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How to Evaluate Investment Opportunities in CRE Marketplace Lending

How to Evaluate Investment Opportunities in CRE Marketplace Lending

It’s no secret that investors are always looking for the best return on their investments. In an effort to achieve that goal, investors have been turning in increasing numbers to peer-to-peer and marketplace lending platforms to achieve a greater return on their fixed-income investments than more traditional vehicles such as U.S. Treasury bonds and CDs. This search for higher yield has led to great growth in the marketplace lending arena. In fact, according to a recent report by American Banker, the industry grew by nearly 700 percent over the past four years.

Much of the growth attributed to the industry occurred in the unsecured debt arenas, including credit card, car loan and student loan debt. While these types of investments have traditionally offered a range of opportunities for investors, they can also open investors up to a higher level of risk, as there is no collateral taken as security against non-repayment.

Given the current economic climate, while many investors are still looking for higher yield, they are also careful to weigh risks associated with their fixed-income investments, seeking out transactions that will serve as a foundation for their financial stability in the future. As a result, investors are beginning to shift their focus from the unsecured debt platforms to those that offer opportunities in secured debt, such as commercial real estate. An October 2016 report by Moody’s reinforces this trend, citing the fact that marketplace lending continues to make up a larger portion of the real estate finance industry, offering even more opportunities for investors.

Why commercial real estate?

As a whole, marketplace lending has added new opportunities to the fixed-income arena, opening the door to investments that bring about attractive yields, enjoy short durations of between one and three years and can often provide the added security of collateral.

Specifically with commercial real estate investments, the loans are typically of a shorter duration, higher interest and return, and are backed not only with a first lien on the property, but the added advantage of the income-producing nature of the property itself. Most commercial real estate marketplace lending platforms offer a mix of opportunities, including investments in whole loans, fractional interests in larger loans and professionally-managed funds to offer diversification to investors.

Together these factors offer investors the yield and security they are often looking for, creating a ripe opportunity for investment.

How should investors evaluate potential opportunities?

For investors interested in adding commercial real estate to their fixed-income portfolios, there are several factors to consider.

The first step to evaluating a marketplace lending platform is to seek out technology processes that help, not hinder, the investment process. Some platforms are designed to serve the masses, offering investment opportunities as low as $1,000. Others are more discerning (restricted to accredited investors) with higher investment qualifications, a professionally-managed underwriting process and qualified transactions that produce the potential for higher yields.

Also, find out whether the investments are backed by collateral, and if that collateral is an income-producing property. It’s wise to ask about the platform’s underwriting requirements and the expertise and criteria used to determine the viability of a loan.

Finally, some platforms also offer low-cost, professionally-managed funds that provide a lower risk because your investment is pooled with others and applied to a unique portfolio of viable transactions.

The key to successful marketplace lending investment, especially in the commercial real estate realm, is knowing when and where to apply the technology, and when and where human judgment and expertise are required. As with any investment, it’s wise to get yourself fully informed before entering into any transaction.

Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer of CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).

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