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Crowdfunding vs. Private Lending—What’s the Difference?

Real estate investors need to grow their portfolios to grow their net worth. That means they need to own more doors or complete more flips. And to do that, investors need capital.

What’s the best way to get that capital? Searching the internet, social media, and forums leads to many different formulas and strategies. Two of the most prominent are crowdfunding and private lending. These two sources of capital are quite different.

• Crowdfunding means raising money from a group of people to finance investments by promising equity and/or returns on those investments.
• Private lending means getting a loan on the property. For investors, this usually means a business-purpose loan from a private money lender like Lima One rather than a bank or credit union.

This post will break down both funding strategies to help investors decide which strategy makes the most sense, given their personal experience level and the type of deal their pursuing.

How Does Crowdfunding Work?

What is crowdfunding? Many people are familiar with it from sites like Kickstarter, which allow people to raise money to launch new products or artistic projects. Real estate crowdfunding is remarkably similar. An investor raises money for their next fix and flip project or rental home purchase from a group of people.

In real estate crowdfunding, an investor promises a return on the investment. These distributions could come quarterly, annually, or on some other schedule. The investor also gives shares, which represent a slice of equity in the project.

Crowdfunding for Residential Properties

For beginning real estate investors, crowdfunding for real estate properties usually takes the form of what can be called “friends and family” money. An investor will ask a close circle for funds to purchase a property to flip or to hold as a rental.

On a flip, the investor will pay back the friends and family money plus returns after completing rehab and selling or refinancing the property. On a rental property, the investor will typically pay a return based on the monthly cash flow that a property or portfolio of properties generates.

More sophisticated investors may structure crowdfunding as a syndication, which is a more formal legal arrangement. Syndicators promise returns for equity investment and may promise to pay back the entire investment at a certain benchmark, like a property refinance. Often, syndicators will also charge management fees to investors, and they may keep preferred equity over contributors to ensure they are paid first if profits are smaller than expected.

Crowdfunding vs. Investors

Crowdfunding is basically the same as aggregating a group of investors for a project. The difference is that crowdfunders usually have many people contributing smaller amounts of money and getting smaller equity shares. Getting investors for a project, whether from friends and family or others, generally requires promising bigger equity shares in the project. Investors will usually have more say than crowdfunding contributors, which is appropriate because they have more money at stake and often have more real estate investment experience.

The Pros and Cons of Crowdfunding

The biggest pro of crowdfunding for a real estate investor is that they can purchase a property without putting a lien on the property, as a private lender loan would. Crowdfunding investors may also be able to avoid certain fees incurred when closing a loan.

One con of crowdfunding is that an investor takes on the obligation to communicate with a larger group of people instead of a single lender. The distributions required may also be more expensive than the typical monthly payments made to a private lender.

Equity vs. Debt Crowdfunding

As mentioned, investors can crowdfund by promising equity or shares. Sometimes, they may choose instead to combine smaller loans from friends and family in a debt crowdfunding strategy. This kind of debt crowdfunding is actually more like private lending, because it changes an investor’s responsibility for repayment. The private lenders are simply individuals instead of an established company like Lima One, which means processes are less formal and often bumpier. Friends and family debt can sometimes be more expensive than a private lender like Lima One.

Real Estate Crowdfunding vs. REIT

Let’s take a brief sidebar for people looking to start investing in real estate by purchasing shares in a crowdfunding or syndication deal. These people may want to consider buying shares in a REIT (real estate investment trust) instead of a specific deal.

REITs are formal funds that invest specifically in real estate, but unlike crowdfunders, they typically have a much larger portfolio of diversified assets. Many are also publicly traded companies, which creates transparency through quarterly and annual reports. Lima One’s parent company MFA Financial Inc. (NYSE:MFA) is one example of this kind of REIT.

The Power of Private Lending

Private lending gives real estate investors a desirable alternative to crowdfunding. Getting a fix and flip loan or rental portfolio loan from a private lender like Lima One is often a more transparent, faster, and simpler process than crowdfunding or syndication.

As a national private lender with over $10 billion in funded investment property loans, Lima One has established processes for quoting, underwriting, and closing loans. This means that investors can get quick answers about what financing is available on a specific deal, as well as a reliable timeline about when a loan can close. That is far more certainty than a crowdfunding solution can provide.

In addition, a real estate loan from Lima One can offer a lower cost of funds than many crowdfunding options, giving investors more profit potential on deals.

Why Serious Investors Choose Private Lending with Lima One

The reliability and timeliness are key reasons that professional real estate investors who do multiple deals per month choose private lending. Serious investors build their businesses on consistency and scalability, and they know they can do more deals when they eliminate uncertainty by working with a proven private lender.

What do these types of investors look for in a private lender?

• Clear direction about what types of deals they fund, so the investors can quickly arrange financing.
• Reliable capital to fund any qualified deal the investor finds.
• Premier customer service that moves deals quickly, both before closing and during the course of a deal with construction draws and servicing.

Lima One Capital provides all these things, as our reviews show.

Choosing the Right Funding for Your Investment Strategy

Now that the difference between crowdfunding and private lending is clear, investors have the information needed to choose the right capital strategy for their portfolio of real estate investments. There’s no overall right or wrong answer because each investor has an individual strategy. That means investors need to do due diligence to identify the best way of raising funds for their upcoming real estate investments.

As the nation’s premier private lender for real estate investors, Lima One offers investors who close multiple deals per month an ideal way of funding deals. Investors looking to scale can schedule a call or get a quote to find out more. Lima One helps investors of various experience levels to fund fix and flips, rentals, and more.

 So, if your analysis points you toward private lending instead of crowdfunding, you owe it to yourself to speak to Lima One about your next deal.