Kookie, Lend Me Your Home: What is Peer-to-Peer Real Estate Lending?

If you want to be a successful real estate investor, you must first master the art of the deal. At least that's what they used to say before peer-to-peer (P2P) real estate lending came along. 

P2P real estate lending platforms enable you to make property investments without requiring tons of capital or a mortgage—in fact, you don't need to buy property at all. These real estate apps for investors are making investing in real estate easier and more accessible than ever, but they may also make it riskier at times. So how does P2P real estate lending work? And is P2P real estate lending a good investment?

Peer-to-peer real estate lending is the practice of matching investors with borrowers looking to take out loans to fund real estate projects. A project can be for any real estate endeavor, such as a rental property investment, a new development, or fixing up an existing property for resale. Borrowers use the loan to fund their project with the understanding that they'll pay the investor back with interest according to the loan's terms.

The first thing P2P real estate lending platforms do is find borrowers, which are people who need a loan to fund a real estate project. Borrowers can be anyone from a real estate developer, a house flipper, or even a landlord looking to renovate. These borrowers often turn to P2P platforms because they tend to be more lenient with credit requirements, meaning many of them have a less-than-perfect credit history. 

For borrowers, P2P loans are more flexible than traditional loans since they're able to shop around and negotiate repayment terms with investors. Additionally, P2P real estate lending empowers investors to choose how much money to invest, how much interest to charge, and the risk level they're comfortable with.

On average, P2P real estate lending yields an annual 8% to 10% return on investment—minus fees of up to 2%—but earnings totally depend on the terms of the loan (and the borrower abiding by them). Individual real estate investors can benefit significantly from social lending platforms like Patch of Land and Fund That Flip, but the positives of P2P real estate lending are delicately balanced by its downsides.

P2P real estate lending is a short-term investment, but that doesn't necessarily mean you'll make quick returns. Short term means anywhere from one to five years or more, depending on the scope of the real estate project and the terms of the loan. Some borrowers will begin repayment immediately while others will pay only interest or defer payments until the real estate project is complete. The terms of P2P real estate loans are crucial for determining whether your investment timeline will meet your profit goals, as is considering the following risk factors.

Some platforms will grade loans based on how likely the borrower is to pay them back, but these calculations may also determine interest rates. This means that riskier loans are usually more profitable because those borrowers will probably accept higher interest rates, meanwhile loans to more creditworthy borrowers are less profitable. 

Since most platforms don't require borrowers to put up collateral, investing in P2P real estate lending is basically a gamble on the borrower's ability to pay back the loan. The bank isn't there to run a credit check or enforce the terms of the loan, so the burden is on you as an investor to ensure that the borrower can pay it back.

Oftentimes, borrowers on P2P platforms are there because they're ineligible for a loan from a bank. Borrowers with lower credit scores are less likely to pay back their debts, so banks usually avoid lending to them. While P2P lending alleviates the real estate industry's dependence on institutional investors, peer-to-peer real estate lending is more accessible to borrowers with lower credit scores who may be more likely to default. With risk of default comes the potential of losing your investment.

P2P real estate loans follow the classic risk-reward dichotomy: Riskier investments will reap higher rewards. P2P real estate lending gives investors the freedom to determine how much to invest and allows them to structure a loan based on the returns they want. Basically, as an investor, you get to decide how much money you want to make and what you'll risk for it. 

Unlike traditional real estate, P2P real estate lending investors don't need fat stacks just to make a down payment. You can invest practically as much or as little as you want. For instance, the minimum investment on the Groundfloor platform is just $10. Peer-to-peer real estate lending platforms are awesome for investors who make up for their lack of capital with the time and effort they'll dedicate to researching their investments. 

Because of the heightened risk, many P2P real estate lending platforms are only for accredited investors. Those of us who are still amateurs can still use platforms like Yieldstreet and RealtyMogul. Note that spreading risk across multiple platforms and borrowers is an excellent risk-mitigation strategy when investing in P2P real estate loans.

P2P real estate lending tends to favor bold investors who are willing to take larger risks now for a potentially bigger payday down the line. If that description sounds like you, perhaps investing in peer-to-peer real estate loans is a good idea. Regardless of your strategy, always conduct extensive due diligence before adding a P2P real estate loan to your portfolio.