Real Estate Tips |5 min read

Real Estate Crowdfunding vs. Hard Money Lending

There are several ways to invest in real estate. Some methods involve using traditional mortgage loans to secure properties, while others provide alternative financing options. For instance, investors looking for a fix-and-flip project may use methods like hard money loans. On the other hand, some investors may want a more hands-off approach, like crowdfunding. Today, we’ll compare crowdfunding vs. hard money lending and their pros and cons so investors can explore different investment options. 

Contents of This Article:

What Is Real Estate Crowdfunding?

Real estate crowdfunding is a way to invest in real estate by pooling funds with multiple investors to finance different projects. Investors contribute money via online fundraising to help fund a property without directly owning or managing it. This method provides easy access to real estate investments by lowering entry barriers and providing investment opportunities in properties that might otherwise require significant capital. 

Through online platforms, even a few hundred dollars can give investors access to Real Estate Investment Trusts (REITs). These are essentially holding companies that own and operate diverse real estate investments, such as houses, apartments, condos, and more. Some crowdfunding platforms also allow investors to access private market deals, earning higher returns than some publicly traded REITs. 

That said, crowdfunding can be a great way to diversify your investment portfolio and potentially earn favorable returns. However, if you’re looking for the best returns, you don’t want to dedicate too much of your portfolio to crowdfunding services. Later, we’ll talk about another way to invest–using Maryland real estate loans

Pros and Cons of Crowdfunding

Any real estate investment strategy has pros and cons. Before choosing one that aligns with your goals, it is important to evaluate the benefits and potential downsides. Here are some considerations for crowdfunding. 

Benefits of Crowdfunding

  • Low Barrier to EntryInvestors, even those who are beginners, can contribute to investments with relatively small amounts of money, sometimes as low as $500.
  • Passive Investment- Investors can participate without having to physically manage properties, deal with tenants, or handle day-to-day operations.

Person adding coins to a jar surrounded by icons representing financial concepts, highlighting crowdfunding vs. hard money lending.

  • Diversification- Crowdfunding allows investors to spread money across multiple projects, property types, or locations, helping to reduce risk.

Disadvantages of Crowdfunding

  • Market RisksCrowdfunding investments can fluctuate depending on the real estate market. So, investments may not be doing great when the economy isn’t doing great.
  • Lack of Liquidity- Crowdfunding investments aren’t easily sold or transferred. So, funds are often locked in until the project is over, which can range from several months to years.
  • Platform Dependent- The success and security of investments rely heavily on the platform investors use. So, poorly managed platforms can impact the investment and any funds made from them.

What Is Hard Money Lending?

Another way to invest in real estate is by using hard money loans. Hard money loans work similarly to traditional mortgage loans. However, there are many differences. For instance, instead of taking out a 15 to 30-year mortgage to buy a property, investors can take out a short-term hard money loan that they’ll repay usually within 1 to 2 years. The requirements are also much different. A traditional lender determines loan approval based on creditworthiness, while hard money lenders focus more on the value of the investment property. 

Hard money loans, since they’re short-term, are ideal for real estate projects like fix-and-flips. That way, investors can buy the property, fix it up, sell it for profit, and repay their loan, all within a short period of time. However, it’s important to note that these types of loans do have higher interest rates and may come with higher fees due to the risk to the lender. Additionally, the property is used as collateral, so if you’re unable to pay the loan, you risk losing your investment. 

Pros and Cons of Hard Money Lending

Like crowdfunding, there are some pros and cons to consider when applying for hard money loans. While it’s a great option for those looking to secure a property quickly, the fees and interest rates are generally higher. Here’s what to consider if you’re looking into hard money lending. 

Benefits of Hard Money Lending

  • Fast and Efficient Funding- Hard money loans are approved and funded quickly–often within days. This is great for investors looking at time-sensitive deals. 
  • Flexible TermsHard money lenders are generally more flexible than traditional banks, giving room for negotiation in terms. They’re more likely to cater to an investor’s unique project needs.

Blue piggy bank on a desk surrounded by cash and sticky notes, with one labeled 'Hard Money Loan,' illustrating financial planning and loan options.

  • Easier to QualifyBorrowers with poor credit can still qualify for a hard money loan. This is because approval is primarily based on the property’s value rather than the borrower’s creditworthiness.

Downsides to Hard Money Lending

  • Higher Interest Rates and Fees- Hard money loans typically have higher interest rates, ranging from 8% to 15%. They also have additional fees like origination points and closing costs.
  • Shorter Loan Terms- Loan terms typically range from 6 to 24 months, which means borrowers have to either refinance the loan or sell the investment property quickly to pay it off at the end of the term.
  • Risk of Foreclosure- Because the property serves as collateral, borrowers face the risk of foreclosure if they default on the loan.

Find a Trusted Local Lender Today

If you’re looking for an investment, consider the pros and cons of crowdfunding vs. hard money lending. There are plenty of real estate investment opportunities out there and several ways to make them happen. Whether you want to take on a fix-and-flip project or want a more hands-off approach, there are plenty of options to consider. 

Are you looking for a hard money lender for your next real estate project? Contact Maryland Hard Money Lenders today! Our team can help you finance your next investment quickly and efficiently. Learn more about our lending process, or start filling out a loan application today!

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