Private lending as an asset class is in growth mode. In fact, since the 1980s, private lending has been one of the fastest-growing sectors in the lending market as a whole. Since the 2008-09 financial crisis, when banks almost entirely abandoned the real estate lending sector, nonbank lenders have picked up the slack and taken private lending to new heights. Today, some of the fastest segments of real estate lending are in the private money market.
The prospects for future growth in real estate private lending are good and getting better. Certain segments of the market are maturing, which means investors have better opportunities than ever before.
Traditional Lending Opportunities for Private Real Estate Investors
When it comes to lending opportunities for private investors in real estate, nothing beats mortgages. In fact, mortgage lending is the largest private lending category, but that doesn’t mean that all opportunities are for individual investors. Institutional investors make up a large part of the private lending market.
The mortgage lending sector can be split into three distinct markets, and all of them have tremendous opportunities for private money lenders.
- Residential mortgage lending – In December 2018, according to Magnify Money, 51 percent of the $10.3 trillion of mortgage debt was serviced by nonbank lenders. That’s a broad category that includes both individual lenders as well as institutional lenders, as well as direct lenders and marketplace lenders.
- Commercial mortgage lending – Commercial lending is not only about mortgages. It involves any type of commercial real estate development, including ground-up developments such as multifamily residential and office space. It also involves rehabilitation projects. Still, commercial mortgages are an important sector within the real estate lending category, and it’s wide open for private lenders.
- Industrial mortgage lending – The same applies to the industrial sector. It encompasses more than mortgages. Yet, mortgages within the industrial sector can be financed with private money.
Non-Traditional Lending Opportunities for Real Estate Investors
When it comes to private money financing, the opportunities for private real estate investors are growing by the day. Private lenders have plenty of opportunities within the traditional lending sectors due in large part to market growth after the financial crisis. However, more and more, there are non-traditional lending opportunities private investors can pursue.
The following opportunities for private lenders are either in the early stages or entering the mature stage of market growth.
- Marketplace lending – Marketplace lending is a type of platform lending that allows multiple investors the ability to pool their money to invest in different types of real estate projects. Most opportunities in this segment of the market have been for accredited investors, however, in the last couple of years non-accredited investors have seen more opportunities present themselves. Marketplace lending is beginning to mature as its own asset class, and there are opportunities for both debt and equity investors. Types of projects also run the gamut from residential fix-and-flip to commercial and industrial ground-up developments.
- Real estate crowdfunding – Often seen as synonymous with marketplace lending, real estate crowdfunding can also be viewed as a subset of marketplace lending. New and emerging business models are presenting themselves such that opportunities are not so easily categorized as equity- or debt-based nor easily classified as marketplace or direct lending. Hybrid models of lending and investing allow novice debt investors to partner with more experienced investors, private lenders to partner with institutions, direct lenders to partner with marketplace lenders, and lenders and borrowers to partner with each other where the borrower puts “skin in the game” on their own developments.
- HELOC – There aren’t many platforms offering private lenders opportunities to fund home equity lines of credit (HELOC) products, but there are a few that are beginning to rear their heads. There is plenty of room for this segment of real estate lending to grow.
- Fix-and-Flips – The fix-and-flip market is hot for private lenders right now. This is one of the key areas where banks pulled out of the market after the financial crisis. As a result of banks leaving a big gaping hole in the market, crowdfunding, marketplace lending, and private lending opportunities for real estate investors exploded. The opportunities are there, and they’re getting better.
- Bridge lending – Bridge lending is another ripe opportunity for private money financiers. By taking on higher risk and assuming a position higher up on the capital stack, private investors can get in on bridge loans that allow current or ongoing development projects to be funded mid-stage. They offer higher returns and greater opportunities for private lenders willing to assume the risk.
- Refinancing – Refinancing currently financed real estate projects can run the gamut from fix-and-flip hard money loans to conventional mortgages to high-interest commercial adjusted-rate mortgages refinancing for better terms. Any type of refinancing is available for private funding if the investor knows how to find opportunities.
- Home improvement – Homeowners who want to improve their homes can also take out loans from private lenders. This is another market segment that is in its early stages but that also has plenty of opportunity for growth.
- Blockchain lending – Blockchain is an early-stage technology that is presenting new business models and new takes on old business models. Opportunities for private lenders range from traditional lending products to crypto lending opportunities. One prominent blockchain lender specializes in HELOCs. Others offer real estate crowdfunding opportunities recorded on a distributed ledger, a decentralized technology that offers immutability and transparency for transaction reporting. Some uses of the technology involve funding real estate opportunities with cryptocurrencies such as bitcoin while others allow real estate investors, including lenders, a way to tokenize real estate assets.
The Ever-Changing Private Real Estate Lending Landscape
Real estate lending is constantly changing. The rapid advancement of technology ensures that private lending models and real estate lending will continue to evolve well into the distant future. We are seeing these changes taking place before our very eyes every day.
The JOBS Act of 2012, for instance, opened up new business model opportunities and created more opportunities for more investors and lenders than any other legal, regulatory, or technological advancement since the Securities Act of 1933. Another piece of legislation has recently been introduced that promises to make a few significant changes on the back of the JOBS Act.
Last month, the Securities and Exchange Commission (SEC) proposed an update to the accredited investor definition. Currently in the public comment period, if the legislation passes, it will expand the definition of accredited investor to include persons and institutions that historically have not been considered accredited investors. The practical implication is that more lenders will enter the market, which will lead to more opportunities for lenders and the creation of new lending products to meet the demand.
The above list of lending opportunities for private real estate investors is not exhaustive, but it’s a good start for investors looking for the best opportunities.