Consumer loans vs real estate lending

Introduction

The fact that getting started in real estate typically demands a significant amount of cash makes real estate financing one of the most appealing aspects of the industry. It is also difficult to do and takes a lot of time.

Real Estate Investment Trusts emerged as a potential alternative, but in their infancy, they were restricted in the kinds of opportunities they could present to investors. Real estate financing came into existence as a result of the peer-to-peer (P2P) model, and today investors may have exposure to property at reasonable returns and lower expenses.

Crowdfunding enables you to participate in a variety of real estate options, including loans, group purchasing opportunities, and rental properties. Who is the one taking out the loan? Whether they are "flipping" flats or building new homes, the people who require money for these initiatives are often either businesses or individuals.

Alternative lending options, such as peer-to-peer (P2P) platforms, are preferred by certain borrowers over traditional banking institutions since the latter may be time-consuming, and costly, and applications are frequently denied.

When you borrow money through one of these sites, the loans you receive will have greater leeway. In addition, borrowers often receive the cash faster, and they are exempt from needing to pay fines or penalties for early return. In addition, as a p2p investor, you have the opportunity to increase your return while diversifying your portfolio through the purchase of the real estate. It's a victory in every way!

You might anticipate a return on your investment of between 10 and 15 percent each year if you put your money into property loans.

How do P2P Real estate loans work?

Whenever a real estate developer, whether an individual or a corporation, needs money to buy or improve a piece of land, they typically approach a financial institution for assistance. However, these applications are frequently rejected, and applicants must then hunt for other options.

Investors now have access to new methods for raising funds, such as crowdsourcing and peer-to-peer lending, which both utilise online platforms. They then offer up the investment opportunity to anybody who wishes to invest by submitting applications to the site. After enough investors have participated in the round and made their payments, the round is said to be concluded, and the borrower is given access to the cash.

P2P investors have the option of picking and choosing the loans in which they wish to invest based on the level of risk involved, which is represented in the rate of interest. After then, the borrower is responsible for making loan repayments by the conditions that were agreed upon. In most cases, investors have the option of investing in property loans which are either secured, unsecured, or via equity.

The amount of risk involved might either be more or lesser, depending on the kind of loan obtained.

Comparing Consumer Loans Vs Real Estate Lending

Crowdfunding can refer to either financing between private parties (P2P) or lending between private parties (real estate), however, there are several key distinctions between the two forms of lending.

The following is a comparison of real estate lending to peer-to-peer lending:

Portfolio diversification

Many people in the investment world think that real estate should always be included in the portfolio of any serious investor. It is among the assets which operate well over the period and always deliver healthy returns. Those gains will always be available. If you choose to put your money into consumer loans rather than the property market, then that particular asset will not be included in the portfolio that you create for yourself.

P2P property investments, on the other hand, would be a fantastic way to get your foot in the door if you're thinking about entering the real estate market.

Returns

To begin, and maybe most importantly, your returns are an essential component of every investment you make. Consumer-to-consumer lending often yields larger returns than investing in real estate.

The most reputable peer-to-peer lending sites will provide you with an average annual return of 11 per cent, with Mintos providing returns that are above average at 14 per cent.

Investing in real estate often results in a return of somewhere about 10 per cent. Even while ten per cent is a respectable return, it is still much less than what you may anticipate receiving from an investment in consumer loans.

Risk

Investing in real estate is a safer bet than lending money to individual consumers. Because of this, real estate investment typically works best with investors who already have mortgages as a form of collateral. If an investor is unable to pay back their loan, the procedure that follows is rather uncomplicated: the house will be repossessed, it will be sold, and the proceeds will be returned to the investors.

The majority of loans that are made through peer-to-peer lending are unsecured, which results in a higher level of risk. Although it does not involve a significant amount of danger, it is nonetheless seen as a riskier investment than real estate.

Liquidity

Although this is dependent on the platform, in general, investments in real estate will always have lower liquidity compared to consumer loans.

This makes perfect sense given that it might take many months or years to develop and enhance a piece of property. Because real estate ventures often take longer and need more resources, it's possible that it won't be until a considerable amount of time before you see a return on your investment.

Another point to keep in mind is that very few peer-to-peer property platforms offer a secondary market where you may sell your assets if you decide you want to withdraw your money.

This is not the same as getting a short-term consumer loan, in which case you would get the money once a month.

Additionally, the provision of secondary marketplaces is becoming an increasingly popular feature among P2P systems like Peerberry and Income Marketplace.

Research

Every project that involves real estate is unique in its way. When you choose a project in which to invest, you will need to study it thoroughly, comprehend the words and resources utilised, and be knowledgeable about the metrics, such as the Loan to Value ratio, financial ratios, and others.

Because there is so much variety in real estate projects, the best strategy is almost always to invest manually and handpick the initiatives yourself.

This is not the same as getting a consumer loan, for which you don't need to do nearly as much research. That's why auto-investing is used by so many people!

You, as an investor, may establish your portfolio, then kick back and relax as the platform manages your investments for you.

Conclusion

P2P property investment is a terrific choice if you want exposure to the real estate market, are prepared to do the research, learn about the property, and devote a good amount of money to the platform, all of which are necessary conditions.

Consumer loans, on the other hand, are your best alternative if you want better profits over a shorter period and don't want to spend a lot of time doing research. However, you should be aware that this type of investment will not provide you with exposure to the real estate market.