It’s no secret that most financing in the multifamily sector goes to larger deals. With private lending, however, that can change.
The Challenges Small Multifamily Developers Face
Freddie Mac published an outlook on Multifamily real estate at the beginning of this year. They conclude that the pandemic hurt the multifamily sector severely. That could have major implications for smaller multifamily projects since small developers may not have the capital or the cash flow to maintain projects already started or to begin new projects.
The pandemic affected multifamily housing in several important ways, according to Freddie Mac. These include:
- Lower vacancy rates. Artificially propped up by eviction moratoriums, last year’s vacancy rates went from 4.7 percent in the second quarter of 2020 to .4 percent in the third quarter. Freddie Mac predicts an increase in vacancy rates in 2021.
- Rent growth – Rent growth started positive in 2020 then went negative in the second quarter. Rent decline slowed in Q3, but Freddie Mac is positive about rent growth for the rest of this year.
- Originations – Again, 2020 started with strong originations resulting in a 20 percent decline throughout the year. Freddie Mac expects a bounce-back in 2021.
Each of these challenges affects small developers more than large developers, but the bright side is that small developers also stand to see the biggest gains as the economy recovers. Private lending can help.
7 Ways Small Multifamily Developers Win with Private Lending
Since banks are reluctant to finance small multifamily deals, developers must get creative with their capital raising. Private lending is the best opportunity in today’s market. Here are seven ways small multifamily developers can improve cash flow and capital to fund their next project.
- Raise capital faster – Small multifamily developers often have capital limitations, but those can be overcome with private lending. A mezzanine loan, for instance, can help sustain development on a project that risks slowing down or coming to a halt due to cash flow challenges. Bank loans are often slow and accompanied by red tape whereas many private lenders will fund a project without credit checks or lots of paperwork. Even equity deals can be closed faster, especially through a marketplace lending platform, because due diligence is performed based on individual investor concerns rather than an institutional framework.
- Capital is within reach – Backing up a second, gaining access to capital in the first place is a big step forward for many small multifamily developers. Since they often have a difficult time obtaining bank loans, small developers must operate out of pocket. Gaining access to private loans means having operating capital and cash flow, two of the biggest challenges.
- Developers get better terms – Private lenders have less overhead and fewer underwriting expenses than institutional lenders. And the private lending sector is very competitive, which means many private lenders are willing to cut a deal for small multifamily developers. If there is a chance a private lender will profit from your project, you have a good shot at getting a private loan.
- Flexibility – Private lenders are much more flexible than banks and other institutional lenders. They often set their own criteria for which projects they finance, but because they are individuals or small co-ops, they are more agile and quicker to change their terms for the right deal.
- Private lenders finance smaller amounts – Banks focus on large financing deals because they are more profitable. That means small multifamily developers are shut out of the traditional borrowing experience. Private lending bridges the gap. If your project doesn’t meet a bank’s minimum investment criteria, you don’t have a shot at a loan even before you apply. Private lenders look for smaller projects they can earn a quick return on within a shorter period.
- Diversity – Marketplace lending platforms like Sharestates give multifamily developers access to a diversified base of private lenders. Instead of receiving capital from one investor, many projects are funded by hundreds of smaller investors. This means that small developers can obtain a loan more easily and hit a capital raising target more quickly.
- Private lenders accept personal guarantees – Developers with bad credit or a high-risk profile have difficulty getting loans, but if you have a large bank of operating capital, you can personally guarantee a private loan and that is often enough to lower your risk profile. Banks often do not accept such guarantees. Obtaining a loan is much easier if you can personally guarantee the funding.
Coming out of the pandemic, small multifamily developers have much better chances of getting needed capital and increasing their cash flow with private lending. Now is a great opportunity to fund your next deal.