When you finally decide to join other online gurus in commercial real estate investing you will likely find yourself looking at platforms that offer crowdsource funding, and those that offer peer-to-peer (P2P) lending. It is important to understand the difference between the two, as they are two very distinct types of investment opportunities.
When it comes to crowdsource funding the money goes into a common pool and you invest in a BPDN, also known as a promissory note or borrower payment dependent note. With P2P the amount you give goes into financing a particular project and is backed by real estate collateral. Below are two major differences to understand when determining which option is best for you.
- With P2P, the amount you invest is usually higher than that of crowdsource funding. It can be $25,000 and higher while that of crowdfunding may start as low as $5,000. ALhtough investing a lower amount may seem to come with a lower risk, you need to understand that with peer-to-peer lending your money is backed against loss by collateral while with crowdfunding you stand a chance of losing the entire amount. Losing $5,000 would not be fun!
- Another major difference that you will note is in the interest rates offered by P2P and crowdfunding. With P2P the interest rates seem quite modest ranging from 6% to 12.5%. This is so because the risk of losing your money is low. Should the borrower default, the collateral can be disposed off and your principle amount, fees and interest accrued paid back to you. With secured investments you can sleep well at night. With crowdfunding, the interest can look much better, often ranging from 9-18%. The interest rates are that high because the risk of losing your money may be high too. If the borrower defaults, it is easier to lose your principle amount since there is no collateral backing the loan and because the investments are generally speculative.
It is important when you are deciding to invest your money in various opportunities that you do your due diligence to ensure you make a smart investment that is right for you. It is always advised to go for an investment that protects your principle amount from too much risk. If chances of losing your money are high, you will need to decide if that is a gamble you like to take, however our advice to you is: Slow but sure wins the race!
With common misconceptions regarding the similarities and differences of crowdsource funding and peer-to-peer funding, we hope this offers some clarification to help you make the best decision for you.