Is EstateGuru a good platform to lend money to real estate projects using P2P lending?
EstateGuru is an Estonian peer-to-peer (P2P) lending platform which allows its users to invest their money into real estate loans. The platform performs a thorough risk assessment for all loans on the platform to ensure that only secure and high-quality projects are offered to potential investors.
I initially heard about EstateGuru from a friend who invested a small sum and then just enabled the “AutoInvest” feature with decent results. Based on his experience I wanted to try out the platform and see for myself if it’s a good platform to invest my money.
Unlike other P2P lending platforms, the advantage of real estate loans is that they are backed by real estate collateral which can be sold in case the borrower defaults. Unlike other collateral, for example, machinery, the advantage of using real estate properties as collateral is that it usually maintains a high value.
The loans on EstateGuru are granted as bullet loans which are also known as balloon loans. With bullet loans, the borrowers usually only have to pay back the interest over the lifetime of the loan. Then at maturity the borrower has to pay back the full principal. There are also other forms of bullet loans in which the interest is not paid back during the lifetime of the loan and instead is included in the final payback of the principal.
Most loans are secured with first rank debt (senior debt). This debt takes precedence over subordinated debt (junior debt) in the event of a default. First rank debt often is the original mortgage taken on the property. This means that if the loan cannot be repaid EstateGuru is first in line to take over the property. They can then sell it and try to recoup the investment with little or no loss.
One way to ensure a low loss in the case of a default is that the value of the collateral stands in a healthy relationship with the value of the loan. To gauge this EstateGuru provides the loan to value ratio (LTV). The ratio can be calculated by dividing the loan amount by the collateral amount. It indicates how big the loan amount is compared to the value of the collateral. For example, if the LTV is 50% and the loan amount is 100000€ the collateral value is 200000€. The higher the LTV value, the higher is the risk and the lower the ability to recoup the investment in case of a default.
Another approach EstateGuru uses to limit the risk of losing money in the case of defaults is to divide the project into smaller stages. With every completed stage the value of the collateral rises and in return the loan amount of the next stage increases. This ensures that the collateral value always stays close to the value of the loan and as a result, the risk for the investor is being decreased.
For example, at first, a loan is granted to purchase the land only. As the land itself is not as valuable yet only a smaller loan is granted. In the next stage, the infrastructure is being laid. With the infrastructure in place, the value of the land rises and so does the loan amount of the next stage. Finally, the construction of the building is started. As the land got more valuable again the loan amount of the final stage increased.
The sign-up process for EstateGuru was quite quickly done. After providing my personal information I had to answer a KYC (know your customer) questionnaire to prove that I have the required knowledge. Afterwards I had to fund my account. For the first account funding, a bank transfer is necessary which took quite a bit of time to process. It would be great if the account could be funded by credit card instead. Following fundings can be performed via bank transfer or faster bank link with Estonian banks like LHV.
EstateGuru provides a decent amount of loans to invest in. However, it seems like the selection is more limited to new investors. After looking through the different investment options on the primary market I decided to look deeper into a project in Germany. The interest amount of 11% seemed great and the loan term of 18 months provided some flexibility. EstateGuru provided the full and detailed collateral property valuation as a pdf.
Based on the information from the project page I decided to invest a small amount of 100€ to try out the platform. After my investment got confirmed it took roughly 2 weeks until I received the final repayment plan.
So far I have not been disappointed and enjoy using the platform. EstateGuru does a good job of showing the key information about a loan and providing additional material supplied by the borrower. While there is a small initial hurdle to figure out how the platform works it is easy to overcome. I do plan to invest more in the future and am quite excited to try out the “AutoInvest” feature in the future.
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