Peer-to-peer lending (P2P lending) has been around since 2007. P2P is a way for borrowers to get lower rates than they would at a financial institution. On the flip side, P2P investing is a way for investors to get higher returns than if they lent money to the government or companies through bonds. This post will look at the alternatives to P2P lending.
The historical P2P returns have been roughly 7% – 8% with a well diversified portfolio of 100 or more A-AAA rated notes. I've personally returned 7.2% a year since 2013.
But now that interest rates are going up, we're seeing credit quality worsen at the margin. The pool of money chasing the pool of buyers is also much greater, thereby compressing returns.
If there is ever a downturn, P2P investors may see defaults rise without any recourse. Once the borrower has defaulted, it's virtually impossible to get your money back. Therefore, savvy investors are looking at good alternatives to P2P lending at this stage in the cycle.
Alternatives To P2P Lending: Real Estate Crowdfunding
Real estate crowdfunding emerged after the 2012 JOBS Act was passed. Essentially, you can invest in a real estate project either as an equity investor or as a debt investor for as little as $5,000 – $10,000. Investors pool their money to buy an asset they would otherwise be unable to buy due to cost.
Returns in the industry since 2012 have been roughly 13% – 16%. Meanwhile, investors have the option of diversifying their investments all across the country, particularly in the heartland of America, where valuations are lower and net rental yields are higher.
No longer do you have to be stuck in expensive San Francisco or New York to do your job thanks to the internet. Geo-arbitrage is alive and well, especially post pandemic.
Given this trend, the best alternatives to P2P lending is real estate crowdfunding followed by owning physical rental properties.
The Best Real Estate Crowdfunding Platform
There are dozens of real estate crowdfunding platforms. But one has emerged as the winner:
Fundrise, based in Washington DC, Fundrise was founded in 2012. It is focused more on the mass market with the creation of their eREIT funds. Anybody with $500 can invest in a Fundrise eREIT. Fundrise is the oldest real estate crowdfunding platform and the most innovative today.
As of 2021, Fundrise has over 150,000 investors with over $1 billion in assets to deploy.
Let's do a deep dive review.
Fundrise Company Review
Since its founding in 2012, Fundrise has raised over $200 million in capital from accredited and non-accredited investors as of 2021. The money has been used to invest in real estate crowdfunded projects in commercial office space and multi-family condominium complexes across the country. Fundrise is also the pioneer in eREITs, diversified real estate funds.
The inspiration for founders (and brothers) Ben and Dan Miller was to open up real estate investing to ordinary people and to give them a chance to own a piece of property in their communities. Their father was a major real estate investor, so they've grown up with real estate in their blood.
The average investment on the Fundrise platform is about $5,000 with annual returns ranging from 10% to 14% according to management. If you're looking for an easier way to diversify your investments into real estate as a non-accredited investor, investing in Fundrise is a solution.
Fundrise is headquartered in Washington, D.C. and the platform allows individuals to invest as little as $1,000 in real estate development projects.
Fundrise Funding History Details
In early 2017, Fundrise also raised ~$14 million from existing Fundrise investors through an “Internet Public Offering,” bringing total funds raised to over $54 million.
Fundrise Management Team
Fundrise’s leadership team gets high marks from industry insiders. The founding brothers, Benjamin and Daniel Miller, are sons of noted Washington D.C. real estate developer Herb Miller.
Benjamin Miller, who acts as CEO, has 15 years of experience in real estate and finance. He worked on $500 million of property as a managing partner of WestMill Capital Partners.
Brandon Jenkins, Chief Operating Officer – Brandon helps to run the design and tech teams to ensure the Fundrise software platform is running smoothly. He was previously an investment advisor and broker for Marcus & Millichap, the largest real estate investment brokerage firm in the U.S.
Kenny Shin, Chief Technical Officer – Kenny has been the CTO since Janary 2011 and has previously consulted for Fortune 500 companies in the finance and technology space, including Fannie Mae, Oracle, Department of Defense and NATO.
Fundrise Growth And Performance
Fundrise has grown aggressively partially because their investments have performed well since 2014. 2018 was a big year where they outperformed the stock market and real estate market by 14%+. See below.
Real Estate Crowdfunding Benefits
What's awesome about Fundrise is that it has easy eREITs to invest in. Each eREIT (West, Midland, East Coast, Growth, Income) is open for all investors where there is supply. An investor can simply ride the geographic/strategic decisions the eREIT manager chooses to make a potentially healthy 8% – 16% return based on historical performance.
Here are three examples of Fundrise's eREITs. I'm partial to the Heartland eREIT due to the new administration that's focused on bringing jobs back to middle America.
Real Estate Versus Equities Performance
The following chart compares the performance between real estate and the S&P 500. I'm surprised to see such massive outperformance by the FTSE NAREIT ALL REITs asset class. But it makes sense because after the NASDAQ bubble burst in March 2000, real estate started taking off partly because the Fed aggressively lowered interest rates, and partly because equity investors looked at hard assets to park their money.
Fundrise says its servicing fees are 30 basis points (a basis point is 0.01%) a year, which ranks quite favorably among real estate crowdfunding platforms. In the fine print, it says this can go up to 0.5% of invested capital per year.
Each deal’s annual returns are quoted gross, not net, of annual servicing fees. The platform has historically not taken a spread between income from the asset and payments. Fundrise also charges real estate companies a one-time 1% to 2% origination fee and $5,000 closing cost.
Currently, for all Fundrise eREITs, investors will not have to pay anything in asset management fees until they earn a 15% annualized return. After this (or if you earn over 15%), asset management fees range from 1-1.5%, depending on the eREIT you have.
Fundrise, like other platform counterparts, touts the cost-saving advantages of crowdfunding over traditional investing models. Over time, lower fees matter more for performance.
On Fundrise, the investor would get a net return of 13.7% or $68,500 versus a 7.7% net return, or $38,500 on a non-traded REIT.
Check out my latest Fundrise overview post pandemic. It will share more reasons for why the best alternatives to P2P lending is real estate crowdfunding.
Real Estate Investing Sweet Spot
Historically, data shows investors with a 20% allocated to real estate have outperformed those who only own stocks and bonds. The 20% real estate model was made famous by the ~$30B Yale Endowment. It outperformed traditional allocations 22.6% annually for decades by investing at least 20% of its portfolio in real estate.
However, in the past, the best private real estate opportunities require minimums of $100,000 or more, making them inaccessible unless you’re very wealthy. The only other option is to go through middlemen who charge high fees, thereby negatively impacting returns. This is where Fundrise and their technology comes in because their investment minimum can be as low as $500.
Commercial Real Estate Opportunity
Below is a chart highlighting the different sized real estate markets. You and I can't buy trophy properties like the Empire State Building because these properties are just too large and expensive. You and I can buy fixer uppers to make some sweat equity. I did so in 2014 and am still working on my house slowly today.
But fixers can be risky and stressful if you don't know what you're doing. So it seems like the Midsize market is the sweet spot for investing given less competition, a more inefficient market to exploit, and potentially higher risk-adjusted returns.
The demand from institutional real estate investors like Fundrise is heating up post pandemic. It's a good idea to join them as the economy recovers.
Diversify Your Investments
Low interest rates are here to stay for likely the rest of our working lifetimes. They've been going down for 35+ years in a row now. It's therefore best to invest in income producing assets because not only will they provide a higher income stream, they'll also attract more demand, thereby boosting the principal value of your income investment.
Fundrise says that of the hundreds of projects it reviews every month, fewer than 5% are approved. It performs due diligence and pre-funds all its investments from its own balance sheet before offering them to investors. Fundrise wants to align its interests with all of its investors.
The following diagram shows the approval process for a project at Fundrise.
As a real estate crowdfunding investor with over $800,000 in exposure, proper due diligence is vital.
For those who want to diversify their investments, own an underlying hard asset, not have to deal with maintenance and tenants, and take advantage of lower valuations and higher rental yields across the country, take a look at Fundrise. It's free to sign up and explore.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college working at two of the leading financial service firms. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 34 largely due to his investments. They now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009. It is one of the most trusted personal finance sites today with over 1 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times and Bloomberg. Alternatives To P2P Lending is a Financial Samurai original post.