on the amount that you have invested with them. Biz2Credit does not seem to charge any additional service fees. Funding Circle has a service charge of 0.75% that is based on the size of the loan.

Diversification or Types of Real Estate Opportunities

Real estate investing is financing real wealth. Real estate is valued by one of the least volatile and most definitive assets in the world. Diversification is like an insurance for lessening investment risk. There’s no such thing as a guaranteed investment; however, diversifying your sources of investment capital is helpful. Divesting in realestate equity and financial securities is also a wise move.

Through P2P lending/equity crowd funding, you can finance any of the mentioned real estate variety opportunities. For example, you can invest in residential properties such as buy to let properties or residential loans looking to profit on its rent. You can also invest in commercial real estate (RE) looking to profit through RE lease and rent or RE ownership looking to convert its value for profit. You can invest in development and construction financing looking to leverage on property appreciation and increase the value of the construction.

Real estate investment opportunities can also vary depending on the duration you’ll want your investment to become productive. You can choose from a short or long-term investment. Short term investment such as flipping real estate takes a less of three (3) months to be productive while long term investing in real estate can be a couple of years before it reaches breaking even point.

Due Diligence and Vetting Process

Although the vetting process may differ from one individual to another, the basics remain more or less the same. There are three stages in a due diligence, but ideally, an investor will be moving through a process that checks the solvency of the borrower, the legality of the business model and the financing of the project among other things.

While each of these stages is measured on a scale of 0 to 100, the investor should be able to make a decision based on his or her own criteria. This is because the investor is usually looking for either a high or low in terms of each of these measures as opposed to an average.

There are three major types of peer-to-peer real estate investors based on how they do their due diligence:

Type 1: The Investor

These investors tend to be more traditional business owners, and in most cases, they will be avoiding doing all the legwork that comes with the vetting process. Instead, they try to put as little effort as possible and have other people do it for them. Online lending platforms that focus on investing have their own due diligence teams process the loan applications from borrower and lender side of the equation. The investors on these platforms merely get a mention once the project has been fully vetted and ready for funding.

Type 2: The Active Investor

Average Investment Returns

P2P real estate investment returns have historically been lower than equity crowdfunding or real estate access investment returns. Unlike equity crowdfunding platforms that carry lower funding fees and platforms that specialize in providing financing to second-lien, lending platforms, they are P2P equity platforms that provide liquidity to crowdfunded lending notes.

Comparing P2P crowdfunding investment returns to returns of other equity investment is not particularly meaningful because platforms don’t hold the entire investment risk, and returns may be even lower due to transaction costs.

P2P platforms do not have investment exposure to borrower defaults. However, they assume operational risk associated with defaulted loans.

P2P real estate crowdfunding platforms assist investors in purchasing fractional portions of a pool of loans or notes, thereby providing liquidity to those loans.

Due to low yields, compared to other crowdfunding platforms, P2P real estate crowdfunding platforms often require higher minimum investments, higher platform fees, and shorter-term maturity.

Inventory or Opportunities to Invest

So many aspects of the P2P real estate crowdfunding industry can be compared to online stock investing. In fact, I prefer to think of P2P investing as a peer to peer stock market that offers much more opportunity than your typical stock market.

Comparing peer to peer investing to stocks is an easy choice, and there are definitely some similarities. For starters, you are investing in a particular asset or business, just like a stock. When you invest in a P2P real estate opportunity, you are investing in a business or property that you expect to make money from. Always in the stock market, you need to look at stock investing as a long term investment because stock value typically rises over time.

Real Estate Investing

Real estate investing is one of the popular and most profitable forms of peer to peer investing. There are a few different ways for you to invest in a peer to peer real estate platform, including:

Real Estate Crowdfunding Syndication

Also known as REIT investing, this style is similar to investing in a property and is similar to real estate crowdfunding. With this style of real estate investing, you own part of the property and receive a portion of the cash flow of the property. Since you own a portion of the property, you can sell your percentage of the property to others for other cash flow.

Performance — Estimated vs. Actual Returns

Millions of people have been trying to figure out how to make more money. But they didn’t know that one of the easiest ways to start pulling in bigger bucks… is by investing in real estate.

The problem?

For most people, investing in real estate is pretty intimidating when they think about it.

They think about buying a home, leasing out a property, and then sitting around and twiddling their thumbs as people pay rent and make them rich… right?

But is that really what it’s all about? Or can you actually make more money by leveraging the biggest asset that you have: your time?

The answer is maybe… but only if you’re willing to take the time and research to navigate the marketing hype and misinformation that’s out there…

One of the biggest challenges that most people have is knowing what companies to use and which ones to stay away from.

In fact, take a look at any “Real Estate Investing Secrets” ad you see.

Are they telling you that you can sit back and do nothing?

That’s exactly what happens when you sign up for them!

Summary

Crowdfunding is an excellent way for startup real estate financing. In this section we will do a P2P real estate crowdfunding comparison guide, we will compare the following platforms: RealtyShares vs Patch of Land vs Neustar vs Realty Mogul vs Fundrise vs Groundfloor