EvoEstate: Guide to P2P Real Estate investing

Gustas Germanavičius
Gustas Germanavičius
March 11, 2019

How to invest in P2P Real Estate deals

You've probably heard about P2P or peer-to-peer investing - the new type of ''sharing economy'' that's taking the world by storm.

Simply explained, P2P lending is a method of debt financing that allows people and business to borrow and lend money without using a bank or credit union as an intermediary.

This (relatively) new type of investing has made some noise on social media and in the news. Meanwhile, P2P lending platforms that connect investors with borrowers are springing up like mushrooms and raising millions of VC capital, one after another.

Here are two things you should understand:

  1. How does P2P lending work?
  2. How to choose the project(s) to invest in?

How does P2P lending work?

In the basics, P2P lending is simple:

You lend your money to someone who needs it. That someone puts your money into a project that needs financing, whether it's their business, real estate, or it can be a simple consumer loan.

The borrower then pays you - the investor - interest, which is the percentage on top of the loan that you also get back in full. That percentage is the profit that you make out of this deal.

But how do you find someone who needs a loan?

P2P lending platforms evaluate business loan applications, while marketplaces like EvoEstate double-checks these evaluations and decide whether or not make the particular investment opportunity public. During the evaluation process, the P2P lending platform or marketplace assesses the entity’s financial performance, the ability to repay the loan and possible risks.

Then, you - the investor - can choose who you want to lend your money to. What's more, you can make separate loans to various projects. That is, instead of investing €10'000 in one project, you can invest €2000 in five different ones.

In the case of EvoEstate, the marketplace sources you best investment opportunities across different countries in Europe. Then, once you've chosen whom to lend to, you can oversee your whole portfolio in one place, which makes it easy to manage and diversify your investments.

From the investor's perspective, diversification - meaning, investing in several properties instead of just one - plays a significant role in one’s financial assets stability and risk management. The best approach is to distribute your capital over several investments instead of putting all eggs in one basket.

 

Think about it:

If you were to invest in just one property, you'd be taking on a great risk because you'd be relying solely on the performance of that property to receive returns on your investment.

In the meantime, when you invest 10+ loans in several different countries and properties, you can reduce the risk of substantial loss - if one of your borrowers dodges or delays payment, there are nine others that compensate for the poor performer.

How to choose the project(s) to invest in?

As a beginner, you may be asking yourself: how do I choose projects to invest in? There are three key factors to consider:

  1. What type of investment the project is?
  2. How long will the repayment take?
  3. How risky is the project?


Types of investments

There are two types of investments: equity and debt.

While both of them may promise you a high return on investment, there are a few differences which might make one more appealing than another.

 

Equity investment means that the investor enters the deal as a shareholder. That is, if you're investing in a property, you get shares of that property. The stakes granted are proportional to the amount you have invested.

Pros:

  • No cap on the return, meaning that in the end, you might make more profit compared to debt investment

Cons:

  • Higher risk - if the property isn’t sold at an expected price, you’re losing money. For example, if the project is on the market for a long time and it has to lower the price, or if the real estate market depreciates, the property's value decreases, and so does your profit.
  • Longer hold period - the time between the purchase and sale of a property (starting from 24 months). This is a long-term commitment.

 

Debt investments, on the other hand, mean that the investor acts as a lender to the property, either lending money directly or via a P2P platform.

Pros:

  • Shorter hold time (6-24 months) - a great option if you don’t want to tie up your assets for the long-term
  • Lower risk - the loan is secured on the property and the investor receives a fixed interest rate calculated from the amount invested
  • Interest is usually repaid every month, which means a regular income for you

Cons:

  • Defined returns on investment, which is limited to the interest rate agreed on in the initial proposal


Repayment time and schedule

When it comes to repayment, there are two things to pay attention to: what's the repayment time and what's the offered repayment schedule?

Repayment time is the period during which the debt obligation is to be repaid. It can differ greatly depending on various aspects, such as the overall amount of the loan, the profitability of the project, and more.

Let me explain:

Let's say, you're investing €1'000'000 with an interest rate of 9% and 1 year repayment time. In this case, you'd receive €90,000 in interest payments. But - if the repayment time were 5 years, you'd receive 5x more or €450,000.

Repayment schedule refers to the complete table of periodic loan payments. When looking at real estate crowdfunding investment opportunities, there are two types of repayment schedules:

  • Periodic repays its investors on a monthly/quarterly/biannualy basis. Periodic interest payments can be a great indicator of whether or not everything in the project is going well.
  • Final repays the loan at the end of the loan period.

How risky the project is

Finally, when choosing projects to invest in, you should look at how risky or safe they are.

Loan to value (LTV) expresses the ratio of a loan to the value of an asset and is used by P2P platforms to evaluate the assessment of lending risk. The number is calculated by dividing the lending amount with the total value of the property, then turned into a percentage.

For example:

If your borrower is looking for an investment of €1'000'000 in a property worth €2'000'000, the LTV is 50%.

The lower the LTV percentage is, the less risky the loan is considered. But - the riskier the project needing financing is, the higher your interest rate is. In other words, investing in high-risk projects means that you can win big, but you can also lose big. Before betting with your money, make sure you calculate your risks.


Wrap up

Overall, here are the main pros and cons of P2P investment from the lender's point of view:

Pros:

  • Higher returns (in the range of 8% up to 20%) when compared to other types of investments
  • Risk diversification - P2P platforms let you divide your capital between multiple loans
  • Easy decision making- you can evaluate the projects looking for loans and choose the ones that you want to invest in

Cons:

  • The money that lenders issue on loans are usually not insured or protected by state, meaning - if the borrower is unable to pay the loan back, the lender loses what he/she has invested
  • Projects may default or be late to pay back the loan at the right time.

Hopefully, this article gave you a useful first insight into P2P investing. If you're ready to give P2P a try and want to invest in real estate, don't hesitate to reach out to us and we'll help you get started!

Hopefully, this article gave you a useful first insight into P2P investing. If you're ready to give P2P a try and want to invest in real estate, don't hesitate to reach out to us and we'll help you get started!

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