Since the financial crisis of 2008-2009, banks and traditional lenders have scaled back their funding of real estate projects. However, private lenders have stepped up to fill the gap.
The private lending landscape is made up of both individual and institutional investors. Data collected by ATTOM Data Solutions indicates that one prominent real estate marketplace lending platform saw a 70 percent increase in home flipping loan dollar volume in 2017 over the year before and a 50 percent increase in loan originations. Another prominent fix-and-flip lender experienced a 100 percent increase in loan originations. The average gross return on investment (ROI) for flipped properties that year, according to ATTOM, was $68,143.
The data shows that house flipping is growing in popularity. As a result, house flippers are getting deals financed in record numbers. But they’re not going to banks. They’re going to private lenders and marketplace platforms where lenders pool their money to fund real estate investments.
Why Private Lenders Should Fund Your Next Real Estate Project
Private lenders fund more than fix-and-flips. In fact, private lenders may fund virtually any type of real estate investment. That includes mortgages, home improvement projects, HELOCs, commercial and industrial ground-up developments and leases, and more.
They also use a variety of different business models, including marketplace lending, direct lending, and hybrid approaches.
The JOBS Act of 2012 opened the door to private lending for many real estate professionals who have struggled to find funding their projects. The landmark legislation allowed lenders to use technology in new ways to market their products to potential borrowers. As a result, online lenders, most of them private lenders, have proliferated.
According to the Federal Reserve Bank of New York, online mortgage lenders have improved efficiency and benefited borrowers. They are able to process transactions more quickly than traditional lenders and respond more agilely to demand fluctuations and market conditions. The same is true of online lenders in every vertical.
With more than 200 real estate crowdfunding platforms in the U.S. alone, and billions of dollars funding investments each year ($33.7 billion in 2017), there has never been a better time for real estate developers and investors to find private capital for their deals. You just have to know where to look.
Private lenders do not place as much emphasis on FICO scores as traditional lenders. Rather, they look more closely at deal structure, real estate experience and track record, and project financials. Due to innovation in underwriting and risk assessment practices, private lenders have expanded their influence and helped more real estate pros realize greater profits and fund more deals.
Expectations for the Future Growth of Private Lending in Real Estate
In May 2019, The American Association of Private Lenders (AAPL) surveyed members of its Government Relations Committee to ask them about expectations for private lending in the next five years. The answers were interesting. Industry professionals said they expect
- l the number and size of private lenders to grow;
- l increased “professionalization”;
- l new capital infusion to meet housing demands;
- l private lenders to specialize in specific niches;
- l private lending to drive platform innovation;
- l higher returns with fewer players;
- l private lenders to embrace technology;
- l private lending to outperform banking;
- l significant consolidation among capital providers and originators;
- l and increased state regulation.
In other words, it appears that private lending insiders expect the market to mature, and since real estate is one of the hottest markets for private lenders, we should expect the real estate lending market overall to mature.
Another thing that could impact the growth of real estate private lending are proposed rule changes for accredited investors. Among these proposed changes, the Securities and Exchange Commission is considering the addition of new investor classes based on occupation and certifications. Other classifications that could gain accredited status include registered investment advisors, rural business investment companies, family offices, and Indian tribes that meet certain investment criteria. If these proposed changes are passed, it would widen the door of demand on private capital, which will lead to market newcomers, new lending products, and a rise in private lending volume. The public comment period for these proposed changes ends mid-February.
How to Find a Private Lender for Your Next Real Estate Project
While market demand for private capital is growing and opportunities for investors are better now than ever, there is intense competition among private lenders, and among investors and developers for private money. That’s a good thing. Still, different real estate projects have different capital needs. Therefore, a search for capital should begin with identifying the type and amount of funding necessary for project completion.
Next, make a list of private lenders who can potentially fill that need. This will require some research.
When evaluating private lenders, look for the types of investments they focus on. If a lender specializes in home improvement projects and your project is a commercial ground-up development, that is not a good match.
You also want to look for a private lender who’s funding criteria match your project capital needs. Does the lender have a minimum or a maximum? Some lenders look for small deals in the range of $50,000 to $100,000. If your project requires millions of dollars in financing, then there’s an obvious non-match. On the other hand, if your project is a smaller project and a lender typically finances larger deals, you can eliminate that lender from your list of potential capital providers.
Another area where you’ll find a lot of diversity is with credit risk terms. Some lenders only fund projects if a developer provides some of their own capital. Others require a strong FICO score or a certain amount of experience. Some lenders use a loose risk assessment analysis while others are quite stringent. You’re looking for potential lenders whose terms match your ability to meet them.
Narrow your list to 3-5 potential lenders before making a final decision. Try to include a mix of lending models — for instance, direct lenders as well as marketplace lenders. You may even include friends and family members.
After you’ve got a solid list of 3-5 potential private lenders, create a presentation with your project details. It should include all project parameters, from acquisition costs to material requirements. Anything pertinent that a potential project funder would want to know should be included. In the case of marketplace lenders, find out what their project deal parameters are and make yours conform.
Finally, you’ll want to perform your due diligence on each potential lender. What is their reputation among real estate professionals? How many deals of your type have they funded? What is their success rate? Create a list of criteria that are important to you and evaluate each lending candidate according to that criteria. You want to create an apples-to-apples comparison so that you can choose the best lender for your real estate project. When you arrive at your conclusion, you should feel good about the funding source you have chosen and its match with your project.
In the competitive landscape of private lending, it’s important for real estate developers to find a lender who is the perfect match for them and their project. Marketplace lending is an excellent funding model for some projects, but it isn’t for everyone. Perform your due diligence based on your project, its funding requirements, and your personal values.
To learn more about Sharestates please click below.
Private lending is nothing new. It’s been around a long time. In fact, it can be traced back to Macedonia around 3,000 years ago. In the U.S., the fix-and-flip segment of real estate investing has relied on private money for almost as long as pros have been rehabilitating properties. However, since the financial crisis of 2008-2009, private debt has grown in virtually every real estate investing sector. In the fix-and-flip sector, it has skyrocketed.
As an asset class, private lending emerged in the late 1980s. It started as a unique funding mechanism for mezzanine loans or special situation financing. Today, it’s a common method of funding fix-and-flip property deals with no signs of reduction any time soon.
The Advent of Fix-and-Flip Private Lending
In 2012, President Barack Obama signed the JOBS Act, which made it possible for lenders of all types to directly market their offerings to borrowers. As a result, hundreds of marketplace lending (MPL) platforms sprung up in the years that followed. The first of these was established in 2010 and paved the path for others to follow. Many of these platforms specialized in real estate lending.
There is a lot of overlap between the MPL sector, which encompasses real estate crowdfunding (RECF), and private lending. Private lenders may seek out borrowers through MPL or RECF platforms, but they may also conduct themselves through direct lending models. Either way, the industry has seen tremendous growth since the financial crisis. Lenders leverage the internet to find borrowers and use traditional offline marketing methods, as well. One of the areas where private lenders have found a foothold is in the area of fix-and-flips.
Following the tradition of hard money lending, fix-and-flip financiers issue short-term loans with high interest and fast closings. They also typically have lower credit risk standards than traditional loans, which is why borrowers favor them.
Investors have enjoyed great returns ranging from 8 to 12 percent interest. Lately, however, fix-and-flip real estate investing has come under scrutiny by state regulators and faces a few challenges. It will still continue to be a prominent part of the real estate ecosystem, and private funding of fix-and-flip properties is poised to grow even further as more online platforms offer more deals for investors.
The Current State of Fix-and-Flip Property Lending
In 2017, ATTOM Data Solutions estimated that flippers turned over 193,009 single-family homes and condos during the previous year. It’s possible the entire fix-and-flip industry saw a total of 300,000 properties turned over. Investors saw an average return of 51.9 percent on fix-and-flips that year. The following year was almost as good as investors saw an average return of 49.8 percent. These are the first and second highest averages since the year 2000.
Another event that happened in 2017 to create new opportunities for private lenders and investors in the fix-and-flip sector was the creation of opportunity zones. These zones allow investors to reinvest capital gains into property rehabilitation projects in predesignated neighborhoods or to invest those gains in qualified opportunity zone funds. For private lenders, they represent opportunities to fund projects in these areas targeted for revitalization.
This rise in fix-and-flip property investing has put the sector on state regulation radars. Last year, New York introduced legislation that could increase transfer taxes for investors by as much as 20 percent. If it passes, it could hamper house flipper in New York. Florida has also introduced legislation that could impact fix-and-flippers and other real estate investors.
On the technology front, private real estate lenders are beginning to underwrite loans and assess credit risk using artificial intelligence and machine learning. Deal analysis is also being impacted by new technologies.
While fighting regulation and the challenges of new technology, increased competition from banks is also beginning to impact the fix-and-flip sector. While some banks are referring borrowers to private digital lenders and some are finding unique ways to partner with real estate technology firms, others are developing their own digital lending platforms.
The Future Looks Bright
Since the financial crisis of 2008-2009, traditional lending institutions have tightened their credit standards and shut out millions of would-be home buyers. The situation for flippers is even bleaker. Those without good credit, or wealth to finance their own deals, lose out on lucrative real estate deals. That’s why many of them have turned to private lenders for capital.
In a white paper titled “Private Lending Goes Public” published in April 2018, ATTOM Data Solutions reports that 207,088 single-family homes and condos were flipped in 2017 and that 34.8 percent of them were financed. The dollar volume for financed flips hit a 10-year high of $16.1 billion. Much of this growth is fueled by online lending.
Besides ease of access to needed capital, one other advantage to funding fix-and-flips through private lenders is a path to a quick closing. Borrowers can get their money in 10 days compared to 10 weeks through a bank.
As the volume of fix-and-flip loans has grown, so too has its diversity. What was once relegated to accredited investors has now been opened up to non-accredited investors. And it isn’t just individuals funding the loans. Many fix-and-flips are funded by institutional investors. In some cases, even banks are funding fix-and-flip investors through marketplace lending platforms or other online channels. And the introduction of real estate investment funds gives investors opportunities to invest in fix-and-flip properties by pooling their money to leverage greater returns and lower risk along with other investors. These opportunities will only increase as the market matures.
Securitizations are another area of potential for the fix-and-flip sector. SoFi and Marlette Funding have led the way in asset-based securities (ABS) in the marketplace lending sector. In late 2017, LendingHome funded its second Opportunity Fund with a $300 million credit facility. Last year, Angel Oak Capital Advisors, LLC obtained $90 million with a securitization backed by fix-and-flip loans. There is plenty of potential for such ABS products to grow in size and number within the next five years.
In a sense, ABS aside, all fix-and-flip deals are asset-backed. Where traditional lenders assess credit risk on Fair Isaac (FICO) scores and property values, private lenders care more about deal structure, loan-to-value ratios, and after repair values. Still, there is a tremendous risk to fix-and-flip investing.
How Private Lenders Manage Risk
Fix-and-flip investors are subject to a number of risks associated with property investing. They can pay too much for a property and not leave enough on the back end for profit. New investors typically fail to include fees and holding costs in their equations. Another common mistake investors make is underestimating the cost of repairs or other expenses. Outside of investor control, the market could turn while rehab is taking place, causing the investor to lose on a deal that a few weeks earlier looked like a sure win.
In these cases, a private lender can serve as a check and balance against the fix-and-flip investor’s judgment. By taking a keen interest in the financials of a proposed flip, the lender can spot challenges the investor might overlook. Any red flags can be a cause for rejecting the proposal.
The best private lenders are not just interested in the deal. They’re also interested in the investor. They may look at the credit score, but they also want to know the investor’s overall experience in real estate, his experience in the specific type of real estate deal being proposed, whether or not the investor can back his own project, and the number of successes the investor has.
Private lenders are more than silent financiers. They are partners with a stake in the fix-and-flip investor’s success.
There are currently two bills working their way through the New York state senate that would impose a “flip tax” on real estate sold within two years of purchase anywhere in the state of New York. One is an assembly bill, Assembly Bill A5375A, and the other is a senate bill, Senate Bill S3060E. Both would effectively do the same thing.
Appropriately titled “New York state small home anti-speculation act,” these legislative items are being proposed for one reason only: To discourage property speculation.
The Blatant Attempt to Kill Real Estate Speculation
Both of these bills are currently in committee. The Senate bill is making its way through the Cities Committee of the Senate and is sponsored by Julia Salazar, senator for the 18th district in New York. The assembly bill, currently in the Ways and Means Committee of the Assembly, is sponsored by Erik Martin Dilan of Assembly District 54.
Both bills also have co-sponsors.
Aptly named, if passed, the bills would impose a 20 percent tax on properties sold within one year of purchase and a 15 percent tax on properties sold within two years of purchase within the state of New York. The Senate bill states the purpose of the bill boldly as “an effort deter property speculation and flipping in vulnerable neighborhoods.” There’s no definition of what constitutes a “vulnerable neighborhood.”
Effectively, the bill could hamper property improvements throughout the state and could do so with severe effects in New York City. Here are three negative effects this legislation could have on New York:
- It could drive property speculators to surrounding states – Real estate investors who buy properties to fix them and flip them to new owners may have their profit potential negatively hampered by the new legislation and seek to do business elsewhere. New York is situated geographically as it is, the new legislation could have real estate developers seeking opportunity in as many as six nearby states: Connecticut, Massachusetts, New Jersey, Pennsylvania, Rhode Island, and Vermont. That’s a lot of exit holes, and the net result would be a negative for New York.
- Some neighborhoods could see less property improvement – Real estate moves in cycles. There are neighborhoods, especially in New York City, where large blocks of real estate are dilapidated and could use some improvement. Some of those neighborhoods are poor or undernourished neighborhoods. A property tax on flips could slow down development in those neighborhoods, which would lead to a slow down in homeownership. Rundown neighborhoods will take longer to receive the development they need to improve property values and create more homeownership opportunities. That would be bad for the state. It would be awful for New York City.
- Higher tax rates could mean lower government revenues – According to the Urban Institute, property taxes account for just 10 percent to 20 percent of state revenue in New York. Interestingly, five of the six surrounding states have higher property tax rates. Currently, in New York, capital gains are taxed as regular income and based on your tax bracket, but if imposing a 15 percent to 20 percent capital gain on fix-and-flip deals imposes a tax burden for real estate investors, it could lead to fewer real estate investors making fewer deals, or, as stated above, drive them to surrounding states. That could lead to less government revenue overall.
Could A ‘Flip Tax’ Affect Marketplace Lending?
The proposed legislation does not make a distinction between where you find your deals. If you live in New York state and you own a percentage of real estate for less than two years, you will have to pay the 15 percent or 20 percent capital gains tax should these bills pass. Real estate investors outside of New York will not be affected, but the same negative impacts mentioned above could affect New York real estate investors finding deals through marketplace lending platforms like Sharestates.
You should know what your senators are considering in case you want to contact your representative to voice your concerns.
PwC recently published a report that looks at emerging trends in real estate in the U.S. and Canada. Included in that report is a list of the top five markets to watch in 2020. Here they are in a nutshell:
- Austin, Texas
- Raleigh-Durham, North Carolina
- Nashville, Tennessee
- Charlotte, North Carolina
- Boston, Massachusetts
Nevermind that four of these five are in the south, and two of them are in North Carolina. What do these five markets reveal about real estate development going into 2020?
What to Real Estate Developers Should Know For Next Year
From Austin to Boston, real estate developers have a wide diversity of opportunities going into 2020.
High Investor Demand
Austin rose from sixth place in 2019 to first place for 2020. What’s so special about this Texas capital? Better yet, what can real estate developers learn about this potential hot market?
There is a lot of investor demand in Austin. What that means is, there is plenty of potential for development. But people in Austin are different than other places (what would you expect from the slogan “Keep Austin Weird”). There is a lot of expansion taking place in Austin and real estate developers should see it as a market rife with opportunity.
Suburban Office, Multifamily, and Technology
Raleigh-Durham is not what you think about when you think about the technology sector. However, there are now more than 89,000 tech jobs in this metro area. For that reason, developers should see it as the Eastern seaboard’s Silicon Valley. That spells opportunity.
The homebuilding trend seems to be multifamily. That could be because of the local colleges. It is home to Duke University, the University of North Carolina, and North Carolina State University. There is also a lot of suburban office opportunities as the business sector continues to grow.
The Slowing Pace of Homebuilding
While Nashville moved from first to fourth place in homebuilding outlook, it isn’t all bleak for this 18-hour city. The homebuilding market may be cooling, but it’s not dead. And, because the city moved up to third from fifth in overall real estate, there is still plenty of development taking place in other sectors. While home sales are slowing, real estate values are increasing. That’s an environment that offers a different kind of opportunity for investors as high-end homes could be the target.
Manufacturing, Technology, and Homebuilding
Charlotte is another city that has moved up in rankings. Up from ninth, the city is now fourth in overall real estate opportunities, and second in terms of homebuilding. But there are commercial opportunities, as well. The city is growing in terms of attracting technology and manufacturing companies. Real estate developers that specialize in those real estate sectors should have plenty of opportunities.
Unique Development Opportunities in Boston
Boston is a rich city with a lot of diversity. Real estate prices have increased in the past few years, as have median home sales. It’s a smaller market, but there are still a lot of development opportunities, and a lot of it is high-end development. That could be because the price of real estate in Boston is not cheap.
Another reality that drives this market is scarcity. There just isn’t a lot of inventory, and the raw land left for new development is scarce. What that means is a guarantee on appreciation, which spells a hot market for buy-and-hold investors.
There is also an interest in downtown Boston condos, apartments, and single-family homes. Real estate is more expensive in downtown, but it’s a lifestyle choice for many millennials and seniors who want to live closer to the amenities they enjoy. Each of these markets spells a ripe opportunity for real estate developers.
Real Estate Markets Conclusion
Each of the top 5 markets for 2020 offers different types of development opportunities for real estate developers. Those opportunities are tied to investor desires as well as homeowner interests. Developers looking for lucrative markets, whether in pure return on investment opportunities or in volume opportunities, should consider these markets.
REOs represent unique investment opportunities for serious real estate investors. An acronym for real estate owned (REO) foreclosure, REOs are properties owned by lenders whose borrowers defaulted on the loan. Due to the foreclosure process that allows the lender to retain ownership of the asset, REOs end up on the books of banks, mortgage companies, and other lenders–including some marketplace lending platforms like Sharestates.
Banks and REO Properties
No lender wants to end up with a portfolio of properties on their books. That defeats the purpose of their institution. A bank, for instance, would rather see the income from the loan product rather than a property that will simply sit without a resident or ongoing maintenance. The bank has no one on staff whose job is to provide upkeep for properties. Therefore, such real estate usually ends up falling into disrepair and the value declines.
The same can be said of other lending institutions such as mortgage companies and real estate investing platforms. They are in the lending and investing business, not the real estate upkeep business.
For that reason, REOs typically sell for much less than their actual retail value. They represent a loss to the lender, and the longer they sit, the more the lender will likely lose on the resell. One way to find such properties is to inquire at a bank or other lending institution to see if they have such properties available to investors right now. That can be hit or miss, but there is usually a good chance that a lending institution has at least one–especially if they are a large institution and the economy has taken a downturn. Following a large number of foreclosures in a particular geographical region, an investor will usually have an easy time finding such properties.
Many banks list their REOs online, which makes it easy. Here are a few banks’ REO listing web portals:
Where to Find Non-Banked Owned REOs
Of course, bank websites are not the only place to find suitable REOs for investment. There are some real estate websites that specialize in REOs, or that include REOs in their sales listings. Here are a few of those sites:
Why REOs Make Good Investments
REOs are usually good investments because they are discounted properties due to the fact that their institutional owners do not want them on their books. They represent liabilities, not assets. They are typically priced to recoup some or all of the lending institution’s investment rather than turn a profit.
While the properties themselves are discounted, investors should prepare to make further investment in repairing the properties, updating them, or providing some maintenance and upkeep before they are able to sell or rent them. Once the repair and maintenance costs are factored in, many REOs can turn their investor buyers a nice profit.
While Sharestates does not specialize in REO properties, and while we have a strict 34-point underwriting process to vet properties and borrowers, it does happen that a borrower will default on a property loan. Our REO rate is a very low 0.17 percent.
Investors looking for REO properties can check the property listings at Sharestates and see if there are currently any properties held by the platform.
Last-mile fulfillment centers represent a cultural shift in retailing. Retailers delivering products to their customers are moving these fulfillment centers to urban areas where they can be closer to their customers. To make that happen, they’re not building ground-up facilities. They’re repurposing old warehouses and parking garages being underused by a decline in automobile usage among millennials.
By repurposing old spaces, retailers can save on investment while moving their products closer to the consumer during the fulfillment process. Doing so relies on mixed-use properties. But that’s just one application of the mixed-use real estate paradigm.
Mixed-Use Residential Communities
The U.S. population is growing, largely due to immigration, but there is a stark difference in growth rates between rural communities, urban communities, and suburban communities. According to Pew Research, rural counties in the U.S. have grown 3 percent since the year 2000, but a smaller percentage of the overall population lives in rural areas due to higher growth rates in urban and suburban settings. Urban growth has been at 13 percent since 2000, and suburban growth has been at 16 percent.
Urban areas have gained 1.6 million net new migrants and 9.8 million more births than deaths. People are moving out of rural areas in large numbers, but because of 1.2 million more births than deaths, rural populations have a net growth rate.
With increased urbanization, less automobile usage among younger adults, and the different needs of aging populations, mixed-use residential communities are growing.
Mixed-use development can range from residential communities that include commercial spaces such as beauty salons, restaurants, and specialty retail shops to office complexes that also include townhomes, condominiums, or penthouse suites alongside a few specialty retail shops and restaurants. They provide developers a less risky approach to development as a shift from residential to commercial real estate investment can lead to gains in one to offset losses in the other. By the same token, investors can benefit by diversifying their portfolios.
Demand for Mixed-Use Spells Opportunity And Convenience
The two largest living generations are influencing the path of real estate development. Millennials are urbanizing and renting for longer than their parents and grandparents while driving less. Baby boomers are retiring and downsizing, seeking communities where all the necessary amenities are within walking or short driving distance. On top of that, Amazon is driving big-box retailers out of business.
All of this is driving up the demand for mixed-use real estate development. That means opportunities for ground-up developers to meet the needs of today’s home buyer, retail merchant, property manager, and investor. It also means opportunities for investors, retailers, and landlords to diversify their portfolios and meet the needs of the end consumer. Finally, it means that consumers are allowed to live, work, play, and shop in a more concentrated area utilizing amenities that are within walking distance, a bike ride, or a short drive.
As retailers set up their last-mile fulfillment centers to “move-in” closer to the consumer, and as consumers rearrange their lifestyles to move closer to their favorite shops and play areas, mixed-use properties are hot again. Ground-up developers can make more efficient use of real estate while property flippers can rehabilitate old spaces and turn them into properties that meet all the needs of retailers, home buyers, renters, and investors. Everyone can get a piece of this pie, and there’s plenty of pie to go around.
Homeowner trends from 2002 to 2018 show that fewer people overall own their own homes. Demographically, people are moving from rural areas to urban areas where homeownership levels are generally higher. Also, homeownership among the white population is about 70 percent versus 50 percent for blacks and Hispanics. Homeownership is also lower among people under 35 than for older people. In fact, the stats show that the older a person is, the more likely they are to own their home.
In 2004, 82 percent of people between 55 and 64 owned their homes, but that level had dropped to 75 percent in 2018. Seventy-seven percent of people 45 to 54 owned their own homes in 2004 versus 70 percent in 2018. Among 35 to 44-year-olds, homeownership dropped from 69 percent in 2004 to 60 percent in 2018. For Americans 35 and under, homeownership peaked at 43 percent in 2004 and had fallen to 36 percent by 2018. These stats may be alarming, but it indicates a growing market for rental properties.
Builders Should Look to New Construction on Rentals
Single-family rental properties have been the norm in metro areas all across the U.S. But that could be changing as cities and states all across the country are doing away with zoning ordinances that favor single-family only residential areas. That could mean there is about to be a shift to multifamily rental properties from New York to California. If that is the case, then I’d expect a run on commercial financing for these property construction projects.
Millennials have been putting off big decisions in their lives for later than previous ages. That means they tend to rent instead of buying well into their 30s and 40s, which is why we have such a low degree of homeownership. It also means they are a key market for multifamily housing. Builders who want to compete in the urban markets would do well to look toward multifamily.
Single-Family Rentals Aren’t Going Anywhere
While there will likely be a surge in multifamily rental property construction and financing beginning within the next two to five years, single-family rental properties won’t disappear. That’s because institutional investors have been on a buying spree. They’re buying up starter homes and renting them out to young families. As long as there is a rental market for single-family residential units, you can bet institutional investors will hold onto those properties. They won’t sell until the market shifts to accommodate more buyers.
What this means for builders and borrowers is that single-family construction likely won’t be going away just because multifamily picks up. In fact, you might find a lucrative market to build and sell single-family rentals to institutional investors.
What Kind of Financing Is Available For Rental Construction Projects?
Builders looking to get into single-family or multifamily new construction projects will have to figure out the financing on those projects early in the planning phase. Will you seek traditional bank financing or look for alternative funding channels? Don’t forget there is a new class of private investor with cash in the pocket ready to help you finance your projects. Real estate crowdfunding platforms allow private accredited investors to finance new real estate projects, whether they be single-family or multifamily.
To get access to this investor money, you simply create an account at Sharestates and present your project for review. Using a 34-point underwriting process, your project will be vetted to see if it meets the expectations of our investors. If it does, you can have your new rental construction project funded from more than one funding source. The process is faster than going the traditional money route.
There are three primary drivers of the rental market in real estate right now.
1. Large companies are buying up single-family rentals and holding them in their portfolios long term. This is driving up the cost of real estate and making it unaffordable for a large number of would-be homeowners, especially young millennials and first-time home buyers. This is forcing those potential homeowners to continue renting for a longer period of time.
2. The job market isn’t the same as it used to be. In fact, the average employee tenure for people aged 45 and younger is less than five years. As a result, people are reluctant to buy real estate so that they don’t get tied up in a mortgage when it’s time to move.
3. Wages are also volatile. Since people tend to switch jobs more often, their income and benefits packages change more often. Plus, many people are working in the gig economy at least part-time, which means their income fluctuates. It’s difficult to get locked into a long-term mortgage agreement when you don’t know how much money you’ll make, or how much you can save, from month to month.
These factors are driving the current rental market. That’s why more people are renting, and many of them are renting single-family homes. That spells huge opportunity for real estate investors looking to cash in on high demand. But how do you get in on this rental market if you are not highly liquid and cannot afford to lay down huge piles of cash on real estate acquisition?
RECF Offers Rental Opportunities for Investors
Rather than opt out of real estate investing altogether because you lack the liquidity to purchase physical property, why not invest what you can each month in real estate opportunities on real estate crowdfunding platforms?
There are two types of deals investors can get involved with on RECF platforms: Equity and debt.
Equity deals allow investors to own a piece of real estate along with other investors. That real estate can be ground-up construction, fix-and-flip, or rental properties. If you invest in a rental property, you’ll receive monthly dividends from the rental income those properties produce, and when the properties sell you’ll get a portion of the proceeds from the sale.
Debt deals allow real estate investors to get in on a loan with other investors. Rather than loan $100,000 to a real estate investor for property acquisition, repair costs, and more, you might just put in $10,000 and become a partial owner of a loan product. Another word for this is fractional ownership.
Because the rental property market is so hot, there are quite a few opportunities for investors to participate in both debt and equity deals that allow them to become investors in rental properties without the associated headaches.
How to Invest in Rental Properties on Real Estate Crowdfunding Platforms
The best way to get involved in partial ownership of rental properties is to set up an account at a RECF platform like Sharestates and begin looking for suitable properties. Each property deal includes information on the property and the borrower. You’ll be able to compare the risk associated with each deal based on the underwriting criteria used, and you can choose how much you want to invest in each property.
As with any type of investment, you’ll want to perform your own due diligence, but the benefit of real estate crowdfunding is you can invest in real properties without having high liquidity.
In June, the state legislature passed, and Governor Andrew Cuomo signed, new legislation that changes the way rent can be increased, and other benefits for multifamily property owners, moving forward. Unfortunately, instead of these laws sunsetting after a number of years, the new legislation has made them permanent.
The largest percentage of rental units in New York City, 44 percent, are rent-stabilized while only 1 percent are rent-controlled. These are the homes that were the primary target of the regulation and which will be most affected by it.
What Are The Major Rent Control Reforms?
While the new legislation didn’t go as far as many advocates were hoping for, there are some pretty strict hand-ties for landlords. The legislation did not do away with the major capital improvements loophole, but it does narrow the scope of definition for major capital improvements and limits how much landlords can raise rents to compensate for them to just two percent. This provision of the law will be in effect for the next 30 years.
In addition, the legislation puts an end to the 20 percent vacancy bonus landlords can raise rents by for new tenants when they move in. Landlords can also no longer raise rent from the preferential rent to market rate when tenants renew their leases. Landlords are further capped on how much they can spend on individual apartment improvements. Not only that, but the jurisdiction for the law has been expanded to include Westchester, Rockland, and Nassau counties.
How Might These Reforms Affect Multifamily Development in the Years to Come?
There are two major areas of multifamily development likely to be affected by these rent reforms. The first is the new construction sector. The second is capital improvements.
While many of the laws in the reform are targeted toward landlords who currently manage rental units, that doesn’t mean new construction won’t be affected. It costs money to build apartment complexes. Landlords rely on tenant rents and rent increases to pay for that development. While it could be a number of years before capital improvements are necessary on new developments, the cost of materials and labor will continue to climb. So developers will have to factor in the rising costs of construction and weigh it against flat rent increases. If the math doesn’t work out, in the long run, we will likely see new construction of multifamily developments decrease once market forces for labor and materials no longer make it profitable to build.
On the capital improvements side, landlords will be reluctant to improve apartment complexes if they can’t recoup the costs by raising tenant rents. On the other hand, certain maintenance costs cannot be avoided. This will become a major balancing act for landlords for the next three decades, particularly for landlords of older buildings.
For older complexes where rents are maximized, what could happen is landlords may decide to replace older buildings with new construction, which would allow them to effectively run older tenants out of the building and charge new tenants in new buildings higher rent. The “good cause” law was not included in the new legislation. This clause would prohibit evictions except for good cause. If it becomes too financially restrictive and costly to manage older apartment complexes, landlords may not have another way out other than to replace older buildings with newer constructions.
Rent reform advocates are disappointed the law didn’t go far enough. From a landlord perspective, it’s going to be difficult to manage the regulation financially and could hand strap many landlords in New York City and surrounding counties.
A Bankrate survey last month highlights Millennial attitudes toward real estate investing. As it turns out, they’re favorable towards it. More favorable, in fact, than toward cryptocurrency, gold, or even stocks and bonds.
In terms of generational interest in real estate as a long-term investment, millennials score the highest. For Baby Boomers, it’s 30 percent; Generation X, 31 percent; the Silent Generation, 23 percent; and Millennials, 32 percent to 34 percent depending on their income bracket. Even Millennials making less than $30,000 per year are more interested in real estate as a long-term investment than members of other generations. That’s good news for everybody.
Why Real Estate is a Good Investment for Millennials
While it’s true that the stock market has yielded higher long-term returns on average than real estate, real estate does have its advantages. It’s hard to say no to average annual 8 percent returns, but real estate investing can yield incredible short-term returns. Here are just a few of the advantages of investing in real estate:
- Investing in real estate builds long-term equity
- Certain types of real estate investing can yield tax-free gains
- Owning rental properties can lead to passive retirement income
- Real estate acts as a hedge against inflation
- It also is a good hedge against a down market in stocks
- Real estate is an appreciable, physical asset
- Investors can see respectable returns without investing the full value of the property
- Real estate allows you to diversify your portfolio
Real Estate Crowdfunding is a Good Investment When Your Assets Are Illiquid
One of the challenges of investing in both the stock market and real estate is you need to have a fair amount of liquid assets to invest. If you want to put $50,000 into stocks, you need $50,000. If you want to buy and hold real estate, you need to invest at least enough liquid assets to secure a loan for the rest. That can be anywhere from $10,000 to several hundred thousand depending on the market and the value of the real estate you are buying.
Real estate crowdfunding provides another avenue for passive income by allowing Millennials to invest in real estate through fractional ownership. It’s also a great short-term investment with long-term implications.
For example, if you want to invest in a $500,000 commercial real estate development project, you’ll need a large amount of capital to make a traditional investment. These types of investments are typically limited to the number of investors who are allowed in on a deal. You need to be liquid, and your money is tied up until the development is completed.
With real estate crowdfunding, however, you can get in on a deal like this with thousands of other investors. Each of you puts up a minimum amount of investment and you receive dividends when the property sells if it’s an equity investment. Your returns are based on the value of the real estate property at the time of sale. You can also get into real estate crowdfunding with debt. The concept is the same. You and several hundred other investors put money up for a project and receive ongoing dividends as passive income when the interest on the debt is paid off each month.
With real estate crowdfunding, you can invest in any number of projects simultaneously and keep investing your returns over and over as new projects are presented and funded projects close. And many investors are realizing returns close to stock market returns–in the 8 percent to 12 percent range. Millennials interested in real estate investing for the long-term should consider real estate crowdfunding as an option to traditional real estate investing that requires more liquidity to get started.