According to a Freddie Mac sponsored article at National Real Estate Investor online, small apartment communities consisting of five to 50 units house up to 70 percent renters. Still, the majority of multifamily financing goes to larger multifamily projects. Thanks to private lending, this can change.
7 Ways Private Lending Can Help Small Multifamily Projects
It’s difficult for small multifamily projects to receive funding because banks are not financing as many projects as they used to, have implemented stricter risk management controls, and prefer to finance larger projects where income earned from interest is more justifiable based on the cost of capital. Still, that does not leave developers of small multifamily projects in the lurch. Here are seven ways small multifamily projects can benefit from private lending.
- Access to capital – The most obvious benefit is access to capital that might not otherwise be available to small project developers. Since bank lending has practically dried up, unless you personally know the lender, small developers must seek capital elsewhere. Private lending is an open door.
- More diversified lending base – Through marketplace lending platforms, small multifamily project developers have access to a more diversified lending base. Instead of seeking capital from one source, the borrower can receive capital from multiple sources even while proving their risk worthiness to only one source. Due to this nature of private lending, these loans are often easier to obtain.
- Better terms – Borrowers often get better terms from private lenders. That’s partly because private lenders often don’t have the huge overhead and underwriting expenses that banks and institutional lenders have. There is also a lot of competition among private lenders now to fill the gap in lending for small developer projects. That competition means better terms for the borrowers.
- Faster access to capital – Whether seeking capital for a ground-up development, a mezzanine loan to keep a project afloat, or seeking capital for another level within the capital stack, real estate developers can gain access to much needed capital faster from private lenders. This capital is typically taken from stocks, mutual funds, certificates of deposit, and similar investment vehicles. Therefore, it’s more accesible. When acquired through a marketplace lending platform, many private lenders keep a minimum amount of money in their account on such platforms in order to fund projects quickly.
- Lenders are able to finance smaller amounts – Institutional lenders usually have minimums. Borrowers seeking capital below a lender’s minimum requirement will be denied outright. Your chances of obtaining a loan are nil before you apply. Private lenders, on the other hand, typically will lend smaller amounts. That makes it easy, and a perfect match, for small multifamily development projects.
- Private lenders will often take a personal guarantee – If your risk profile is bad, or you have bad credit, private lenders will often loan on the basis of a personal guarantee. If a developer can back their loan by proving they have cash to cover the loan amount in the event of default, obtaining a loan from the private lender is fast, easy, and comes with no strings.
- Private lenders are more flexible – Many private lenders are also more flexible in their terms and repayment options.
If you are a developer working on a small multifamily project and are seeking financing for that project, your best bet is seek a loan from a private lender or marketplace lending platform.