This alternative finance sector is growing fast and it’s already huge. In fact, the alternative finance sector reported £3.2 billion of business in 2015, up 84% from the previous year.
Two of these sectors are peer-to-peer lending and property crowdfunding.
What is Peer-to-Peer lending?
Peer-to-peer lending (also often referred to as P2P lending) is a direct way of one or more people lending to another person or entity at rates which are attractive to the borrower while providing a good return to the lenders. This is most often done via website platforms that allow the applicant to be matched with lenders. Each lender can invest as much or as little into the loan as they wish.
If the loan is unsecured, the applicant will usually be credit-checked and verified, helping to reduce risk for the lender. If it’s secured, then you become a creditor for that person’s property, in a similar way to a mortgage company or bank if they lent to them. The loan is for a set interest amount over a set amount of time, and this is where the lender makes their profit.
What is Property crowdfunding?
Property crowdfunding is similar in the sense that multiple people can invest as much or as little into each project as they wish. With this approach, you buy a stake in the property itself. Instead of profits being gained from interest, they’re gained from the money the property earns, either through being rented or any capital growth on sale.
With crowdfunding, the investor invests into properties of his choosing using a website platform. The investor can decide which property he wants to invest in and how much he wants to invest.
What are the differences between the two?
Both peer-to-peer lending and property crowdfunding allow you to easily build a diverse portfolio, either by taking part in multiple loans or buying stakes in multiple properties. With P2P, you can take part in loans at different amounts, whereas with property crowdfunding, you can invest in different types of properties which could earn returns at different rates.
There are, however, two big differences between them. The first one is the type of risk involved. With peer to peer lending, the main risk is the borrower defaulting on the loan. With crowdfunding, that’s not an issue, however if the property loses value rather than gains value, the value of your stake will decrease proportionally.
The other big difference is that P2P lending is for an agreed amount at a set rate over a set period of time. So once the loan is finished, you don’t earn any more. Whereas with crowdfunding, you actually own a stake in the property itself. This means that you receive a portion of any profit the property makes until either the property is sold (and you receive a portion of any profit made) or you are able to sell your stake in the property.
In the long-term, this means your investment is tied to the property market with crowdfunding. So if the property increases in value, the amount your stake is worth increases – whereas if a P2P lender lends against a property that increases in value you don’t receive any increase in your return.
So the clear benefit of property crowdfunding over P2P lending is that it allows you to earn any rental income and potentially benefit from any rise in the value of the property.
If you like the sound of property crowdfunding and creating a diverse property investment portfolio, join Brickowner today.