by David Drake
The crowdfunding industry will continue to experience exponential growth in 2016. The entry of 400 of hard money lenders in the crowdfunding space will add into this growth.
Hard money lenders are small groups of investors or private individuals who lend money to house flippers or real estate developers based on the property they are buying and not their credit score. Such loans can cost up to twice the average mortgage and feature high origination fees. Despite this high cost of borrowing, real estate entrepreneurs can access up to 100 percent of property purchase price from hard money lenders to finance their deals as long as they can back their loans up with real assets.
Moving into 2016, online automation of more processes will be inevitable in the crowdfunding industry and resistance to embrace it will be futile for hard money lenders. Here are five top reasons why at least 400 hard money lenders will get into the Real Estate Crowdfunding (RECF) space in 2016:
1. RECF offers hard money lenders a large market
The 2015 Times Realty News Real Estate Crowdfunding report predicts that capital raised through real estate crowdfunding in 2015 is likely to hit the $2.57 billion mark up from $1 billion in 2014, representing a 150+ percent increase. This means that the number of entrepreneurs raising capital through RECF is increasing. Also, the crowdfunding technology removes geographical barriers allowing users to access markets they would not have accessed otherwise. The opportunity that RECF crowdfunding space offers and the rate at which the industry is growing will certainly attract hard money lenders into the crowdfunding space this year.
2. Approval of crowdfunding rules under Title III and IV
2015 saw the Securities Exchange Commission (SEC) approve the rules relating to Equity Crowdfunding under Title III and Regulation A+ under Title IV of the Jumpstart Our Business Startups (JOBS) Act. The approval of these rules is significant because it opens up the crowdfunding space to non-accredited investors, increases the amount of capital that entrepreneurs can raise through crowdfunding, and puts investor protection measures in place. This expanded investor space and protection measures are likely to attract hard money lenders to the RECF industry in 2016.
3. Real estate entrepreneurs need quick capital
Unlike other sectors where entrepreneurs can wait for months to reach their financing goals, real estate developers have to raise huge amounts of cash within a very short time to undertake their projects. This urgent need for capital has caused leading RECF platforms to develop strategies such as pre-funding projects on their platforms. Hard money lenders are likely to tap into this opportunity and provide capital to real estate developers, hence many of them will make an entry into the crowdfunding space in 2016.On the other end of the continuum are homeowners challenged with their monthly house amortizations. They can go to several online sites that offer financing to meet their needs for cash to meet their obligations. One of these sites is rapid finance. It offers home loans, re-financing of loans, consolidation of debts, and more.
4. Growth of debt crowdfunding
Debt crowdfunding is the largest form of crowdfunding having dominated the crowdfunding industry in 2014. Out of the $16.2 billion raised by the industry in 2014, $11.08 billion was raised through debt crowdfunding according to the 2015 Global Crowdfunding Report. DealIndex’s Democratising Finance report shows that debt crowdfunding is more popular among established businesses. In 2014, the report shows debt crowdfunding grew by about 190 percent in the UK with at least 74 percent of all crowdfunding platforms being debt-based. The domination of debt crowdfunding, and the fact that it is most preferred by established businesses, is likely to entice hard money lenders to enter the real estate crowdfunding space this year.
5. Automation of processes in crowdfunding platform
Crowdfunding platforms are increasingly automating their processes, and we will see many more processes being automated in 2016. One of the key benefits of automating crowdfunding processes is the significant reduction of turnaround time as deals can be syndicated and closed online. The process of sharing documents and signing deals is simplified, hence investors can access all the information they need to make investment decisions online.
Note: This article originally appeared on Investor Intel with this link http://investorintel.com/market-analysis-intel/5-reasons-to-attract-hard-money-lenders-into-crowdfunding/#comment-537878 on April 03, 2016
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.