The May 2019 Fannie Mae Housing Forecast indicates a growing trend in new housing starts and existing home sales. The forecast doesn’t show where these homes are located, but it does show there is room for optimism in each real estate market. The question for investors is, what kind of neighborhood makes the best investment? Should you put your money to work in urban, suburban, or rural markets?
Where Are People Choosing to Live?
It can be difficult to discern trends in a mixed environment. On the one hand, President Trump’s Opportunity Zones could create opportunities in urban markets where many of these zones are located. On the other hand, millennials are beginning to buy their first single-family homes and are looking at suburban areas. Not only that, but movers are migrating from metro areas to the suburbs. These trends are happening as the market transitions from declining home sales into an upmarket trend and mortgage rates are creeping upward.
Another thing affecting real estate markets is the aging baby boomer generation. The second largest living generation is retiring, downsizing, and moving into 55+ communities.
Fannie Mae points out another trend in non-traditional home ownership–manufacturing housing communities. These can be non-profit communities, government-owned communities, or resident-owned communities, and they can exist in urban, suburban, or rural housing markets. What makes this attractive for some home buyers is the cost of ownership is often lower.
As you can see, all of the environments offer some benefit to the home-buying demographics. Seniors moving to retirement communities can choose one in an urban area, a suburban market, or a rural setting. The same goes for single-family buyers of any generation and those on the lower end of the economic scale have good choices in all markets too.
So Which Real Estate Market Should You Invest in?
Knowing where people want to live is only a part of the equation in determining what makes a good investment. It says something about demand, but it says very little about the actual math of the investment. As an investor, you should analyze home-buying trends, but also neighborhoods and communities and the property values. Choosing a good investment is as much about your own values as it is your investment strategy. If you know rural markets well, or a specific rural market, you might find better opportunities there than in an urban setting.
This goes just as well for real estate crowdfunding opportunities. Look for investments that provide a return based on sound risk assessment principles, but invest in what you know. If you understand multifamily markets and feel comfortable with those types of investments, there are plenty to go around. If you feel more comfortable with single-family homes or fix and flips, then put your money in those investments instead.
A good real estate crowdfunding platform will have a diversity of opportunities. As an investor, your task is to find the right opportunities for you. You can start by determining your values: What is your risk tolerance, do you prefer urban markets over suburban and rural, and do you like specific demographics of housing consumers? Are you more familiar with single-family, multifamily, or commercial real estate?
Once you narrow down your real estate investing interests, your investment style, and your values, begin looking for opportunities. When you make these judgments, don’t just focus on the potential returns. Also look at the cost of acquisition, holding costs, and property taxes. How much can you endure?
In January, National Real Estate Investor published an article that began with a look at the S&P 500 through the third quarter of 2018 and ended on a high note with a positive outlook for alternative investments in general and real estate investing in particular. Has anything changed since then?
Actually, the S&P 500 has rarely been better. In fact, 79.3% of 29 reported companies have exceeded analyst expectations. Not only that, but the Dow and Nasdaq are just both just 1.6% below their recorded highs. Stocks are aiming for the skies.
But hold onto your hat because analysts are now predicting a slight turnaround.
Bull or Bear Market in 2019?
Markets are hard to predict. In times of volatility and rapid change, they can turn on a dime. Today, analysts are concerned about the global economic outlook and what might happen with China. An American Express study found that chief finance officers have a positive outlook overall, but not as positive as a year ago. That’s good news, but it’s not great news.
The International Monetary Fund recently reported it expects a pullback on global economic growth. Instead of growing 3.5 percent as forecasted in January, the IMF expects the economy to grow just 3.3 percent. That’s a far cry from a recession, so there’s no need for alarm. However, it does indicate that confidence is waning.
Stocks had a good first quarter, but with these outlooks, the rest of the year might not be as good. They could still be good, just not as good. In other words, I don’t see a bull or a bear.
Why Alternative Investments Aren’t Cooling
Regardless of what happens in the stock market, alternative investments like real estate should remain a part of your portfolio. If the market turns sharply down, you’ll be glad you invested in real estate. You might even complement it with commodities and other alternatives.
If the stock market takes an upward turn, you’ll still want diversification, and real estate is usually a good bet. Commercial real estate will likely be the best bet for a market upturn because when company stocks do well and businesses are in expansion mode, they tend to invest in real estate. The big question is whether you should invest in development or rentals.
Marketplace Lending is a Safe Bet for Transitional Markets
I’d say we’re still looking at a transitional market, not just in real estate, but also in stocks. In fact, the entire economy seems to be in a transitional mode. How long it will take to make the full transition is anyone’s guess.
With marketplace lending, you can bypass the ownership dilemma. You cut out holding costs, and it’s easier to move your money around if it isn’t tied up in a physical investment. There’s nothing wrong with owning properties, especially if they’re appreciating in value, of course. On the other hand, if you need a quick exit strategy due to the unpredictable nature of the markets and their potential for quick turnaround, then fractional ownership on a short-term loan or real estate development can help you gauge where the market is headed long term and allow you to shift your asset mix if the need arises.
At the end of the day, private investors would do well to maintain a good mix of alternative investments, including real estate, and rely on crowdfunding platforms for short-term investments and to keep some of those assets liquid. Whichever way the market ends up turning, you’re more likely to come out smelling like a rose.
What makes a solid real estate crowdfunding (RECF) investment? Is it anything like traditional real estate investing? You’d be surprised at how similar it is to analyze a real estate crowdfunding investment and a traditional real estate investment, but there are differences. Let’s discuss those, point by point.
1. It’s all About the Underwriting
With traditional real estate, you may not be the underwriter, but underwriting is important and should be considered. Your RECF underwriter will be interested in many of the same metrics that you, as an investor, should be interested in, namely, loan-to-value (LTV) ratio, after-repair-value (ARV), and estimated repair costs, just to name a few. When evaluating a real estate crowdfunding investment, you should take a good look at the criteria the platform uses to evaluate risk and to underwrite a project. If those aren’t readily available, be prepared to ask questions.
2. Deal Sponsor Experience
If you’re going to invest in a real estate project, you want to know that the person managing that project has the requisite experience to pull it off. Whether we’re talking about a ground-up development, a fix-and-flip, or a value-added commercial rehabilitation project, you want the person managing that project to have some experience and a successful track record in that specific type of project. That’s true of both traditional real estate investing and RECF.
3. Deal Structure
Real estate crowdfunding investments can range in deal specifics from straight equity to debt, or some form of a mix between the two, and more complex arrangements. Pay close attention to whether or not you are investing in equity, in which case you get a percentage of ownership in the investment, or in a debt arrangement. With loan deals, you’ll get a periodic payout based on the terms of the loan whereas in an equity deal you may not see a payout until the property is sold. Understand how each deal is structured before you invest.
4. Risk Factors
Risk factors are very important. Is your investment going toward a first lien position or mezzanine? Is the investor putting some skin into the game? How about the platform? Or do investors on the platform fund the entire project? How much cash flow do you have? How liquid is your portfolio, and do you have a well-defined exit strategy for your investment? You should ask all the same questions you’d ask on a traditional real estate deal plus additional questions based on the platform and the structure of the investment.
5. Platform Considerations
Any RECF platform that wants your investment should have customer service representatives available to you at reasonable times. You’ll undoubtedly have questions about the platform itself, investments listed, and your payouts. When you do, you want the platform to be responsive to your requests. You should also evaluate the management team of the platform itself. Do they have experience in real estate investing? How old is the platform? Does their technology facilitate easy transaction management and analysis? You’re not just investing in real estate. You’re also investing in the platform.
6. Realistic Financial Projections
Finally, just like in traditional real estate investing, you want RECF projections to be realistic. If it seems too good to be true, it probably is. That said, RECF returns can be higher than expected on traditional real estate investing due to streamlining of processes offered by technology and the differences between your local economy and the economies of geographic locations where real estate projects on the platform are listed. Evaluate all claims to financial projections against realistic expectations and, if possible, get testimonials from past users.
Real estate crowdfunding is still relatively new, but it’s been around long enough that all of these criteria can be assessed relatively easily.
Real estate markets move in cycles. One year, or one decade, commercial real estate could be the hottest sector, and then the market shifts and residential becomes hot again. Single-family could shift to multi-family, commercial could shift to industrial, or markets that favor buyers could shift to markets that favor sellers. Market conditions are always changing.
The fix-and-flip market has been a hot residential market for the last couple of years. Is it still a hot market, or will it cool off in 2019?
Why 2019 is Still a Hot Market for Fix-and-Flips
Whether fix-and-flips are “hot” largely depends on where you’re located. Like real estate sectors, geography plays a big part in whether real estate is hot or cold, and geographical markets run in cycles too.
CNBC reports that states west of the Mississippi River are colder markets than those on the east coast. The reason is because of the number of days, on average, a property sits on the market before it sells. Known as holding cost, each day your property doesn’t sell is another day you don’t realize a profit on your investment. Ideally, you want to get into and out of your fix-and-flip property as soon as possible. That’s why geographic considerations are important, because if you live in an area with high unemployment or a lot of vacant properties, then your fix-and-flip could be on the market for a long duration.
Factors to Consider When Investing in Fix-and-Flip Properties
No matter what market you are in, however, there are some things to think about before you purchase a property you want to repair and put back on the market. First among these is the buy price. The old adage “You make your profit when you buy” rings true. If you overpay, you’ll squeeze out any potential profits on the back end. If you overpay too much, you might not profit at all.
Another factor you must pay attention to is the loan-to-value ratio (LTV). If you are borrowing money for your project, you need to make sure that the amount of money you borrow for property acquisition and repairs leaves you enough room to profit when you sell. Successful investors have a set LTV they use as a benchmark. Sixty-five or seventy percent LTV are common.
After-repair value (ARV) is also a consideration. How much will that property be worth after you make the necessary repairs? Can you sell it for that amount and make a profit? What if you discount 5% or 10%? Could you still profit?
Should You Pool Your Money to Invest in Fix-and-Flips
If you are investing in fix-and-flip properties, it’s important to perform your due diligence, on both the property and the market. Due to technology, investing in fix-and-flips is a lot easier and less risky if you can pool your money to invest in a property along with other investors. By spreading the risk around, you do not put as much of your money at risk and you share the burden of risk with other investors. You can also maintain certain liquidity in your investment portfolio because you do not have to invest all of your capital in a single property. You can spread your investments around in multiple properties, which distributes your personal risk among several investments.
Marketplace lending makes this type of risk distribution possible. If you are a conservative investor or have a low risk tolerance, marketplace lending allows you to manage your risk by sharing it with other investors and spreading it out among multiple investments in smaller increments per investment.
There are indications that the hot fix-and-flip market of the past is still hot in 2019. That’s not to say it won’t cool, but the signs are showing a steady market at this time.
The partial government shutdown is now in its fourth week, the longest shutdown in history, and several voices are beginning to rise up in alarm that the shutdown could have drastic consequences for the economy. They could be right in the long term, but for now, indicators seem to be that the real estate sector is doing fine.
Kevin Hassett, chairman of the Council of Economic Advisors, estimates that quarterly economic growth is reduced by 0.13% for each week the shutdown lasts. Still, that’s less than 1% to date. In short, economic fundamentals are still strong, and I’m not the only one saying this. A former Wells Fargo CEO said it two weeks ago, and a UBS Investor Watch Pulse Poll shows that 78% of long-term investors believe it too.
Economic Fundamentals Indicate a Strong Economy
While unemployment numbers for January 2019 have not been released yet (they’re due out in February), in December 2018, the unemployment rate was 3.9%. It has been in steady decline since September 2016 when it was at 5.0%.
Another indicator of a strong economy is the inflation rate. In December, it fell to below 2% for the first time since August 2017. Real Gross Domestic Product (GDP) is still on the rise. In the third quarter of last year, it rose 3.4%. That’s not as good as the 4.2% we saw in the second quarter, but it’s still not bad. There aren’t any signs that GDP will decline in the near future. GDP for real estate and rental and leasing increased by 5.3% in the second quarter of 2018. It went up by 2.7% in the quarter before that. Again, no signs of a turnaround any time soon.
Why We Should Be Optimistic About the Real Estate Sector in 2019
There are lots of reasons to be optimistic. Should the government shutdown last through April, we will likely have cause for concern, but as long as we’re seeing positive growth numbers in the fundamental economic indicators, we can maintain optimism in the housing market, new development sector, rental and leasing, and marketplace lending.
CoreLogic reported the overall mortgage delinquency rate hit an 11-year low in the second quarter last year. It ticked up slightly in the third quarter and again in the fourth. Still, at 5.17%, that’s hardly anything to be alarmed about. It was close to 30% at the height of the Great Recession in mid-2008, according to the Federal Reserve.
Existing home sales numbers for December 2018 have not been released yet, but in November, they increased from the previous month. First-time homebuyers are buying up real estate in droves. Since 2008, the single-family rental market has boomed. The current market is looking good for sales and rentals, commercial and residential, and the signs seem to indicate a steady pace for the foreseeable future.
That doesn’t mean there aren’t legitimate concerns regarding the real estate markets. Rising interest rates could put a hamper on mortgages. If so, that will only mean a stronger rental market. Millennials and young adults could continue to buy more homes, especially starter homes. If so, new developments and existing home sales will remain strong. As long as GDP and manufacturing continue to rise, commercial real estate should be a strong sector, as well.
What Does This Mean For Marketplace Lending?
Like most real estate sectors, marketplace lending should remain strong, but investors should look at where the market has been and where it is headed. If rentals remain strong, you’ll see more opportunities in equity markets. If new development and housing starts continue to do well, you’ll see more debt opportunities. In a transitional market, conditions can favor buyers or sellers, lenders or borrowers. The key is to know the market and to have a clear vision about your own goals. Opportunities are there, but investors and developers must perform their due diligence and think harder about how market forces are affecting their individual businesses.
Check out the latest investment opportunities from Sharestates. Click Here
Since 2013, Sharestates has operated with one principle in mind: To offer private investors direct access to online real estate investments and to provide borrowers with access to capital at a competitive rate. We’ve been able to succeed on both counts as the following statistics show.
The first Sharestates loan was issued in 2015. Since then, the platform has received 5,514 loan applications. That’s an average of 1,838 per year or more than 35 per week. Of these applications, we’ve closed on 1,615 loans for a total volume of $1,442,329, 050. That’s an average of $893,083 per loan.
These are numbers to be proud of and illustrate that Sharestates does not accept any run-of-the-mill investment opportunity. Rather, we employ a rigorous review of all loans with a 34-point underwriting process. And investor returns are a stark testimony to our process.
Cumulative investor returns have risen steadily over the life of the platform. In July 2015, cumulative investor returns were less than $100,000. By January 2016, they had risen to over $2 million. By July of the same year, that number was over $6 million. Today, cumulative investor returns are over $80 million. We should surpass $100 million by the end of the first quarter of 2019.
Average annualized returns have remained fairly stable. In 2015, investors earned an average 10.99% on investments through Sharestates. In 2018, the average has been 10.20%. Average annualized returns in the first quarter were at 10.25%. Q3 saw the lowest at 10.03%, but Q4 saw the highest of the year at 10.31%. We’re hopeful that a rising real estate market is going to be good for investors in 2019.
One of Sharestates’ goals is to minimize losses for investors. Since we opened operations, there have been a total of nine loans past due for 60 days or more. That is less than a 1% past due rate. The number of loans that have gone into foreclosure is 14. Again, that represents less than 1% of Sharestates loans. The number of REO properties is also less than 1% with only seven loans. We’re proud to announce, however, that investors have lost 0% of their principal in the last three years of issuing loans, a stellar track record.
Sharestates Investors and Geographic Operations
Sharestates has, by no means, reached its zenith. At this time, we are operational in 23 states, and we’re licensed to lend in 47 states. That gives us a lot to look forward to as we continue to expand and grow in 2019 and beyond.
New York is the state with the most loans issued; a testament to the deep roots Sharestates has developed here over time. A total of 797 loans have been issued in New York since the company’s inception, representing 55.6% of the total loans issued. There are several states where only one loan has been issued to date. Of these, Michigan had the smallest at $117,000. Almost all of the states along the eastern seaboard have been added onboard. Some of the larger states out West (California and Texas, for instance) have Sharestates loans issued as does Hawaii with one $1 million loan. The largest area uncovered by Sharestates is the flyover region.
The majority of Sharestates loans are first lien positions with a mere 2.7% in the second lien position. We’ve issued loans in the residential, multifamily, commercial, mixed-use, and land categories.
On the investor side, we have private investors in 41 states. Over 700 loans have been paid off to date for a total of $536,018,450 total principal returns. Our origination volume has increased from a mere $1 million in January 2015 to over $1.4 billion today. We’ve also seen 23% of our borrowers return and 80% of our investors getting in on more than one deal for a total investment size of $121,849.
Sharestates looks forward to continuing our steady growth while serving both real estate investors as well as direct borrowers and brokers. Thank you for your trust and for being part of the Sharestates family. We believe in full transparency with our community. For more insights into Sharestates performance, visit our statistics page.
Real estate developers, property rehabilitation professionals, and landlords all have one thing in common. At some point, they’re going to need outside funding for a project. For many such real estate professionals, a bank is not an option.
The biggest problem with banks for real estate investors is that many banks won’t fund their project. Banks typically have stringent loan application requirements. If you get approved for a loan, you’ll end up in a 20- or 30-year mortgage contract. That means you’ll be tethered to the bank for a long time. Marketplace lending, however, offers a reasonable alternative that won’t keep your assets tied up long-term or keep you tied to a creditor for very long.
Why The Marketplace Lending Option is Attractive
Marketplace lending offers several benefits that real estate investors can’t get at a bank. Here are a few to consider:
- You borrow from a pool of financiers – With marketplace lending, you aren’t tied to one lender for a long period of time. Marketplace lending platforms like Sharestates take money from a pool of investors who believe in your project and want you to succeed.
- No long-term agreement – Marketplace loans also tend to be short-term, bridge financing solutions. You can fund a project on a six or twelve month amortization schedule, which allows you to pursue other projects and secure more funding for those projects while you complete your project and pay back your loan.
- Fewer hoops to jump through – Not all marketplace lending platforms require a credit check. Those that do don’t rely entirely on your FICO score to approve your loan. If you can guarantee your funding by proving you have the means to pay it back should your project go south, a marketplace lending platform is likely to give you the nod before a bank will.
- You can fund more than one project at a time – Banks are very concerned about borrowers’ leverage in the marketplace. While marketplace lenders care about that too, if you can prove you have the means to offer returns on the investment for your backers, you have a better chance at getting the funding you need from a marketplace lender.
- You can access your funds more quickly – The loan processing time at a bank is very slow. It could be weeks before you get your hands on the money you need to complete a project. With marketplace lending, once approved, your funding arrives quickly. That means you can turn your property around quicker, pay back your loan, and fund another project.
- You can finance smaller projects – Another benefit to going through a marketplace lender is you can secure funding for a small project. Many banks have minimum loan limits. If you want to fund a project below that limit, they won’t approve your loan.
- Marketplace lending is more flexible – Many marketplace lending platforms don’t just provide loans. If it makes more sense to structure your real estate project as an equity offer, then you can offer investors a return on their investment without taking out a loan that you have to pay back. Banks don’t offer that option, and if you find one that does, it will cost you to set it up.
Marketplace lending is a great option for real estate developers and other investors who appreciate quick funding at fair prices that won’t lock you into long-term contracts. Consider your options before you decide on a funding source, and make sure to due your due diligence on the lender and their underwriting criteria.
Buying and selling real estate works like buying and selling anything else. If you’re going to profit, you must buy low and sell high. However, predicting when the real estate market will be at their lowest is a difficult task even for the most seasoned pros.
That said, there are definite signs that real estate prices in any given area are trending lower or higher at any given time. The difficulty lies in predicting when those trends might reverse.
3 Types of Real Estate Markets
There are three types of real estate markets: Buyer’s markets, seller’s markets, and neutral markets.
When there are more properties than buyers, this is called a buyer’s market. Market conditions favor buyers because there is less competition for good deals. In such a market, it is easier to find lower prices and good deals. However, sellers can still hold onto their properties until they get the price they want.
A seller’s market is when there are more buyers than properties on the market. In this environment, prices are likely to be higher. Therefore, you are less likely to find good investment deals.
Neutral markets favor neither buyers nor sellers. The number of buyers on the market equals the number of homes and interest rates are stable and affordable. It’s possible to find good deals in a neutral market, but you have to hunt for them and likely negotiate for them.
Why It’s Difficult to Profit From Timing the Market
Real estate investing is about earning the highest return on investment as quickly as possible. If you buy at the low end of the market and want higher returns, you’ll have to wait until the market swings upward. Unfortunately, it can take months, or years, for real estate markets to change. Even if you could predict when it happens, you’re likely to hold onto your property for longer than you want to and your holding costs will eat into your profits.
Investing in neutral markets could be riskier than at any other time. That’s because prices are just as likely to go down at any time as they are to go up depending on any number of unpredictable factors. Buying for investment purposes in a seller’s market is risky because you are likely buying at a higher price. If prices are already high, they are more likely to go down than up.
If you could have predicted the Case-Shiller Home Price Index drop in December 2008, right in the middle of the housing bubble burst, and purchased real estate on that day virtually anywhere in the U.S., it’s still likely you would have held onto your property for several years before you could have sold it at a profit. Housing prices hit their lowest level in 2012. Timing the markets should be left to experienced investors.
The Alternative to Timing the Real Estate Market
Instead of trying to time the markets, a better way to invest in real estate long term is to use a strategy called “dollar cost averaging.” With this strategy, you invest the same amount into debt loans on a regular basis regardless of market conditions. To learn more about how debt investing can be a better hedge against time markets click here.
Thanks to real estate crowdfunding, real estate investors can use dollar cost averaging to earn passive income over time. For instance, you can invest $1,000 a month and see respectable returns without having to wait for a market turn. Even in seller’s markets, you can earn decent returns. They may be smaller, but regular investments in vehicles that are performing well have proven that passive income investments lead to fewer losses and more steady gains over time.
One of the most interesting real estate investing sectors is the industrial sector, especially in this age of rapidly growing global e-commerce. Amazon has over 100 fulfillment centers in the United States alone. For a store that sells merchandise online only, that’s a lot of real estate. Another online retailer, Overstock.com, recently announced it was opening a 517,000-square-foot warehouse in Kansas City, Kansas. Industrial real estate for e-commerce is a growing sector with a lot of opportunities for serious real estate investors.
But e-commerce is not the only business sector where industrial real estate investing opportunities occur. The question for today’s investor is, does it make sense to incorporate industrial real estate into your portfolio?
The Industrial Real Estate Market in 2018
Diversification is very important for any investment portfolio. That usually entails a good mix of assets in multiple asset classes, but investors must still perform their due diligence to pick the best investments within those asset classes. For real estate, the market in 2018 looks good for the industrial sector.
For the most part, rent growth is positive. According to JLL, the Class A market is burning hot, or it was in the second quarter at least. The Class B and C markets are much more competitive. Vacancies are stable and at an all-time low. The signals show that industrial rentals are strong.
The market is also looking good for new construction. Up by 3.7 from Q1 2018, investors looking for opportunities in the industrial real estate sector should be able to find them quite easily.
Factors Driving the Industrial Real Estate Market
According to Reonomy, industrial real estate demand currently outweighs supply, but supply is closing in. There was 35 million square feet of new industrial real estate constructed in Q1 this year, with 42 million square feet set for later development. Investors should consider these trends before making any major investment decisions.
As mentioned earlier, the growth of e-commerce is driving industrial development all around the world. In 2017, online sales accounted for 9% of all retail sales. That figure is expected to increase to 12.4% by 2020. You can bet it won’t stop there.
As companies like Amazon and Overstock expand their product offerings and expand geographically, they will continue to build out distribution and fulfillment centers. In January this year, Amazon opened its first brick-and-mortar grocery story, Amazon Go, in Seattle, Washington and is planning a second store this fall. Geekwire reports Amazon has almost 600 brick-and-mortar retail locations, including bookstores, pop-up stores, and package pick-up locations. While these storefronts fall more into the retail real estate category, retail stores are fed from distribution centers, which are classified as industrial. As e-commerce expands, and that includes smaller online merchants who will need to fulfill physical product orders, there will be a higher demand for fulfillment and distribution centers to meet the demand for these products.
Industrial real estate investment includes various considerations regarding distribution, storage, warehousing, manufacturing, assembly, production, and more across various industries. For that reason, real estate investors should perform thorough own diligence and consult a financial advisor before making any major investment decisions.
Recently Funded Sharestates Industrial Loan
Warehouse Facility in Salem, New Jersey
Recently Funded Sharestates Industrial Loan
Office and Retail Facility in Toms River, New Jersey
Recently Funded Sharestates Industrial Loan
Warehouse Facility in Baltimore, Maryland
Recently Funded Sharestates Industrial Loan
Warehouse Facility in Newark, New Jersey
Marketplace lending has created incredible new opportunities for private investors, but if you’re new to investing in real estate loans or crowdfunding in general, then you might need a primer on how to evaluate real estate loans. Here is a short checklist of criteria lenders use to evaluate whether a borrower is a solid risk for a requested loan and what investors need to know before you invest.
When it comes to real estate crowdfunding, every platform has its own criteria, so be sure to evaluate any platform’s lending and underwriting criteria before you invest. In general, however, most platforms focus on the following lending criteria:
- Property valuation – It’s essential to understand how a property is valued, especially with regard to a requested loan amount. This typically requires a property appraisal and could include comparables to other properties recently sold within the same geographical area. Banks and private lenders will review a subject property’s loan-to-value ratio (LTV) as an indication of the risk a particular loan presents to the lender.
- Business plan – Another criteria lenders use to judge whether a loan is a good investment is the borrower’s business plan. If it’s a rental property, lenders want to know the ongoing maintenance costs, how much rent is collected by each tenant, the number of units vacant for rent. On a rehabilitation project, the estimated cost of repairs is necessary. Also, how long will the property sit before it goes back on the market? On ground-up developments, all capital expenditures are evaluated, which include payroll expenses, equipment, cost of materials, licensing, regulatory expenses, and more.
- Borrower – A very important part of any loan evaluation is the character and experience of the borrower. Does the borrower have a good credit score? What other debt does the borrower have and will he or she be able to pay off the requested loan? What kind of real estate experience does the borrower have? More specifically, do they have experience in the kind of real estate deal for which they are requesting a loan? What is their track record? An investor with 10 failed deals is a much bigger risk than an investor with two successful deals and no failures.
The Importance of Underwriting in Real Estate Lending
Underwriting is one of the most important aspects of real estate lending. The underwriting and credit risk evaluation process determines so much in whether or not a loan is a successful investment. That’s why private investors interested in investing in a real estate deal should know they can trust the platform’s underwriting procedures. Sharestates uses a 34-point underwriting process that assesses the property as well as the borrower.
With regard to the property, the LTV ratio is one of the most important criteria. Different lenders have different expectations. Generally speaking, the lower the LTV, the less risky the investment. A 50% LTV is better than an 80% LTV, indicating that the borrower has a lot of room for unexpected expenses between the amount they are borrowing and the expected sales price of the property. Lien position, property location, occupancy rate, and development phase are also important criteria.
Evaluating the borrower is also important. Sharestates places a premium on the borrower experience, especially with regard to the type of project being funded. If the borrower includes a personal guaranty and is willing to back their project with their own money, that would also reduce the risk involved for the lender.
To learn more about Sharestates’ many loan programs and underwriting criteria for different types of real estate projects, click here.