Friday, 19 February 2016

Real Estate vs. Peer-to-Peer Lending

Real estate as investment has become more and more popular over time. Even though investment in the sector collapsed after the 2008 financial crisis, people still invest a considerable amount of capital in real estate. We take a look at how investing in real estate fares against an alternate asset class viz. Peer-to-Peer Lending.

1. Capital Outlay: Real estate requires a huge amount of capital investment. A lot of people do not readily have this amount of capital available at all times. Even if someone opts for debt financing (and the corresponding Income tax benefits), at least 20% of the value of property has to be self-financed – which can be substantial. Though everyone is anticipating a change in the IT rules, in this budget, however, the benefits related to income tax exemptions are also limited to 3 years.  

Hence, if you don’t have adequate capital available, the other options are not very favorable.

On the other hand, Peer-to-Peer lending does not require high capital investments. Most P2P Lending websites allow you to invest lower quantities and spread your risk.

2. Low Liquidity: Real estate investment is a highly ill-liquid asset class. Properties can't be sold quickly or easily without a substantial loss in value. This means when you do need immediate capital and cannot source funds from anywhere else, using your real estate asset is not an option for immediate capital.

Peer-to-Peer lending, on the other hand, have liquidity. Firstly, as a lender you get monthly payments on your investment. If a situation arises where you require your money before the tenure is over, you have the option of selling the contract to another lender who will take your place and receive the pay-out instead.

3. Cyclical nature: Real estate prices tend to have cyclical and are generally dependent on demand and supply in an area and/ or the state of macro-economic affairs in the country. If one is stuck in a wrong cycle or there is an incorrect assessment of prices, it can drastically erode the capital value of the investment.

On the other hand the capital and interest in a peer to peer lending parlance remain unaffected by the state of economic affairs. The investor receives fixed monthly income.

4. Management and Maintenance: Regular maintenance of a property is a necessity. There are refurbishment or regular maintenance costs that have to be incurred with respect to holding a property. Furthermore, there are annual/ monthly maintenance charges that are to be paid in a RWA and yearly property taxes.

Compared to this, a peer to peer asset does not come with a burden of maintenance. With an ease of online investing and monitoring – everything is there at a click of a button.
While real estate is still a well-known investment option, it is not the easiest one. It requires a lot of effort and time from the investor and demands high involvement. This is not the case for P2P Lending.

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