The growing popularity of the term crowdfunding has created many new opportunities for individuals to raise capital through the mechanism of peer to peer lending as well as equity investing. This new regulatory breakthrough, powered by technology, has gained so much traction that Crowdnetic & CNBC developed The Crowdfinance 50 Index to keep track of the accelerating amounts of capital being raised by private issuers online through the top crowdfunding platforms, including Patch of Land.
The Crowdfinance 50 Index is a tool created to gain better insight into the emerging crowdfunding market. This index represents the daily average index of the 50 largest capital commitments raised by private U.S. companies listed on Crowdnetic's data platform. Crowdnetic is a leading provider of technology and market data solutions to the marketplace lending and securities-based crowdfunding industries. The company focuses on bringing transparency to these emerging asset classes and rapidly transforming financial services landscape. Crowdnetic’s technology and market data solutions are used by banks, investors and non-bank lenders with a focus on institutional-quality, customizable web-based applications.
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While the Crowdfinance 50 Index represents a wide variety of industries, the real estate industry in particular has experienced a tremendous amount of success through lending offerings online, or crowdfinancing for real estate developers in need of funding – often short term and with rather quick funding timelines. In fact, this method of online real estate lending has made such an impact that Crowdnetic & CNBC went a step further and created a subset of their index called The Crowdfinance Real Estate Average. So what makes real estate crowdfinancing so appealing to both the borrowers and investors?
Accessing Money for Real Estate Projects Via Crowd Financing
Benefits Over Traditional Lending Methods
The popularity of crowdfinancing quickly spread once real estate developers realized the advantages that online sources of capital, raised by platforms, has over traditional and hard money lenders. One of the main advantages for borrowers is the ability to access a large pool of consistent and reliable capital. While many traditional lenders could boast a large capital funding source, they lack the ability to close a loan in a quick and reliable manner in order for a borrower to acquire a property before the opportunity is lost. Real estate crowdfinancing platforms, on the other hand, operate with a higher sense of urgency for their borrowers since they understand how crucial speed is in the housing market, and use technology to enable them to fund quickly. For example, platforms like Patch of Land are able to close a loan within 7-10 days by utilizing technology-enhanced due diligence combined with a hands-on 'Makes Sense' underwriting approach. Once the project is approved, we will fully fund the loan before making it available to the crowd. By offering prefunded real estate loans to our borrowers, they are able to start construction right away, opposed to some crowd financing platforms that will wait for the crowd to fully fund the loan before moving forward with the project.
Benefits Over Hard Money Lenders
Many real estate developers who need funds in a hurry have gravitated towards hard money lenders since they can typically lend them the capital they need in a short period of time. However, the downside to using hard money is that these lenders tend to be very fragmented, opaque, and in some cases predatory knowing that a borrower may have no other options available. Furthermore, their capital can be limited and while you might be able to get funding today, there's no guarantee there'll be enough for your next project, or the one after that. Borrowers using crowdfinancing for their real estate projects experience a more stable and transparent method of raising funds compared to hard money, and enjoy a longer and more productive relationship with the platform. Major crowdfinancing platforms will offer completely transparent terms, competitive rates, and a large network of investors willing to finance the project. Overall, crowdfinancing offers a more enjoyable borrowing experience, providing a legitimate option for developers interested in avoiding the red tape, headaches and hassles of traditional and hard money lending practices.
Ability to Grow Your Business / Free Up Capital
Crowdfinancing also presents a wonderful opportunity for real estate professionals to grow and scale their businesses. Being able to rely on a consistent and reliable source of capital allows developers to expand their operation and perhaps double or triple the amount of work projects their able to complete in a year. Crowdfinancing can also benefit hard money lenders as well by giving them the opportunity to free up more capital for themselves or other projects they might have in the pipeline by working with crowdfinancing platforms. Overall, individuals looking to borrow funds through crowdfinancing have enjoyed many benefits and continue borrowing in this way.
Now that we've explained how crowdfinancing works for real estate developers looking to borrow funds for their projects, we'll break down how real estate investors are able to diversify their portfolios and earn lucrative returns by acting as a financier in part 2.
If you still have questions about crowdfinancing real estate we encourage you to learn how to use the power of crowdfunding to scale & take your business to the next level by downloading our FREE Real Estate Crowdfunding Borrower Handbook.
Crowdfunding is transforming the way real estate professionals are accessing capital for their projects. By reading this handbook you'll soon discover the numerous benefits alternative lending has over using traditional banks or local hard money lenders.
This entry was originally published on August 13, 2015.