You’re Missing Out On This Profitable Type Of Lending To Landlords

That’s a clickbait sounding title, but it is meant genuinely and there’s a lot of evidence to back it up.

Quite a few 4thWay readers report being comfortable lending against residential property development projects, but say in contrast they don’t understand lending to landlords who own and currently lease out commercial properties, such as shops, offices, hotels and warehouses.

I find this a bit of an anomaly, since residential property development lending is far more complex and intrinsically riskier than commercial investment property lending.

After all, we’re talking about properties that are already being leased out to business tenants, versus maybe a plot of land that might not even have had the previous building torn down yet.

And that’s even though the rewards after bad debts that you can expect to earn in both types of lending aren’t really all that different from each other.

For the record, this type of lending is often called “commercial real-estate lending” (CRE) or, more specifically, “commercial investment property lending”. An “investment property” more generally is one the owner usually intends to hold onto and rent out.

So today I want to help you begin to understand this type of lending better. To that end:

• Firstly, I want to cover some of the basics of how P2P lending providers (and banks) check an application for a commercial-property loan.
• Next, I want to show you where the risks are – even after those checks – and suggest simple ways for you to contain them.

The checks involved in commercial-property lending aren’t really more complicated than many other types of lending. They’re just aimed at answering different questions.

With this kind of lending, the main question is: “Will this building keep earning enough rent, from tenants who are actually likely to keep paying, to cover the loan for as long as it lasts?” Once you understand that, the rest makes a lot more sense.

Checking the property itself

Getting the land and building properly valued

The priority for any P2P lending company is to get the building properly valued by an independent, qualified surveyor. This tells them what the building is realistically worth today.

Surveyors must have insurance in the event they make a major mistake in the valuation.

P2P lending providers also get the building physically inspected to check for problems like a leaking roof, outdated wiring or anything that could cost a lot to fix.

If the building was once used for something like manufacturing, they should be checking whether the land itself might be contaminated.

Ensuring the property legally protects you

What should be very important for most of you: for the most part, you’ll want to be lending where the provider takes a “first legal charge”.

This means that if the borrower owes money to a bank or any other party, you will still get all your money back, as well as all interest due to you up to the actual date of repayment, before anyone else is allowed to get any money from the borrower.

Some of the problems that can happen related to the property

Lenders these days look at how energy efficient the building is. Current rules mean landlords can struggle to legally rent out much older buildings if they are very inefficient, although only a small proportion of the market fails to hit the minimum standard.

Putting a valuation on some commercial properties can be tricky; for example, if the property in question is a restaurant located near a single office building containing just one large company that provides the bulk of the restaurant’s business. Here, the risk is that the company leaves the area and the office is empty for a while. The restaurant instantly loses most of its customers and can’t pay the rent to the owner of the premises.

If there’s a need for a forced sale of the property, it might be hard to find buyers under these circumstances. Even then, you might still not recover the full loan amount.

Most commercial properties are more resilient than in that scenario. But certainly, you want to know that any P2P lending company is not always scraping the bottom of the barrel to close some loan deals.

Not unless it’s setting higher interest rates to compensate lenders who like higher risk, or lending a much smaller amount to the borrower versus the estimated valuation.

Checking the rent: who’s paying it, and how reliable is it

This is the part that probably trips people up most. The loan is repaid from rent that the property owner receives, so you need to know how solid that rent really is.

Peer-to-peer lending companies therefore look at:

• Who the tenants are and how financially secure they seem – certainly including a credit search. A big, well-established company signed up for a long lease is a much safer bet than a small, newer business.
• How long the leases run for. If most tenants’ leases are ending soon, that’s riskier than if they’re locked in for years to come. Peer-to-peer lending companies also check for any clauses that let a tenant leave early, and how often the rent gets reviewed or increased.
• How many tenants there are. A building with just one or two tenants is riskier than one with lots of different tenants, because if one leaves, a bigger share of the rent disappears at once. That said, one really strong, reliable tenant can sometimes be a safer bet than a mix of shakier ones.
• What happens if units in the building sit empty. Loan providers think about how likely it is that units will stay empty for a while, how much it would cost the owner to find new tenants and what bills the owner would still need to pay even while lacking some tenants.

Checking the numbers

Two figures matter most:

1) How much is being lent compared to what the property is worth

You don’t lend up to the full value of the building. You leave a safety margin, especially in the event the building’s value drops later on. A typical maximum is 75% of the property’s valuation.

History shows that anything above that level in this kind of lending rapidly becomes riskier. (A little history lesson on that lower down this page.)

Typically, with these kinds of loans, the valuation presumes the building will be more or less full of tenants when it is sold, which makes it much more valuable.

If the property empties out and can’t (or won’t) be refilled before it’s sold, it can literally halve the sale price. In most cases, this will mean you don’t get all your money back if you were lending against that property.

Thankfully, across the commercial property lending market, that set of circumstances is rare.

2) How comfortably the rent covers the loan repayments

P2P lending companies compare the rent coming in each month with the monthly loan payments, to make sure it more than covers the cost.

There should be enough rent above the loan payments to absorb a shock, like one of the tenants leaving.

You can expect them to test this against a few “what if” scenarios, to see how much bad luck the loan could withstand before there’s a real problem.

Checking the person or company borrowing the money

P2P lending providers also have to look at the borrowers themselves.

Have they successfully managed similar buildings before? Do they have other money or assets behind them if things go wrong? Are they in close contact with their tenants?

They might not reject a loan outright if the answers are less appealing, but they might set higher interest rates.

Ideally, the provider really should meet the borrower.

Often, they will ask the borrower for personal or business guarantees as well, which means they’re expected to make up any shortfall themselves if the property is forcibly sold at an insufficient price.

But, unless or until a P2P lending company has shown solid empirical evidence of the actual worth of those guarantees, you should not put weight on them. (In practice, it’s often not possible to prove that guarantees have strong value, so focus on other things.)

Alongside this, there are legal checks: making sure the seller genuinely owns the building outright, checking for any restrictions on how it can be used, and reading the lease agreements closely for anything that could cause problems down the line.

Furthermore, unless you’re talking about a prime mortgage with a leading interest rate, expect the borrower’s exit strategy to be clear and plausible. Is there a realistic plan to remortgage onto a better deal at the end, for example?

Looking for variety

As online shopping became dominant, you might recall a steady flow of stories about shops and retail centres closing down.

The pandemic certainly caused concern for some commercial-property sectors, too, especially for offices, because everyone started working from home.

So ensuring that there are a lot of different sector to balance each other out at any one time is also a powerful ingredient in this kind of lending.

For banks, this has often happened naturally, because they are such large lenders. Smaller providers, like P2P lending companies, have to make it more of a conscious choice.

Why this keeps going after the loan starts

With this type of lending, because the loans run for years, good P2P lending providers and banks keep checking in – getting the property revalued now and again, keeping track of tenants and lease renewals, and recalculating whether the rent still comfortably covers the loan.

Typically, a great loan should have loan covenants that mean if the property’s independent valuation falls below a certain level (e.g. below 65% of the loan amount), or if rental income falls below a specified threshold, the borrower will be expected to repay some of the debt early to “cure” this imbalance.

You also want to see that a P2P lending company is keeping a watchful eye on rental arrears or other tenant issues once the loan is up and running, and what they can actually do if something starts to go wrong.

Why all that matters: how bad things got last time

In the run-up to the 2008 financial crisis, many UK banks got badly caught out lending against commercial buildings.

By the end of 2007, the typical bank was lending around 95% of the property’s value, leaving almost no safety margin at all.

When commercial property prices then fell 37%, a huge number of these loans ended up being far bigger than the latest valuations of the properties they were secured against.

The financial regulator found that, even as late as 2011, 14% of these loans were worth more than their properties and for the worst-performing bank it was over 40%.

The knock-on effect was heavy losses, with the average bank losing 6% and the worst performance leading to a write-off of nearly 20% of the loans. For years beyond the wipe out, around one-third of all outstanding loans were quietly being given some kind of forbearance – such as extending the loan or relaxing loan covenants – in order to avoid recognising a loss straight away.

In plain terms, a lot of “performing” loans on paper weren’t really performing at all; the problems had just been kicked down the road, with the quality of many of the outstanding loans still in question years later.

As an aside – having knocked personal and business guarantees earlier in this page – back in 2007 the major UK banks often let small commercial property owners waive the guarantees or at least negotiate caps. It was therefore easier for commercial property landlords to default on individual properties and walk away from the debt, saving the rest of their property portfolios. It shows that it certainly makes sense to get the guarantees from borrowers, even if their impact can’t easily be measured.

Lines in the sand

While I’ve necessarily kept this simple, this form of lending really is not complicated.

The main thing to watch out for is that the platform has the skill and ability to do it and that its not overheating if the rest of the market is. For example, when banks were doing really badly in the late noughties, other non-bank lenders doing the same kinds of loans were coming out pretty well.

The banks increasingly took more risks with inflated property prices and agreeing to lend, in many cases, more than the property’s were even worth.

See that your chosen P2P lending providers are sticking to sensible standards and reduce the amount you put in as those standards weaken. Don’t fall for the always false statement that occurs again and again in lending and investing: “This time it’s different.” It never is. Hype is always hype, greed always greed, and poor standards always lead to pain.

Which P2P lending providers offer this kind of lending

Throughout this page I’ve been writing “P2P lending companies” (plural), but currently just one provider focuses a lot on this form of lending, namely Proplend*. Other providers around today just sporadically offer loans of this kind.

Since 2014, lenders through Proplend have lent £287 million against around 250 different commercial properties, mostly in commercial investment property loans.

Lenders have been paid out more than £33 million in interest after lending fees, while suffering just £200,000 in losses. Lending rates at present average around 8%.

Virtually all of the £70 million in loans outstanding are completely on track with no late payments.

In loans over the past 12 months, the borrowers’ tenants have been paying more than two times the monthly loan payments in rent.

Meanwhile, lenders using Proplend can choose to cap their collective lending in each of those loans at 75%, 65% or even just 50% of the property valuation, to contain risks.

The tenants of the properties are well distributed across shops, light industry, offices, hospitality, HMO, leisure, warehousing, petrol stations and more.

Read more in the Proplend Review or visit Proplend*.

Commercial property price bubbles have been part of many banking sector problems over the past 50 years. In a separate piece this year, I’ll share several past examples with you and write about what that teaches you about how to stay even safer when doing this kind of lending.

Pages linked to above

4thWay P2P And Direct Lending Index: Q1 2026.

Proplend Review.