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
As we’ve written recently, the New York real estate market is competitive yet ripe with opportunity. Sharestates was founded in the New York metro area and has completed a lot of deals here. We’ve funded everything from ground-up new construction to residential fix-and-flip projects. Year-over-year, Sharestates deal activity has increased by 28% in New York during the period from January through September.
Sharestates Real Estate Activity in New York
- Sharestates has funded 694 New York loans to date for a total funded volume of $705,211,500
- 434 of the loans funded were for residential properties
- 6 of the loans funded were for mixed-use properties
- 155 of the loans funded were for multi-family properties
- 90 of the loans funded were for commercial properties
- 9 of the loans funded were for land deals
- Average loan size: $1,017,621.21
- Average loan to value (LTV): 67%
- Average renovation budget: $1,009,558
- Average after repair value (ARV): 54% or $2,807,890
Residential Project Success Stories
The first residential project presented below successfully underwent a renovation project covering four individual units. The borrower acquired the property with the intent to “fix and flip” the units. The borrower structured their loan to receive five individual draws of capital over the course of the renovation project which included demolition, flooring, electrical, plumbing, HVAC, windows, doors, cabinetry, tiles, bathroom fixtures and more.
- Appraised value: $1,300,000
- loan amount: $1,080,000
- LTV: 62%
- After-repair value: $2,000,000
- ARV: 54%
This residential property is located in the Bedford-Stuyvesant neighborhood of Brooklyn, NY. Bedford-Stuyvesant or “Bed-Stuy” is well known for its picturesque Victorian architecture, elegant brownstones and vibrant culture. The area is also noted for its proximity to many different New York City public transportation options which is ideal for commuters who work in the city’s central business districts. According to StreetEasy, the median sale price in Bedford-Stuyvesant is $716,000 with an average of 84 days on the market and a median rent price of $2,300. Compared to other brownstone Brooklyn neighborhoods, such as Park Slope with a median recorded sales price of $1,405,000, Bed-Stuy contains many value-add opportunities for real estate developers.
Pre-construction exterior appearance
Post construction exterior appearance
Pre-construction interior bathroom unit
Post construction interior bathroom unit
Pre-construction interior kitchen unit
Post construction interior kitchen unit
The next project success story funded by Sharestates was a 1-unit residential real estate loan. The borrower acquired the property with the goal to “fix and flip” the house. The borrower received $64,000 and structured the loan to include four individual draws of capital over the course of the renovation project which included everything from siding, plumbing, electrical, heating, insulation, wood floors, cabinetry, ceramic tiles, bathroom accessories and more.
The single-family home is located in Hempstead, New York. Hempstead is the oldest and largest town of Nassau County in Long Island, New York. The Nassau County area is immediately east of New York City and has often been known as a white collar commuter area with an average commute of only 48 minutes by Long Island Railroad. According to Realtor.com the average list price for a home in Nassau County is $598,000 and the average days on the market total 112.
- Appraised value: $150,000
- Loan amount: $184,000
- LTV: 80%
- After-repair value: $350,000
- ARV: 53%
If you have a project that you would like to submit to Sharestates for consideration, click here. Sharestates is now funding loans in 46 states Nationwide.
Post construction appearance
Like all types of real estate investing, multifamily real estate development moves in cycles. When it comes to unit size and mix trends, factors are driven by market dynamics, which includes location, demographics, and size of the development. Let’s look at some of these factors.
The two largest living generations–baby boomers and millennials–represent two extreme ends of the spectrum. Boomers are aging and looking at retirement. The oldest members of this generation have already begun executing their retirement moves. That means they could be downsizing. In some cases, they’re moving from a single-family residence into a senior living or retirement community. While most grandparents aren’t raising their grandchildren, some are, and that means multifamily developments for seniors should take into consideration whether children will be involved or not.
On the other hand, many boomers are moving out of their single-family suburban homes into multifamily properties, and they’re looking at bigger apartments with nice amenities. They want apartment units with layouts similar to single-family homes, but they don’t want the responsibility of maintaining the property. Even if they downsize from a large single-family home, many baby boomers still want to live in a large apartment unit. They like the spaciousness.
By contrast, millennials are making major life decisions, such as marriage and home buying, at a later date than previous generations. Therefore, any multifamily development targeted at millennials should consider these factors, and millennials who aren’t married may be co-living or sharing space with other singles.
Multifamily developments targeting specific age demographics should consider the diversity of living arrangements you are likely to encounter and provide a unit size mix based on that diversity within your geographical market.
Development Size As It Relates to Unit Size and Mix
Large and small multifamily developments often differ in how they approach the unit size and mix. Large complexes, for instance, may sacrifice the number of units overall to include more shared amenities such as fitness centers, pet grooming stations, bicycle storage, larger recreation centers, and terraces. Upscale tenants have come to expect such amenities, so if that is your market, you should expect to build with fewer units and more shared or common spaces.
Another difference between large and small developments is in the number of bedrooms. According to Chandan Economics, 52% of large multifamily developments in 2014 had only one bedroom while 30% had two bedrooms, and only 6% had three bedrooms. Twelve percent included a studio. By contrast, smaller multifamily developments included more two- and three-bedroom units and fewer studios and single-bedroom units (44%, 9%, 7%, and 40%, respectively).
One reason for these differences could be that high-income singles prefer larger living spaces with more shared amenities, while lower-income families with more children may require more bedrooms. Interestingly, the same survey revealed that small multifamily developments increased the number of average bedrooms per unit from 1.4 to 1.6 from 2006 to 2014 while the average number of bedrooms per unit for large developments remained at 1.3 for both periods.
Other Trends Driving Multifamily development
Some senior living communities are beginning to develop properties with large front porches, two-car garages with plenty of space for shelving and storage, upscale kitchens, and open floor plans. Larger bedrooms and larger apartment spaces for seniors has developers including dens for a more comfortable living and to allow seniors more space for entertaining guests.
Multifamily developments that serve immigrant communities may want to consider how some families prefer to keep extended family closer together. That may mean more bedrooms per unit, larger bedrooms in some cases, or even larger living rooms and kitchens. When it comes to multifamily development and unit size and mix, the market dictates supply and demand.
As we’ve written recently, the Atlanta real estate market continues to show strong signs of growth. Sharestates deal activity in the Atlanta metro area, in turn, has kept apace. Multi-family projects, in particular, have kept Sharestates busy in 2018 with 125% more Atlanta loan applications than the same time last year. Below, we’ve aggregated some of our internal loan statistics for the Atlanta metro area and highlighted a few recently funded success stories.
- Sharestates has closed 34 of those loans to date for a total funded volume of $76,465,000
- 33 of the Atlanta real estate loans funded by Sharestates were for multi-family properties
- The remaining loan was for a commercial storefront building
- Average loan size: $2,248,970
- Average loan to value (LTV): 69%
- Average renovation budget: $655,618
- Average after repair value (ARV): 63% or $3,226,749
Commercial Project Success Story
The Sharestates commercial success story (pictured) was for a private loan in the Cascade Heights Commercial District. Cascade Heights is a southwest neighborhood of Atlanta with many amenities that Atlanta residents look for: proximity to downtown, parks, green space, and a rich cultural history that mirrors other desirable Atlanta neighborhoods. The subject property is a 1 story commercial building with 7 storefront units and a basement accessory unit for a total of 11,842 rentable square feet.
- As is value: $710,580
- Preliminary loan amount: $500,000
- LTV: 70%
- Total loan amount: $840,000
- After-repair value: $1,302,730
- ARV: 64%
The borrower previously acquired the subject property and will begin to renovate with a $340,000 budget that includes: sprinkler systems, plumbing, HVAC, interior finishes, electrical, masonry, exterior siding, roof structure, exterior lighting, landscaping, grease traps, windows and doors, and grading. The borrower intends to complete the rehab plans and stabilize the investment, then refinance with traditional financing to repay this loan.
Pre-renovation commercial loan in Atlanta
Post-renovation commercial loan in Atlanta
Multi-Family Project Success Story
The Sharestates multi-family success story (pictured) was for a loan in the Hunter Hills neighborhood of Fulton County, Atlanta. Hunter Hills is west of Downtown Atlanta and consists mostly of single-family residences. The neighborhood is only feet away from the west side of the new Atlanta Beltline that will connect nearly 45 neighborhoods via railroad. The subject property is a 63 unit multi-family apartment building with an office unit. The property sits on 2.1 acres of land and is 49,776 square feet in size.
- As is value: $2,260,000
- Loan amount: $1,880,000
- LTV: 70%
- Total loan amount: $840,000
- After-repair value: $2,835,000
- ARV: 66%
The borrower previously acquired the subject property and will begin to renovate with a $300,000 budget. The borrower intends to complete the rehab plans and stabilize the investment, then refinance with traditional financing to repay this loan. Pictured below are some of the completed renovations to date.
Below are some additional before and after renovation photos of a recently funded Atlanta loan. If you have a project that you would like to submit to Sharestates for consideration, please click here. Sharestates is now funding loans in 46 states Nationwide.
Pre-renovation multi-family exterior loan in Atlanta
Post-renovation multi-family exterior loan in Atlanta
Pre-renovation multi-family unit kitchen
Post-renovation multi-family unit kitchen
Pre-renovation multi-family unit bathroom
Post-renovation multi-family unit bathroom
Pre-renovation multi-family unit bedroom
Post-renovation multi-family unit bedroom
There are a number of ways to increase your retirement wealth, but one of the most effective is through passive income. Passive income is a steady stream of income that you earn from past business activity as opposed to activities you perform today. For instance, when you work to earn a paycheck, that is active income because you have to do something right now to earn an income. On the other hand, if you write a book and receive royalties on the sales of that book for a period of 20 years, that income is passive because you’ve already done the work and earn your income on past labor.
Passive income allows you to increase your current standard of living as well as save for your future retirement. Instead of spending the extra income you earn from your past work efforts, you could invest it and save it for retirement. Here are some three ways to earn a passive income from real estate.
- Renting – If you don’t mind being a landlord, you could buy up properties and rent them out. There are several ways to earn passive income from rental units. You can purchase single-family homes and rent them out as long as you don’t mind looking after each property. Another option is to specialize in multi-family units like apartment buildings and condominiums. With that strategy, you can have several rental units with one property. Commercial properties are another option. With this method, you can invest in shopping malls and shopping centers, rent out space to other businesses, and earn a passive income from that real estate. The advantage to commercial rental property is that these tenants tend to be long-term, as in 10 to 20 years, as opposed to 6 months to a year for residential renters.
- REITs – Real estate investment trusts are like mutual funds but the investments in the fund are real estate properties. When you buy shares in a REIT, you are buying a part of the real estate investments within the fund. It’s similar to buying stock. Over time, the REIT will pay out dividends and you can reinvest those dividends in the REIT or in other types of investments.
- Marketplace lending – A third way to earn passive income from real estate is with marketplace lending, also called real estate crowdfunding. Through platforms like Sharestates or Syndicate Profile, you can find properties to invest in that are either debt instruments or equity vehicles. Debt-based crowdfunding means you are loaning your money, along with other investors, to a property owner or developer to use for a project. That money will then earn a passive income for you until the loan is paid off, usually up to 12 months. Equity-based real estate crowdfunding allows you to buy interest in a real estate project, again, along with other investors, and when that property sells, you get back a return on your investment equal to the portion of equity you purchased in that real estate. Many marketplace lending investors reinvest their earnings through the platforms, building up a retirement nest egg of passive income returns.
There are other ways to earn passive income, but real estate is one of the most lucrative ways to earn for your retirement.
It’s tempting for investors to hear about 8%-12% returns that real estate crowdfunding has been delivering and rush in to get their piece of the action. However, it is important for investors to take the steps necessary to ensure their investment is solid.
Real estate crowdfunding (RECF) platforms have changed the way people can invest in real estate. The opaque world of private real estate deals has been upended by a digital transformation that brings with it a deluge of data and its own set of issues. RECF platforms perform investment due diligence before offering it to the crowd of investors, but who is vetting the platform?
The following is a list of three due diligence questions for real estate crowdfunding investors to ask before making an investment decision.
1) How Does the Real Estate Platform vet Their Borrowers?
Every platform is different. Firms will generally perform a FINRA broker check, which, among other things, offers intelligence on the borrower’s credentials, affiliations, and registrations. Some firms consider organizational structure in their vetting process as well as online research. Some of the pertinent information that a firm will usually seek on a borrower is:
- What is their borrowing history, including total volume and rate of success?
- How much experience does the borrower have?
- What is their credit score?
- Do they offer a personal guarantee?
2) How Does the Real Estate Platform vet the Properties?
A lot of what goes into vetting a property is the vetting of a borrower, but factors concerning the actual structure of the deal and the property are considered as well. Some of those considerations are:
- Loan-to-value (LTV) ratio: Traditional bank lenders may not service a loan with an LTV above 59 percent, whereas private non-bank lenders have more flexibility to lend with an LTV of 80 percent.
- Lien position: A property with a first lien might be as attractive to the underwriting process as a large borrower with an impeccable track record, while a second lien is less attractive in the event of foreclosure.
- Location and occupancy: Core urban markets with high occupancy score more favorably than suburban markets with moderate occupancy, which fare better still than rural properties or emerging markets with lower occupancy.
- Phase of development: Stabilized properties, which are existing assets with leases and cash flow, measure more favorably than value-added properties, which are existing properties that are being improved upon. The lowest rated of the three development phases is the ground up phase, where a completely new asset is being built without a rent roll to support the balance sheet, yet.
3) How do Investors vet the Platform?
To start, investors should only work with a firm that has good leadership. How long has the platform been in business? Who are its main players? How successful have they been, and what are their notable associations or accomplishments? One of the biggest considerations for the investor when vetting any RECF platform is whether deals are debt-based or equity-based investments. Debt-based investments mature after a shorter hold time and offer steadier income at lower risk while equity-based investments charge lower fees and offer better tax benefits, but they also have longer hold periods and pose more risks.
Investors should also find a platform with a proven track record. What is the value of the firm’s underwriting history, and what percent of those loans have defaulted? Have investors lost money as a result? What percent of the firm’s transactions is senior debt vs. mezzanine or lower positions on the capital stack? What origination terms does the platform tend to seek? Is the platform only available to accredited investors? What is the required investment minimum?
Investment Due Diligence for Safe Returns
There is money to be made in real estate crowdfunding in the current investment market, but that money is there for those investors who perform the necessary due diligence on the platforms in which they wish to entrust their money. Don’t assume that all real estate crowdfunding platforms were created equally. They vary greatly in terms of the types of deals they offer, their management teams and their track record of success.
The costly lessons of the Great Recession continue to influence cautious bank lending policies in commercial real estate. Expanded regulation and increasing rates and fees have taken the banking sector’s conservative underwriting of real estate financing to an unprecedented level. With tight lending criteria of conventional lenders in the real estate market, investors are actively seek alternative financing, such as real estate crowdfunding, for real estate development.
Origins of Alternative Real Estate Financing
Although many alternative financial services are centuries old, the recession formed the modern and now popular concept of alternative real estate financing. A host of big banks created a ‘capital vacuum’ through their restrictive lending resulting in certain markets and project types being underserved. Due to the gaps created by these traditional lenders, alternative finance has risen to provide additional funding opportunities to underserved real estate developers.
There are some critical spectators who hold the position that the tighter regulations are needed in the real estate investment space especially after the Great Recession, and those spectators are correct. Serious alternative real estate lenders are not looking to fund loans that will increase their risk intake with little to no chances of a successful payoff. The key difference between traditional banks and alternative/private sources of funding is the way in which the loans are underwritten, the speed of the transaction, and the adaptability of the lender. Sharestates, for example, uses a 34-point risk matrix in addition to following all regulatory standards but can still fund the loan in less than half the time it will take a traditional bank. To learn more about what Sharestates considers during the underwriting process, click here.
Essential Alternative Financial Models in Commercial Real Estate
As banking lending has increasingly become more time consuming and generally less favorable to real estate developers, alternative financial services are consistently providing these developers with more efficient funding. Some of these essential funding alternatives in commercial real estate development include:
- Bridge loans. Interim loans used to fund short-term construction or note transfer;
- Mezzanine loans. Characteristically larger commercial real estate loans comprised of debt and equity financing that grant lenders the right to convert liability to an equity interest in a company in case of default;
- Hard money. Short-term loans offered by private investors that typically carry a high-interest rate and can be utilized for acquisition and construction.
Real Estate Crowdfunding – Where the Whole is Greater Than the Sum of its Parts
With a history dating back to when customers saved the Bank of England in the 1730s, and when 160,000 people raised $101,091 for the base of Statue of Liberty in 1884, crowdfunding (in the modern interpretation) is the practice of pooling small funds from numerous individuals to fund a venture. Although this form of fund aggregation occurs on different platforms, the Internet is the primary medium of crowdfunding in recent years. The user-friendly innovation of real estate crowdfunding simplifies and streamlines the qualification process for crowdfunders and real estate developers. Product innovations such as one-click closing and auto-invest are just two examples of this innovation, and the benefits of crowdfunding are clear:
- Access to capital with fewer upfront costs;
- Viable alternative to bank loans or traditional funding; and
- Sharing an idea on crowdsourcing platforms is an effective form of marketing.
Alternative Funding: Finance Industry Evolution
As conventional lender conservatism and underwriting policies intended to avoid a repeat of the recent economic downturn have restricted growth in commercial real estate, developers are more motivated to pursue progressive and alternative means of funding for project execution. More importantly, securing a funding source less reliant on traditional lending sources offers real estate developers greater opportunities and access to capital, with less associated risk.
Alternative financing (also known as marketplace lending) is a formative factor in how the US real estate market has evolved since the great financial meltdown of 2008. Real estate construction activity in the country has seen yearly growth since 2009 (US Census Bureau) with alternative financing contributing to the expansion.
Nonetheless, alternative financing remains a new concept to many real estate developers who haven’t been exposed to its benefits. The following are some of the more common questions about alternative financing, bridge loans, hard money, and mezzanine loans.
Why do I need Alternative Financing for my Real Estate Development Project?
You may need alternative financing for your real estate development project for a wide variety of reasons. These reasons revolve around the limitations of conventional financing and the advantages of alternative funding options. Consider the following.
- Time-Consuming Approval Process: The approval process for conventional financing is very time-consuming compared to alternative financing. Approvals and the time it takes to close are fast by comparison.
- Loan-to-Value Ratios: The Loan-to-Value (LTV) ratio you’ll get with conventional financing will only go as high as about 60-70 percent. This means that you’ll have to spend more out of your own pocket to realize your real estate development objectives. Alternative financing allows LTV ratios of up to 80 percent.
- Timing and Prepayments: Conventional financing is inherently long-term in nature. Most conventional lenders will discourage you from closing out the loan early by way of prepayment penalties. Those prepayments could be 1-5 years worth of interest payments depending on the remaining lifetime of the loan. There are shorter prepayment penalties in alternative financing due to the short-term nature of the loans. If the alternative lender does require prepayment penalties, they will typically range from 3-6 months worth of interest payments.
- Flexibility: Alternative financing institutions are generally more accommodating and adaptive than conventional financing institutions. This means that alternative financiers may be more versatile with regard to terms and conditions of the financing agreement.
How do I Find Trustworthy Sources of Alternative Financing as a Real Estate Developer?
Alternative financing is a booming sector within the real estate financing industry. There are a plethora of marketplace lending platforms to choose from. Some of the things you should look for in a trustworthy lender include:
- Track record of success: The best way to analyze an alternative financing institution is to see how long they have been in business and their rate of success is financing new deals through the years. This sector is fairly volatile. This means that unreliable stakeholders tend to fade away sooner rather than later.
- Borrower Assessment Systems: The most reliable sources of alternative financing will have in-depth borrower assessment systems that are comparable to conventional financing evaluation models. Simultaneously, you also want to see quick turnaround times as it demonstrates the maturity of operations.
- Loan Underwriting Prerequisites: Loan underwriting is another area you should evaluate. What kind of a project review process do they have in place? Do they check aspects such as architectural plans, zoning laws, budgetary constraints, project timelines, projected values, and demographical details of the market? You will want to know what will be required to process your loan before you select a marketplace lending platform as each platform has varying requirements.
- Experienced Management and Staff: Investigate the experience of the fund’s leadership. If the alternative financing source has experienced leadership in the real estate industry, you can be sure of their reliability and trustworthiness.
At What Point in the Real Estate Development Process Should we Seek a Bridge Loan?
Bridge loans are most useful at the very beginning of a real estate development project. You take bridge loans when you’re expecting some funds to become available but need to start a real estate development project immediately.
For example, if you’ve applied for conventional financing and are waiting to get approval, then you can use bridge loans up until those funds get released. Similarly, if you have funds that are occupied in another project, then you can take a bridge loan up until those funds become available. There are many online marketplace lending platforms that offer short-term bridge loans to meet this specific need.
Is a Hard Money Loan a bad Idea for my Real Estate Development Business?
No, hard money loans are designed for real estate development projects that conventional financing institutions not fund. Most hard money lenders will fund real estate projects on overly distressed assets or assets that have varying market conditions that make them less appealing to a conventional lender. It is important to note that due to the convenience, and speed of a hard money loan, interest rates are usually much higher than a longer-term conventional loan.
You can use hard money loans to start work on your asset. Once your work on the real estate asset has made it viable enough for conventional financing institutions to back you, you can exit the hard money loan. If done right, this method will still leave you with sufficient working capital.
What is a Mezzanine Loan and how do I Find a Lender?
Mezzanine loans are a mix of equity-based financing and loans. Essentially, when you take out a mezzanine loan, you’re giving the lender the right to convert some or all of the loan value into equity in your business. The lender can exercise that right only when you default on your payments of the loan. Mezzanine lenders tend to look for high-worth borrowers or borrowers with significant assets. There are dedicated mezzanine lenders in the US in the form of traditional funding sources, such as banks, and alternative sources, such as marketplace lending platforms.
What Steps Should I Take to Prepare to Apply for Alternative Financing?
The qualification criteria and the approval process for alternative financing varies. Here are some of the requirements to consider.
- Collect The Right Documents: Even though alternative financing is easier than conventional financing, you’re going to need the right documents for approval. You should prepare ownership/entity documents of your business, your entity balance sheets, along with the relevant plans and proof of liquidity.
- Create A Project Plan: You will need to have an effective and approved loan exit strategy as well as renovation/conversion plan in order to secure funding.
- Present A Memorandum Or Pitch Deck: You may have a face-to-face meeting with the lender where you’ll have to present your project plan. Creating a memorandum or a pitch deck will make this meeting more productive.
- Focus on Your Staff: Like conventional financing institutions, alternative financing institutions also get swayed by the quality of your workforce. The talent and experience of your staff and vendors speak to your commitment to your business. Building a strong team that will attract and build investor confidence.
What are the Disadvantages of Conventional Commercial Real Estate Financing?
Conventional commercial real estate financing is governed by stringent regulations. Between heavy demand for financing in the growing US commercial real estate market and tougher regulations, conventional financing institutions are under pressure. The following disadvantages are the consequence of these factors.
- The conventional commercial real estate financing has to conform to the High Volatility Commercial Real Estate (HVCRE) regulations. This is why the qualification criteria for conventional commercial real estate financing is particularly stringent. As a result, only larger players with heavy-duty balance sheets and long-standing track records in the market are able to get approval.
- Conventional commercial real estate lenders give preference to bigger players and don’t entertain newer entrants as frequently.
- The approval process for conventional financing is time-consuming and the requisite documentation is stringent.
- Conventional commercial real estate financing offers a lower Loan-to-Value ratio of up to 70%.
Insufficient Working Capital Will Never Hold You Back Again
Whether you’re a new stakeholder in the market or a seasoned commercial real estate developer, it is likely that you’ve struggled with access to funding. It is likely that you’ve also faced challenges in securing the working capital necessary to maintain brisk growth. Alternative financing through marketplace lending has the potential to resolve such issues and facilitate growth for your real estate business. You can acquire the capital needed to seize on fleeting commercial real estate development opportunities quickly.
Sharestates has closed over $1 Billion across 1,000+ real estate loans since 2015 – making it one of the largest alternative sources of financing in the real estate space. To speak to a Sharestates loan specialist, submit your contact information today!
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.
When it comes to financing your investments, whether it be your real estate projects or your other business investments, your options are growing by the day. Business owners and project sponsors are no longer tied to the bank loan. In fact, with the number of marketplace lenders on the rise, there are plenty of real estate investment financing alternatives. Here are five that are easier to obtain, often present better terms for the borrower, and are effective in bettering your financial position.
5 Real Estate Investment Financing Alternatives to Bank Loans
- Cash out refinance – If you own real estate properties now, instead of taking out a bank loan for your next investment property, take one or more of your existing properties and refinance them, extracting any built up equity you have in those properties. This can be beneficial in a number of ways. For starters, you may be able to refinance at a lower rate, especially if you are combining to two existing mortgages into one. Secondly, you can take your equity from existing properties and acquire your new one, or lower your financing by using your equity as down payment on a new project.
- Hard money – Hard money lenders have their own criteria, but these make great loans for short-term projects. They are often high interest, so make sure you pay them back on time, but the benefit is you can fund a project using hard money, then refinance the project and pay your hard money loan back upon completion of the project. Hard money lenders usually fund projects they believe in without making the borrower jump through a lot of hoops.
- Get a partner – If you get the right partner, you get a lot more benefit than funding for your real estate project. You could get a valuable partner with experience that you don’t have. A mentor who believes in your project and comes to the table with capital to see the project through the completion is a real estate investor’s dream, but it’s not just a dream. It does happen. Tap into your network.
- 1031 exchange – A 1031 exchange allows you to sell one property and purchase another one of equal or greater value as long as you follow a few simple rules. The big benefit to these exchanges is you can defer your capital gains on the sale of your investment property. Then you can take those gains and buy a bigger property that will provide you with bigger returns. This is a great option to bank lending if you are a rental property investor who wants to grow a portfolio while increasing passive income.
- Marketplace lending – Marketplace lending is another option. With this funding vehicle, you list your real estate project on a platform that allows individual and institutional investors an opportunity to invest in it. There are two types of investments that make this option good for the both the capital seeker and the funder. Equity-based investment allow real estate project sponsors an opportunity to fund a project while giving up some of the equity in that project to the investors. The benefit is you do not have to pay back a loan in the event your project does not succeed. Debt-based investments mean that investors lend you the money and you pay back the loan over time, which means you get to keep all the returns on the back end of the deal.
There are plenty of ways to finance a real estate deal in today’s fast-moving market. Be sure to perform your due diligence on any lenders, funders, or platforms you intend to work with.