With CD yields shrinking, money market returns frozen and the U.S. Treasury bond dipping recently to an all-time low, many of the traditional fixed-income investment strategies appear to be in a period of lackluster returns. As a result, many investors are looking for new avenues to pursue fixed-income investments that not only produce higher yields, but provide similar levels of security.
This desire has led to significant interest in various types of debt instruments, including several types of consumer debt (e.g., credit card, car loans and retail installment contracts). The marketplace for consumer debt is quite large, with some estimates placing it close to $12 trillion, offering broad opportunities for investors. However, there remains significant risk for the investor when entering this arena, as there is no collateral taken as security for the loan against non-repayment.
As a result, investors looking for additional security for their fixed-income investments have increasingly turned to secured debt—many times through loans backed by commercial real estate. Because these lenders place first priority liens on the properties until the loan is repaid in full, if the borrower defaults, the lender can recoup investors’ money. This model offers investors the ability to collect strong returns on their investments, while remaining confident in the investment mechanism.
The rise of online marketplace lending platforms has enabled investors’ unparalleled access to commercial real estate debt investment opportunities, an asset class that was previously difficult to penetrate and typically only available through investment in mortgage REITs. These platforms provide investors with direct, cost-effective and scalable access to fixed-income commercial real estate debt investment opportunities, which can result in attractive yields and substantial investment security.
Evaluating a commercial real estate investment opportunity
There are many factors to consider when evaluating fixed-income commercial real estate investment opportunities via an online marketplace lender. Evaluating how a specific platform utilizes technology, the team’s commercial real estate expertise and the types of investment opportunities available will help to discern if a particular platform will help to accomplish investors’ goals.
- Technology usage: How does technology aid in the investment and funding process on a particular platform? One of the greatest benefits of progressive technology solutions like marketplace lending is a higher caliber customer experience. By placing investment opportunities online, investors are able to view a variety of opportunities all in one place, creating a streamlined process. In addition, because these platforms are web-based, they often provide online investment trackers and/or managers, keeping investors in the loop during each step of the process.
- Commercial real estate expertise: In addition to providing a technology-aided process, does the company operating the platform have significant commercial real estate expertise? While marketplace lending platforms utilize technology to improve deal flow and widen the investor base, it does not mean that traditional lending practices are outdated. In fact, many of the foundations of the paper-based processes are as applicable today as they were in the past. It is critical that online marketplace lending platforms do not rely solely on technology and algorithms to originate and close deals. Having experienced underwriting personnel who can conduct detailed reviews and underwriting and thoroughly check risk factors is critical to creating quality loans (and investment opportunities)—and these components must be fully integrated into any technology-powered process.
- Types of investment opportunities offered: Different platforms offer different investment avenues, with varying rates of return and risk. Some only allow investors to make investments in distinct commercial real estate loans, enabling them to evaluate each loan opportunity individually. Other platforms offer investors the ability to invest in professionally-managed funds, allowing their investments to be diversified across a variety of property types and deals.
As the need for alternative financing for commercial real estate debt continues to grow over the next several years, so will the options for investors looking for fixed-income opportunities. Understanding how to evaluate opportunities and investment platforms will not only help investors reach their goals, but will ultimately benefit the entire commercial real estate finance ecosystem by populating it with informed borrowers and investors.
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).