P2P lending is the practice of lending money to businesses through online services that match lenders with borrowers.
As we move into the second half of 2017 more property developers are having to turn to P2P lenders as their access to traditional forms of capital is tightening.
The major banks are extending less credit to property developers, as a result credit is drying up to many development companies who are turning to these P2P funding channels – usually at higher interest rates.
Investors now have a wide range of options to obtain higher yields via participating in these loans but sorting the out the good deals from the bad is not easy as these investments are unregulated and carry substantial risks.
We take a look at 5 key things you should know about P2P lending before making any investment decisions:
- Don’t chase exceedingly high returns
If a debt offering is returning over 25% and is a “mezzanine style” deal chances are its extremely risky. A developer may have no options other than paying high rates like these over short periods but these deals are highly leveraged and need greater due diligence.
Bottom Line – Avoid deals that promise high rates of return, they are extremely risky and you may lose your capital.
- Know your investment timeframe
P2P lending allows developers to use your funds to grow their business by providing capital to buy new sites or pay their bills on existing sites.
You generally won’t have the option of getting your funds back prior to the expiration of the agreed loan period. Most developers will need these funds for 12-24 months or longer until they complete their projects.
Be prepared for extended loan periods as projects encounter delays such as wet weather or underestimating the time to completion.
Bottom Line – Understand what project you are investing in and the agreed timeframes for your investment returns.
- Investment Security
Just like the major banks, P2P investors should be looking at security in the underlying asset to protecting their investment.
Lending on a first mortgage basis is the safest way to ensure your investment is protected. If a developer defaults on your principle or interest repayments you still have the benefit of first mortgage security. This puts your investment in a strong position as you have underlying ownership of the land.
Bottom line – First Mortgage investment provides investment security.
- Research the developer
Like the stock market, investors need to do some research. You need to understand the basics of a property market and drivers of economic development. How much of a track record does this developer (your borrower) really have?
Where is the project located? Is it close to new government infrastructure? Is there a need for housing, education, healthcare or retail services in that particular area?
Does the developer have a proven development team with delivery experience on completed projects? Who is their preferred builder? What is the builder’s experience?
Bottom Line – You should ask all these questions prior to investing.
- Deal with reputable P2P lenders
Your best chance of a good initial (and repeat) experience in P2P lending is to do your research. The quality of the offerings (not quantity) is key. Online operators should have a local presence which is regulated by ASIC.
Bottom Line – There should always be someone you can talk to on any P2P website. Pick up the phone, make contact and get to know who you’re dealing with, you will soon find out if they know what they’re talking about.
About Crowd Property Capital: CPC is a modern property marketplace fueling a shift into the world that’s less dependent on the traditional incumbents and middle-men. For further information on P2P lending contact David Lovato on +61434932634 or visit http://www.crowdpropertycapital.com.au