According to Deloitte, only four of the top 10 residential real estate lenders are traditional lenders, and the top three of them account for just 21% of mortgage originations. Those same three institutions accounted for 50% of mortgage originations in 2011. That makes me wonder if banks have conceded the mortgage origination market to marketplace lenders.
Signs of a Maturing Marketplace Lending Sector
In their white paper titled “Marketplace Lending 2.0,” published in 2017, Deloitte discusses four specific signs that the marketplace lending market is maturing. The first of these is that big firms in marketplace lending have raised their rates to coincide with the Federal Funds rate while tightening spreads. The second sign of a maturing market is marketplace lenders are operating on business models that maximize retention and lower risk. Thirdly, an increase in conservative investors who specialize in marketplace lending loans appears to be developing on the investor side of the business model. The fourth sign is a preference for passive investment opportunities as opposed to active investing opportunities by investors.
I agree these are great signs of a maturing marketplace lending sector. We see these signs on both sides of the fence – the investor side as well as the lending sign. What undergirds this kind of confidence in marketplace lending is a maturing of the underwriting process and underwriting best practices. Those lenders that are willing to perform the proper due diligence and assess risk intelligently will attract the best investors and the best investments. Things have never looked better for the future of marketplace lending.
How Marketplace Lending Puts Pressure on Traditional Banks
A full decade old now, marketplace lending has come into its own. Some of the larger marketplace lenders are beginning to offer bank-like products without having to go through the arduous process and expense of getting a banking license. That is huge.
But that’s a late development. The marketplace lending model is leaner than the traditional banking model. Banks have legacy processes in place that take a long time to change and that add major costs to their lending products. These costs must be passed on to the loan customer in order for the bank to return a profit. When the last great recession hit, banks pulled back from the lending market in general and the residential real estate market in particular. There was just too much risk for them at that time.
Now that the residential real estate market is picking up speed in various places around the country, home buyers looking for an affordable mortgage will have to go to where those mortgages are being offered at the prices they are willing to pay. Leaner business processes, technology that streamlines the timeline from application to origination while lowering the cost of doing business, and a convenient application process allow marketplace lenders the ability to compete where banks once had a corner on the market.
Real Estate Marketplace Lending Is Turning Big Returns for Investors
It’s not unheard of for investors in marketplace lending to experience double-digit returns. In fact, at Sharestates, investors have seen net annualized returns of 8% to 12%.
Whether investing in equity or debt investments, marketplace lending investors should expect to do some due diligence on the platform before jumping in. Reputable marketplace lending platforms will perform critical due diligence on each property sponsor as well as each property. On top of that, underwriting procedures should reflect a mature outlook on real estate investing in general and marketplace lending in particular. With the right business model and the right investment opportunities, the marketplace lender you trust should be the one that can prove it vets its opportunities with sound underwriting and a solid investment philosophy based on experience. If you choose the right platform, you can expect above average returns and less risk.
When considering real estate development, there are two main paths a developer can take – either ground-up construction projects or renovation projects. Both have advantages and drawbacks, and it’s worth assessing the local real estate market and analyzing which approach best meets the needs of that market.
What’s the Difference?
A ground-up construction project entails constructing a building completely from raw materials – which means producing new walls and foundations, footings, etc., in a brand-new location. A renovation project doesn’t start from scratch, though. Instead, some of a building’s components are demolished and rebuilt, while structural elements are left intact. Renovations typically involve a fair bit of construction work, just like a ground-up project, but if a large part of an older building is being utilized, it’s still referred to as a renovation. Local building codes can differ on this definition, though, so it’s always worth investigating local laws.
Renovation projects often prove to be a more cost-effective option, since much of the structural work is probably already completed before the project. Building permits tend to be easier to access for renovation projects when compared to ground-up construction projects. In addition, by renovating an existing building, a project can frequently get access to desirable locations that would be unavailable to new ground-up construction projects. The big disadvantage regarding renovation projects is that they necessarily come with reduced flexibility in the construction of the building.
General contractors need to work within the existing renovation framework, and that can sometimes result in a building that is less than perfect for the desired purpose. Still, renovation is the clear winner in terms of budget, since a renovation usually costs less money than a ground-up construction. Usually is an important qualifier, though, as it can sometimes wind up costing more to do a renovation since one never knows what unanticipated problems might be found in the walls of old buildings.
Updated building codes could require an overhaul of many of a building’s existing components in order to bring them up to the current code, which can easily add unforeseen costs to a renovation project’s bottom line. Renovating an existing building can also put limits on further expansions to the buildings, as well, whether due to location or incompatibility of elements.
Ground-Up Construction Projects
Ground-up construction offers unlimited flexibility. A ground-up construction project allows for building customization so that a building can better meet the needs of its purpose. For instance, if the building is intended for a company, it can offer opportunities in the area of workflow, capacity, machinery, etc., but that flexibility doesn’t come cheap. Commercial building construction usually has a higher price tag than renovation. However, depending on the nature and volatility of the local real estate market and the stock of existing buildings that are available for renovation, ground-up construction can sometimes be cheaper than a renovation simply on account of avoiding costly problems or the need to modernize outdated components so that they match current codes.
Another important benefit is the option to grow out a building in stages. As a building needs expansion, due to a growing business or a need for more tenants, so can the building. However, it can be difficult and require a longer waiting period in order to obtain the necessary permits to construct a new building from the ground up. Ground up construction projects tends to eat up more time than renovation projects, as well.
It’s important when approaching any sort of development project but especially for a ground-up project, to have an idea of what a development project will look like in full. Development can be divided into three distinct stages.
- Pre-development: The earliest stage of a development project requires the development team to show due diligence, perform research and get the proper permits. It can be the most variable in terms of duration. Investing at the pre-development stage carries the greatest and most varied risks because of the slew of unanswered questions, but can also be where some of the best opportunities can be found. Some of the common tasks that need to be accomplished in this phase include:
- Environmental assessments
- Studying the market and feasibility
- Acquiring the land or an option to purchase the land
- Site plans and development plans
- Acquiring necessary permits
- Arranging the finance of construction
- Making some infrastructure improvements
- Construction: The middle stage involves constructing the improvements or the entire structure. Since the volatile pre-development tasks have been completed, the project risks during the middle phase have a much lower chance of backfiring on investors, but the risk hasn’t been eliminated yet. Some of the most common steps in the middle stage include:
- Vertical construction
- Project marketing
- Tapping into construction financing
- Arranging for the property manager (if this task hasn’t been done during pre-development)
- Operation: The final stage of the development process is operating. This phase is also the first stage of the building’s life. While the pre-development and construction risks have been removed by this point, obtaining tenants or the dependability of found tenants still creates some risk at this stage of development. The most common elements of the final stage include:
- Finding a buyer, if this hasn’t already been done
- Ongoing marketing and leasing
- Determining a hold strategy, if not selling the property
- Ramping up property management activity
- Achieving stabilization
Considering a Potential Development
There are a few major ways to discern whether a development project is a safe investment. First, checking the loan-to-value ratio is a valuable first step. If the numbers don’t come out in a way that you’re comfortable with, then the project is an easy pass. Second, and in a ground-up development especially, it’s important to angle for a good lien position. The first lien position is obviously the best, as it greatly reduces the risk of losing the investment. Third, investors will want to investigate the people constructing the development. If their track record and experience aren’t extensive, then the project carries a considerably higher level of risk.
Last, investors should evaluate the location of the development, and the health and volatility of the surrounding real estate market. Big urban centers carry less risk because they’re guaranteed to have interested tenants or buyers, while rural locations tend to offer a wider array of real estate options and thus such locations present a higher risk of a development going to waste.
Successful accredited investors have the analytical skills to select real estate development projects that represent low risk and healthy returns. Identifying projects with a low-risk and high-return profile can be a time-consuming, tedious, and an inherently complicated task. With this article, we’ll answer the questions that most accredited investors ask when it comes to selecting projects that have strong return potential and a low-risk profile.
What are the Best Real Estate Development Markets to Focus on?
Real estate development markets are evaluated on key indicators such as demographics, tax rates, regulatory environment, population, and industry growth.
Real estate development market demographics reveal the nature of the target audience, the trajectory of the market, and the viability of real estate products and services over the long-term. Real estate markets with rising commercial lease rates, improving industry growth, and increasing populations are favorable to real estate developers, with few exceptions. Additionally, impending changes in regulations, emerging regulatory issues, and zoning law amendments have a direct impact on the direction of real estate markets.
What Makes Real Estate Development Projects low Risk for Accredited Investors?
Factors that influence the risk profile of a real estate development project include Loan-to-Value (LTV) ratio, lien position, occupancy rate, and the development phase. The LTV ratio and lien position have the most bearing on the risk profile of any real estate development project. The LTV ratio indicates the extent to which the project has been leveraged. Higher leverage makes the project prone to higher debt servicing requirements and liquidity challenges in situations where occupancy percentage drops, interest rates rise, or the market contracts.
Why is Crowdfunding less Risky than Direct Investment/Private Lending?
The primary objective of crowdfunding and direct investment/private lending is the same: generate profits; however, these investment types are distinct in the returns they provide, the risks the investor is expected to bear, and the way profits are administered. While private lending may offer the highest returns, it also requires investors to accept the maximum risk. Private lending requires larger contributions and more involvement from investors. If market dynamics put pressure on the real estate development project leading to default, private lenders must independently seek recovery via various foreclosure options.
In crowdfunding investment models, the opposite is true. Contributions required are smaller, allowing for diversification and hedging. The management of the project is handled by experienced and highly-qualified professionals trained to mitigate risk.
What Financial Documents and Statements should I Request from Borrowers/Sponsors (Real Estate Developers)?
You should ask the borrowers/sponsors for documents that will give you access to key indicators of solvency, liquidity, market conditions, and the probable profitability of the project. This means you need to calculate performance metrics such as the debt to equity ratio, the internal rate of return (IRR), and capitalization rate, among others. Financial documents you should request include:
- Construction budget
- Appraisal report
- Title report
- Series note listing/Loan details report
If you do not have a financial background, you may need to get financial assistance from an expert to decipher these documents. Considering credit scores, state of liquidity, and experience in the market is also prudent.
How Much Time Does It Take to Complete Proper Due Diligence and Manage a Direct Investment as a Private Lender and Accredited Investor?
If you plan to use a real estate crowdfunding (marketplace lending) platform to source your investments, you will only need a few hours at most to perform due diligence. If you were to privately fund a real estate project – independent of a marketplace platform – you could spend anywhere from 30 to 120 days performing adequate due diligence. Marketplace lending platforms have teams dedicated to processing investments, underwriting loans, and confirming the quality of an investment before making it available to accredited investors online. To learn more about how Sharestates performs due diligence, visit sharestates.com.
The exact time taken will depend on project size as well as the extent of its features. You may need to be quicker with your due diligence if there is competition for the project and the risk of losing it to a competing investor. Further investigation might be necessary if there are additional revenue generating facilities on the premises such as a laundry, parking, recreation, and fitness amenities. The due diligence period is part of the agreement between the development and investment parties.
The time it takes to manage a direct investment as a private lender also varies on the basis of the project size and inherent facilities. On average, it is not only time-consuming to manage commercial assets directly, but also extremely tedious. It involves managing a wide variety of tasks including payroll, maintenance, tenants, insurance, mortgages, and taxes. Managing direct investments is time-consuming enough that most investors opt to employ third-party management agencies.
Reliable crowdfunding platforms, such as Sharestates, render both financial assessors and management agencies redundant. They eliminate the need for a real estate investor to conduct excessive due diligence or deal with daily management activities. Every project/sponsor is fully vetted before recommendations are made, and issues such as maintenance, borrower defaults, and solvency determination are all handled internally.
While the process of selecting real estate development projects with low risk and high return is time-consuming and complex, it is critical to the success of accredited investors seeking higher performing opportunities. Consider the benefits of crowdfunding platforms as an alternative to going through the complicated due diligence involved in managing direct investments.
Sharestates offers a diverse range of investments within real estate markets nationwide. All open investment opportunities can be viewed on sharestates.com/investments.
Just like any investment portfolio, a real estate portfolio needs to be diversified to protect against downside risk. By investing in a wide range of properties, in different geographic areas and using a selection of investment structures, real estate investors can optimize their yield while reducing the risk of a market downturn. Diversification ensures that if one real estate investment begins to falter, there’s less chance the entire portfolio will suffer.
While diversification in the stock market might seem intuitive, making diversified investments within the real estate world isn’t always as simple. How should real estate investors ensure they are diversifying their portfolio with the appropriate asset allocation?
Real Estate Assets Classes
Single family, multi-family, and commercial properties all represent different real estate asset classes with unique market opportunities.
Single Family Homes
Single family homes represent the lion share of residential homes in the United States. In the aftermath of the Great Recession, home ownership rates tumbled and new housing starts hit record lows, but since the recovery began in early 2010 new housing starts have been steadily on the rise and investor interest has increased as low interest rates and uncertainty in other investment vehicles has encouraged diversification.
Multifamily buildings are a type of residential housing that involve more than two units under the same roof. While they’re not the most common residential buildings, multifamily properties have been in high demand over the last few years. In the aftermath of the recession, home-ownership rates dropped, and the demand for multifamily dwellings swelled as the housing market shifted from ownership to rentership. Demographic trends have also played a role in the growth of multifamily property development. As Millennials seeking jobs has attracted to the younger generation to metropolitan areas, so has an aging Baby Boomer population attracted the older generation to retirement facilities.
Commercial property usually refers to buildings that house businesses, of which there are many unique sectors of commercial real estate including office, retail, industrial, hotel and mixed-use properties. Each sector of commercial real estate is unique with different underlying market fundamentals. From an investment perspective, commercial property has traditionally been seen as a sound investment with higher cash flow than residential property and lower vacancy risk as a result of dealing with companies as opposed to residential tenants.
Marketplace Lending Asset Allocation for a Diversified Real Estate Portfolio
Real estate investing has begun to change dramatically in recent years thanks to the addition of marketplace lending (MPL) platforms like Sharestates. Prior to MPL, if you wanted to invest in multiple properties and didn’t have the capital to build your own real estate portfolio, real estate investment trusts (REITs) were the only available option. Buying shares in a REIT gave you exposure to a portfolio of properties, but individual investors didn’t have a say in the properties that went into the portfolio. MPL allows developers to apply for loans and split the cost of their funding across a crowd of investors. Moreover, the investors control which properties they want to invest in, with the option to choose their own diversification strategy across single family, multifamily and commercial properties, including land.
People who want to invest in real estate can use marketplace lending platforms to start building out and diversifying their portfolio with little upfront capital requirements. Investors can view their portfolio online, and receive monthly interest payments. In today’s real estate market, you should consider diversification not only in terms of real estate asset classes but also in terms of real estate investment platforms that offer the opportunity to invest with the ease of an online brokerage.
When it comes to real estate renovation, converting warehouses into lofts project may be one of the most exciting projects for modern developers. Not only are warehouses naturally spacious, but they also provide a unique style that’s perfect for the growing trend of industrial design.
Of course, as great as real estate projects involving warehouses can be, they also come with a distinct set of challenges to overcome before developers can turn their new purchase into a comfortable and livable space. Following are some of the best examples of warehouse to loft conversions to take place in the US.
Publisher’s Print Shop in San Francisco
Many of the best real estate renovation projects with warehouses involve mixing elements of the old industrial world with the new, more comfortable one. This 1910 building in San Francisco was recreated by a designer called Steven Volpe. It benefits from 18-foot ceilings and huge wooden columns that make it particularly attractive as a loft space.
Although the building opens up to the side with glass work, the shrubs outside and the red brick work help to create a more appealing look. Additionally, the columns inside the building divide the space into pockets that are ideal for zone-based design. If it wasn’t already a home and apartment space, this environment would have been perfect for an open-plan office design.
The Lucky Strike Warehouse in San Francisco
Found in the Mission District of San Francisco, this former Lucky Strike warehouse got a new life thanks to a fantastic real estate renovation. This warehouse to loft project includes plenty of climbing greenery to give it a rustic look, as well as an attractive spiral staircase.
The aesthetic inside is a combination of rough industrial and luxury. There’s an exposed concrete design, as well as plenty of dark colors and metals. However, in the bedroom there’s a potted tree and vertical garden to enjoy.
13th Avenue Loft Portland
Somewhat smaller than some of the more common real estate projects involving lofts and warehouses, this apartment in Portland by Jessica Helgerson is only 870 square feet in size. It’s located within a warehouse building that was transformed into condos, and it includes an airy theme with plenty of luxury elements and unique design features.
There are vintage rugs and heavy woven fabrics throughout to create a more comfortable appearance, and plenty of storage too.
Chelsea Warehouse in New York
BK Interior Design were the company that took part in this warehouse to loft conversion, transforming a standard warehouse into a unique bachelor pad. The apartment is located in New York, with more than 2,400 square feet of space. There’s two bedrooms and two bathrooms included in the space, and the modern home mixes traditional styles with modern aesthetics.
There are plenty of unique features about this real estate renovation that are sure to catch the eye. For instance, the living room comes with a zinc sliding door, and there’s a built in black oak bar for entertaining too. There’s also a live-edge wood dining table that helps to bring the space to life.
The best long-term strategy to reduce operational and maintenance costs is through sustainable design and business practices. These strategies include passive thermal and solar design, high efficiency HVAC, lighting, durability, water efficiency, and green building practices. When other options are unavailable to optimize cashflow, reducing expenses through efficiency is a sensible option. If you’re taking preventative measures early by implementing green design as soon as you acquire the property, you’ll be set for long-terms savings. These sustainable approaches are equally effective in reducing short-term expenses.
Passive Thermal Design and High Efficiency HVAC
If you’re renovating the property or building new, passive thermal design is a strategy that results in minimal implementation expenses and the lowest energy costs. The passive design approach takes into consideration the orientation of the property in relation to the Sun. By structuring the features and improvements of the structure to either absorb or reflect heat, depending on the heating and cooling needs of the occupants and season, it reduces the need for mechanical heating and cooling systems and allows the use of lesser capacity systems.
This design methodology includes using natural ventilation to improve air quality, as well as to regulate temperature and humidity. Many of these concepts are ancient in origin and were developed when there was no access to HVAC technology. When combined with passive features, HVAC systems can achieve much greater efficiency. A tight building envelope that is properly insulated and sealed retains heating and cooling and reduces system run-time. Zone-based heating and cooling systems that allow only the occupied spaces of the home or work space to be temperature regulated also contribute to reduced energy costs.
CFL/LED Lighting, Daylighting, and Photovoltaic
A solution to reducing expenses that can offer immediate savings at a relatively low cost is energy efficient lighting. Most conventional fixtures can be retrofitted with CFL or LED bulbs without any modification, resulting in low implementation costs. As these lighting formats have become the standard in the building industry, the cost of energy-efficient bulbs and fixtures has decreased dramatically over the last several years. Occupancy sensors and lighting timers are an excellent low-cost complement to energy efficient lighting. Occupancy sensors turn lights off automatically when no one in the room in moving.
Daylighting is another passive design strategy that uses windows, light tubes, and other light-directing fixtures to bring natural light to the interior and minimize the need for artificial light. Photovoltaic systems are another technology that have become more economical for investors to consider. As the cost of panels and controllers has dropped, the initial investment has declined, while increasing energy costs have hastened the payback period.
Reducing Expenses with Durable and Low VOC Materials
Investing in durable and low volatile organic compound (VOC) materials keeps maintenance expenses low and improves the appeal of the property. Durability reduces tenant-requested repairs and the time and management expense associated with them. Durability for indoor materials is typically an issue for flooring, counters, walls, and appliances. On a structural level, quality building materials will increase the functional and economic life of the property. Structures that maintain their functional utility and value have longer service lives and result in longer tenant leases and less need for new construction.
VOCs are a hot-button issue for sustainability savvy tenants and buyers. The presence of VOCs is typically very apparent by the odor and will quickly deter potential buyers and renters. VOCs are known to cause respiratory irritation, asthma, and other malignant conditions, and has the potential to be a source of litigation. A large share of materials available today have low toxic emissions, resulting in lower than historical prices for sustainable materials.
Water-Efficient Landscaping and Indoor Water Use
This is another strategy for reducing expenses that can be quickly implemented at a relatively low cost. Water efficient landscaping is often termed ‘Xeriscaping.’ Xeriscaping takes advantage of the tolerance to natural threats of native and adaptive vegetation. Native plants require very little water and are naturally resistant to pests and drought. An additional benefit of natural plants is their tolerance to indigenous weeds, resulting in lower landscape maintenance costs.
Onsite water collection using cisterns and other rain harvesting technologies allows the accumulation of water for off-season irrigation and toilet flushing. Low-flow fixtures throughout a rental property, including faucets, toilets, showers, and irrigation can drastically reduce water expenses and the energy used for pumping in its transfer.
Green Business Practices for your Investment Business
If you manage your own properties or have staff that work for you, going green in the office will improve your bottom-line and support the environment. Within the office there are numerous opportunities to eliminate paper waste, use efficient lighting, select Energy Star rated computers and printers, and encourage employees to use public transportation. Being sustainable in your business supports not only the financial health of your business, but also the human element. Workspaces with good IEQ foster the physical and emotional health of employees and support productivity and creativity in the workplace.
For pragmatists, sustainable practices and design features can earn financial incentives from local planning and national regulatory agencies. Grants and tax credits can help offset the initial cost to implement green strategies and equipment. Incidentally, sustainable practices inherently support the community and build goodwill for businesses that follow them.
Reducing expenses is an ongoing concern for investors looking to develop the maximum cash flow from their operations. While there are a number of strategies to reduce expenses that don’t involve improvement to energy efficiency or durability, sustainability is the simplest and has the greatest overall long-term benefits for investors. Considering these at the outset of the acquisitions process, and throughout the lifecycle of the project and property, offers the greatest expense reduction and positive net effect on the environment.
The recent collapse of brands like “Toys R Us” and Claire’s has left many real estate investors wondering what will happen to all the retail space that’s suddenly up for grabs. Many landlords will now have huge holes in their retail space to fill, and there aren’t a lot of tenants out there that will want that kind of investment opportunity.
After Toys R Us and Claire’s real estate became some of the latest victims in the retail decline, the liquidation of these brands has dumped millions of real estate square feet onto a market that’s already struggling with vacancies caused by store closures and retailer bankruptcies. This trend has been escalating rapidly since eCommerce has risen and shoppers continuously turn towards the internet.
Filling the Left Over Real Estate Space
At this point, many experts believe that it will be difficult to find a viable solution for two companies that had so many locations. Most businesses don’t really need more locations or stores right now, and Toys R Us and Claire’s real estate have shopping solutions everywhere, from regional malls to community strip centers. Many centers will now be in the hands of publicly traded investment trusts who will be able to lease the space but may struggle with declining values.
Ultimately, the degree of success that landlords see when it comes to filling empty stores will depend on the locations of each property and their quality. The best locations will fill up faster as new companies look for opportunities to reach out to their customers in person.
Sharestates CEO and Co-founder, Allen Shayanfekr told New York Business Journal: “It’s no secret that retail-related real estate has been suffering for quite a while now. Toys ‘R’ Us typically operated in very large facilities — leaving few retailers that could actually fill its shoes. We anticipate that the Toys ‘R’ Us real estate that is rented will likely sit stagnant for quite a while before landlords are able to find suitable replacements. In the worst case scenario, those landlords that have mortgages may need to fire sell their properties.”
When asked what Sharestates can do to fix this problem Shayanfekr states: “We’re a lender/syndicator. There’s a possibility that anyone looking to make a quick purchase will come to a private lender like us for quick results, or even to syndicate the equity capital needed. Given the time constraints some landlords might face, it’s unlikely that banks will be able to finance these purchases and given the size of these locations, the market size of buyers could be relatively small — meaning buyers will need both debt and equity financing that can move quickly. That’s what Sharestates specializes in – fast capital!”
Strong Commercial Real Estate
Even with vacancies to contend with, some properties remain viable commercial real estate according to investment professionals. Locations around power centers, discount department stores and so on might be easier to fill than standalone locations that don’t have additional drawing power. Expanding retailers like Ross Stores, Dick’s Sporting Goods, and so on may help to draw in a healthier crowd.
Other chains that are roughly the same size as Toys R Us estate, such as Bed Bath and Beyond, and Best Buy will be focusing on expanding their online presence right now, and remodeling the existing stores they have, rather than building new locations. Target has commented that it currently plans to open dozens of much smaller locations in the next two years, but these will be near college campuses and in larger cities.
An Opportunity for Real Estate Investors
The departure of such a huge tenant like “Toys R Us” or Claire’s will give many landlords around the country an opportunity to reinvent their shopping centre experience and upgrade to make their system more online-shopping-proof. Redevelopments could lead to significant improvements in experience for customers who are looking for something beyond the standard online shopping experience.
With many other big-box retailers in the world shutting down, and large chains like Staples Inc. struggling to keep their cash flow running smoothly, there’s going to be a lot of retail space available in the next year. However, this does mean that potential replacement tenants will have a lot of negotiating power to work with.
The search for commercial real estate financing is at times a complicated and overwhelming process that can leave us with many unanswered questions. Sometimes it’s hard to ask these questions. It’s easy to be intimidated in this business, so we created this brief guide to help answer your concerns and help you move forward confidently, and successfully, in your search for commercial real estate financing.
How long does the crowdfunding process take?
Depending on the platform you select, funding can take anywhere from 15-30 days. You can expedite this process by having all the financing documentation for your project ready before applying. Prepare by carefully reading through all the terms of the programs you’re considering. Knowing the terms and expectations of your lender will also lessen processing times. Put extra care into the preparation of your application to avoid any errors or omissions that could raise red flags. If your funding partner has a streamlined underwriting process, this can also greatly reduce the time to funding.
How long is the closing period for crowdfunded loans?
The closing period for commercial real estate financing can vary greatly. Each funding platform has a unique process and background data requirements. For more complex deals it is critical to have all application and documentation prepared properly. Closing can occur in as little as 5-7 days, if everything is in place and the project meets all the underwriting requirements. That’s faster than any conventional means of obtaining commercial real estate financing.
What are the risks in financing a project with crowdfunding?
Like any financing, the most common risk is that of default. If for some reason your organization is unable to meet its debt service requirements, the debt holder has the right to foreclose on the property. You can avoid this through conscientious budgeting and working with finance professionals to help monitor and control expenses. Also, don’t seek financing that you know you may not be able to repay (a form of fraud). Fraud by fund managers is another concern, but as long as you’re working with a reputable funding platform, there is little risk of involvement in fraudulent transactions.
Is commercial real estate financing available in any market?
Each platform with have different preferences for the types of projects they will be willing to invest in. This most important criteria is risk. Commercial real estate financing is inherently risky, especially for the lender. To mitigate this risk, lenders generally choose to invest in markets that have strong appreciation and lease rates. They will also consider other market factors including industry growth, labor supply and demand, and population growth. Markets that exhibit strong growth in these areas will typically be given preference; however, even if your deal is in a rural area, but has tremendous potential, don’t be afraid to pitch it.
How much does crowdfunding typically cost?
Fees vary by lender and by the risk associated with your project. This is affected by factors such as occupancy, credit score, and borrower experience. It also varies by the type of project for which you’re seeking funding. In general, fees vary between 8 to 14% for debt financing and 10-20% for equity financing, in addition to origination fees ranging from 1-5%. You can get the best deal by properly preparing for the financing process and by working with a lender that specializes in the type of project you’re proposing.
What property classes is crowdfunding available for?
Financing is available for almost all property types; however, commercial real estate financing costs vary with risk. Underwriters have different criteria and return expectations depending on whether the project is commercial, single-family, multi-family, or mixed use. Lease demand and occupancy is an important consideration in this regard. Each geographic area will have varying levels of demand for specific property classes. While commercial properties may be a dominant demand factor in one market, multi-families may be the economic driver in another. A related issue is occupancy. Properties with less units will typically require a lower vacancy rate to obtain the lowest rates. Conversely, multi-family and commercial properties have higher tolerances for vacancies due to scale.
What loan purposes can I use crowdfunding for?
Here’s the good news: you can use crowdfunding to obtain commercial real estate financing for cash out loans, partnership buyouts, bridge to construction, bridge to bank, rehabilitation, stabilization, and even ground up construction. The availability of financing for each purpose will vary with property class and the financial strength of the borrower. The flexibility of crowdfunding in meeting the financing needs of your diverse projects is one of the most appealing benefits of this financial model. Whereas conventional lending sources have many conservative, and often bureaucratic, underwriting requirements and limitations, crowdfunding platforms can act much more dynamically to meet the unique needs of your development business.
This list of questions is by no means exhaustive. Please feel free to ask us any questions that come to mind as you research and evaluate your commercial real estate financing options. Obtaining financing is often a complicated venture, but with the help of committed, passionate, and friendly real estate lending professionals, your funding experience can be much more positive and lower risk.
For those interested in making some serious money within the real estate market, it’s worth looking into fix and flipping for beginners. While various types of property investment can deliver great returns, learning how to fix and flip can be one of the simplest ways to generate revenue from real-estate.
One of the biggest things holding people back from the market these days, is the pre-conceived notions that some communities hold about property investments. Many borrowers believe that they need perfect credit and plenty of capital to get their foot on the property ladder. However, making money fixing and flipping houses might be simpler than most people believe.
What Do You Need to Fix and Flip Houses?
Fix and flipping for beginners might seem complicated at first. However, all you really need to get started is a good understanding of the environment. Those who know as much as possible about the market and the playing field will have a better chance of making a great sale. The goal with fixing and flipping is finding an eager seller on one end, and a cash buyer on the other. This helps to ensure that purchases and transactions are turned around quickly.
The first thing any investor needs to fix, and flip houses is a knowledge of the right markets. If a local market isn’t doing well right now, then it might be a good idea to look in another state or county. The aim is to find a place where cash buyers are willing to put their money.
Identifying the Right Prices
When it comes to figuring out how to fix and flip, finding the right market isn’t enough – it’s also crucial to identify the right price. “Price” refers not only to the cost that an investor wants to pay for the property, but also the money that a buyer will be happy to offer when the real estate has been fixed up. There are a range of algorithms in place that can help buyers to determine the right price.
Usually, tracking down distressed and eager sellers that are keen to get out of the real estate market is the best way to keep prices as low as possible. Finding a vacant home isn’t always as simple as it should be. Generally, beginners should be keeping their eye out for homes that are close to entering foreclosure. Phrases like “For immediate possession” or “below market value” in listings are a good thing to watch out for.
Some real-estate investors entering the field might also try talking to real estate agents and neighbors around the property to get a better insight into what’s been happening with the sale so far.
Finding the Perfect Buyer
For a fixing and flipping strategy to go smoothly, it’s important for investors to line up the right buyers. After a borrower in the real-estate world has secured a contract to purchase a property, they will usually have around 30 days to close on that purchase. Buyers need to be lined up so that contracts can be flipped over immediately. If cash buyers aren’t already available, then investors will be left to do all the leg work once the contract is secured – making investments more complex.
What is Crowdfunding? Straightforward Answers.
After twenty years since its debut, there is still a lot of mystery around the subject of crowdfunding. We’ve put together answers to 7 of your top questions to help you understand what crowdfunding represents. Peer-to-peer lending can be of tremendous value to your investment efforts as a real estate developer and accredited investor.
1. What is crowdfunding?
Crowdfunding is an internet-based funding model that brings together those that need capital with those that have funds needing investment and returns. It is a peer-to-peer model that avoids traditional funding sources such as conventional mortgages and public offerings. Crowdfunding provides greater access to capital for business and individuals undeserved by the banking system and that don’t have the network connections needed to find private funding sources. The internet has provided a channel that conveniently connects parties across regions in real-time, providing greater opportunities than previously available.
2. What are the advantages of crowdfunding?
Crowdfunding offers lower risk than alternative investments and sources of capital. Working together, investors create greater opportunity by pooling funds to access larger and more profitable opportunities. The cumulative expertise provides greater insight in selecting suitable opportunities that represent the least risk and greatest potential returns. Rather than pitching your opportunity to a conventional lender that bases their underwriting criteria on impersonal metrics that don’t relate to your industry, crowdfunding platforms cater to specific niches and put extra due-diligence into evaluating projects and the opportunities they offer.
3. When was crowdfunding created?
In 2003, ArtistShare created the first modern online crowdfunding model for the purpose of allowing many individual contributors to make small investments in the recording projects of musical artists. As a precursor to debt-based funding platforms for real estate, contributors were guaranteed a free download of the artists album once released. This structure is also known as a rewards-based model that offers a fixed incentive, rather than a share in the form of debt or equity. The fact that ArtistShare’s Maria Schneider won a Grammy Award in 2005 demonstrates the success and validity of the crowdfunding model. Many other notable platforms has since expanded the industry to include niches such as software, charity, medical, and numerous other investments and causes.
4. Is crowdfunding more risky than other investments?
Platforms that have an excellent record of accomplishment and engage in the due-diligence required to ensure project success represent much less risk than direct lending. Investing money independently as a private money lender requires conducting your own research and evaluation without the aid of a team of experienced real estate professionals and investors. When investments fail, there is a much greater potential of losing your stake, despite your best efforts to recover funds. Experienced crowdfunding platforms know what to look for in underwriting opportunities to keep defaults to a minimum, and handle recovery when they do occur. Making smaller investments in numerous projects allows accredited investors to diversify their portfolios and lower their overall risk-profile.
5. Who invented crowdfunding?
ArtistShare was the first formally organized crowdfunding platform open to the larger public. The concept of gathering many small contributions through the internet was pioneered by a British rock band in 1997. The innovation allowed the group to raise more than $60k from fans to fund their US tour. This is a perfect example of crowdfunding creating a greater opportunity than would ever have been possible before online funding. Prior to the internet, numerous organizations including governments and private businesses have used pooled funding models to raise capital for large projects. This has included civic projects, war campaigns, and business ventures throughout history. Working together in any capacity has always proven to create greater benefits for all stakeholders involved.
6. Are all crowdfunding sites the same?
Each funding platform has a unique business model that suits the needs of its primary industry and clients. Models that specialize in specific industries, such as real estate, offer greater expertise and knowledge of risk factors specific to the niche. Reputable sites carefully screen all project sponsors and contributors to minimize risk and prevent fraud. Some models require the recipient of the funds to pay back the money borrowed. Others are based on charitable and rewards-based models. The way that your interest is secured can also vary among platforms. Some emphasize debt, equity, or a combination of both. Your selection will depend on your investment or project goals, and the level of risk and return you’re seeking.
7. How long does the funding process take?
One of the remarkable things about crowdfunding is the speed at which projects can acquire financing. When all financial information is readily available for the project sponsor (borrower), fund managers can make faster and more efficient decisions. Conventional loan sources typically take months to render lending decisions for larger projects. Sponsors can get the funds they need in weeks, rather than waiting months to get a project into the next phase of development. This level of efficiency allows investors to take advantage of opportunities typically lost due to time restrictions.
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