Realty Mogul Brings P2P Lending to Real Estate

Jilliene Helman is on a mission. She wants to make real estate investing simple and accessible to everyone. She wants investors to be able to share in the upside of real estate investing without the “hassle of dealing with tenants, toilets and trash” as she puts it.

Helman saw the success of the p2p lending model at Lending Club and Prosper and thought she could apply similar principles to real estate. Together with her co-founder, Justin Hughes, they recently went through the TechStars/Microsoft accelerator program, which helped them hit the ground running. They launched their site, www.realtymogul.com to the public just last week.

They have been running in beta for several months where they funded the first investment on their platform, a residential property in Los Angeles. Right now they have three properties available for investment..

How Does it Work?

There are two kinds of deals at Realty Mogul, equity deals and secured loans.

Equity deals are where the investors maintain a fractional ownership in a property. These investments have a longer time horizon and are higher risk but with higher potential reward.  Realty Mogul investors will be investing alongside a professional real estate investment company in this transaction type. It is an illiquid investment with an estimated 3-5 year term but investors can share in the potential upside as the building appreciates over that time. Also, rents will provide some income to investors in the meantime.

The secured loan deals are simply loans made to a real estate investor. These are typically short-term loans where the buyer is purchasing real estate with the intention of doing some simple renovations and then reselling. So the loan term is less than a year. Investors receive interest on their money and their principal will be paid back when the property is sold.

What are the Returns?

The returns for equity deals are unknown because they will depend on many factors, the most important of which is the health of the real estate market. Realty Mogul will strive for 12-14% estimated returns on equity transactions  but obviously the actual return will not be known until the property is sold several years down the road.

The secured loan deals are much more predictable. These are short-term loans that receive regular interest payments and then a balloon payment at the end when the property is sold. Both secured loans on the platform right now are offering 8% annualized returns.

Off and Running with $500,000 in Funding

Realty Mogul has received $500,000 in initial seed funding from a number of high profile angel investors. Since launching a week ago many people have registered on their site and made investments in one of the three offerings. As of this writing investors have made commitments of $170,000 of the $610,000 needed to fully fund each project. Today, I just committed $5,000 of my own money to the Single Family Rehab project in Washington.

The business model for Realty Mogul is to make money on the servicing side of the business with a small spread on the interest rates charged to the borrower. But Helman said that there is no standard approach here because every deal will have slightly different terms.

Right now, Realty Mogul is open to borrowers in California and Washington.  Unfortunately it is only open to accredited investors right now but eventually Helman said they would like to be open to a broader population of investors. They are watching the implementation of the JOBS Act carefully to see if that will allow them to expand beyond accredited investors.

Despite the recent housing crisis real estate remains a popular investment and Realty Mogul makes it very easy for investors to participate. I think 8% annual returns secured by real estate is a compelling proposition and a nice diversification away from unsecured p2p lending.

Their launch last week generated a ton of articles about the company. Here you can read coverage from Techcrunch, the Los Angeles Business Journal and The Verge.