P2P Lending and Real Estate Crowdfunding Explained

Peer-to-peer (P2P) lending lets individuals fund slices of personal loans to other people through a platform, earning interest as borrowers repay. Real estate crowdfunding pools money from many investors into property loans or funds. Both are marketed as income investments; both carry more risk and less liquidity than their advertised rates suggest.

What has changed

The market is smaller than it once was. LendingClub, once the best-known platform, stopped offering its notes to individual investors at the end of 2020 after becoming a bank. Prosper still sells notes in many states. Many real estate platforms now offer funds (such as non-traded REITs or interval funds) rather than single deals, and some are open only to accredited investors.

The risks

Borrowers default, and defaults rise in recessions, so returns net of losses can be far below the stated interest rates. Notes and many property funds cannot be sold quickly, and some limit or suspend withdrawals when many investors want out at once. These are not bank deposits and are not FDIC-insured. The SEC's Investor.gov has plain-language guidance on crowdfunding and non-traded REITs.

How it is taxed

Interest from P2P loans is taxed as ordinary income; distributions from real estate funds may be ordinary dividends, capital gains or return of capital, reported on a 1099. Defaulted principal may be deductible as a loss, with specific rules.

If you try it

Keep it a small part of a diversified portfolio, spread money across many small loans or a diversified fund, read the platform's withdrawal rules before investing, and compare the net return with an insured savings account or Treasury bills, which pay interest with far less risk.

• Interest income
• What is a REIT?