States are beginning to re-open their economies, albeit some will move slower than others. The weather is warming and optimism is on the rise. While some business sectors—such as retail and tourism—are still suffering from the sudden downturn and the economic lockdown, others saw a surge as a result of the COVID-19 pandemic. Now that we are beginning to re-open the economy, will real estate return to its former state of glory? If it does, real estate professionals around the country may have opportunity zones to thank for it. Here are some ways opportunity zones could pull real estate back up again.
A Brief on Opportunity Zones
Opportunity Zones were created when Congress passed the Tax Cuts and Jobs Act of 2017. In short, these zones were designated as economically distressed zones that provide specific tax benefits to real estate developers in order to revitalize these areas and spur economic development. You can learn more about opportunity zones here.
Fix-and-flip investors have been operating in distressed neighborhoods for years, and fix-and-flip lenders have funded them. The opportunity zones legislation opened the door for alternative lenders to get in on the action. As a result, it opened the door for other real estate developers, including commercial and new construction developers, to operate with more confidence in those areas. Many of these new players were barely getting started, or were in the middle of huge projects, when the coronavirus pandemic hit and the economic lockdown began to implemented. It left their projects in limbo. The question is, will they, or can they, recover?
Opportunity Zone Deadline Extensions
In March, President Trump declared every state, the District of Columbia, and four U.S. territories major disaster areas. According to Polsinelli, these disaster areas will extend important deadlines for qualified opportunity zone investments.
The two deadlines affected are:
- The 31-month deadline for spending cash or other financial assets held by a qualified opportunity zone under the working capital safe harbor plan; the extension is for an additional 24 months.
- Capital received from the sale of a qualified opportunity zone fund; the extension is for 12 months to reinvest the funds in order to count them in the fund’s 90 percent asset test.
The working capital safe harbor extension can be used for qualified opportunity zones in any federally declared disaster area. That means real estate developers and investors in virtually every state could have some relief with this extension. There may be limitations, so Sharestates recommends you get your tax advice from your tax advisor and legal advice from your attorney. Nevertheless, these extensions could provide welcome relief to some opportunity zone investors.
Is Real Estate Development on the Road to Recovery?
While there are some signs of certain sectors of the economy beginning to open back up, there is still a lot of uncertainty surrounding the economy and COVID-19. For instance, researchers still are not sure how the virus will respond to warmer weather or whether it will return in the fall. Furthermore, will opening the economy cause a resurgence in cases even though many states are beginning to flatten the curve? These are some of the unknowns.
Despite the unknowns, state government is beginning to develop plans that allow people to get back to their normal lives. These include continued social distancing measures, mandatory face masks, and enhanced business practices such as reduced shopping hours, limits set on customers per square foot, and limits on how many cash registers can remain open at one time. The idea is to mitigate the effect of the virus and limit its spread while people are allowed to continue their normal routines as much as possible. The question is, will any of this allow the real estate markets to recover and, if so, how quickly?
One sector of real estate that has taken a huge hit is commercial real estate. CBRE predicts a long recovery. That’s possible since office leasing has slowed, the retail sector has slowed, and certain commercial industries such as travel and tourism have come to a halt.
The Motley Fool reports that rents were down initially, particularly right after lockdowns were implemented and in cities where shelter-in-place orders came early on. However, in April, they started going upward again. That’s likely due to the stimulus legislation that was passed as renters began to receive their direct deposits toward the end of the month. Some employers are also beginning to let at least some of their employees start work again, and unemployment insurance has some workers opting to remain at home instead of returning to work. So paying the rent isn’t as big an issue as it was.
If the virus threat continues, however, unemployment and economic stimulus packages will taper off. Some employees could find themselves out of work permanently as businesses shoulder the burden of lower profits due to limited operations. Renters may want to renegotiate rent agreement with their landlords or seek smaller rental units. Ultimately, the rental market will likely recover faster than other areas of real estate, especially if some homeowners end up losing their homes.
In Michigan, commercial developers and construction will be resume operations, with some restrictions, on May 7. Other states are beginning to open up, as well. Still, lost revenue from ceasing operations will be a factor in how quickly the construction sector can recover.
Invesco portfolio managers predict three areas of real estate that will likely recover more quickly than others. These include:
Multifamily certainly has the potential to come out of the COVID-19 crisis more quickly than other real estate sectors. With office space, leasing is more likely to recover more quickly than new construction. The logistics sector also has high potential because even online retailers and digital businesses need warehouses and transportation centers. That need is not going to go away. However, it’s possible that the sector could adapt to a new reality post-pandemic.
How Opportunity Zones Could Play a Part in Recovery
Since opportunity zones provide tax benefits for developers and real estate investors, recovery from the pandemic could lead to more real estate professionals to seek these benefits. It’s likely that new opportunity zone projects will focus on sectors that recover more quickly, and since the focus is on economic development in distressed areas, multifamily investment seems like a likely candidate for new investment.
It also seems likely that new projects could focus on smaller spaces, and new and creative ways to look at new construction and development could also arise to facilitate “the new normal.”
In terms of total recovery, the picture is going to look different for each real estate sector and for each geographic region. Some will recover faster while others struggle. Investors will have to scrutinize every opportunity and be discriminatory in which deals they fund. Due diligence will likely require more nitpicking for a while.
Fix-and-flip investors take great care in buying properties. The BRRRR process involves some math. To ensure a profit on the back end, you have to buy right on the front end. That means calculating purchase price and rehab costs to figure total investment and comparing that to expected sales price at the completion of the project. Investors generally look at loan-to-value (LTV) ratios and after repair values (ARV) to determine whether a project is a good investment or not.
Another strategy called Buy, Rehab, Rent, Refinance, Repeat (BRRRR) is emerging in the real estate investing marketplace. It’s not new, but it does offer some advantages to a straight fix-and-flip strategy. Let’s discuss those.
Buy the Right Property at the Right Price
There are two types of fix-and-flip projects that fit into the BRRRR strategy. One is where the investor goes into the project knowing in advance that he will rehabilitate the property and convert it into a rental property, adding it to his buy-and-hold portfolio. In that case, the investor must calculate expected rents and determine if it will lead to cash flow, or determine if there is potential equity after holding for a few years. If property values go up, he can sell the property later for a nice return.
The other type of fix-and-flip project that might end up in a buy-and-hold portfolio is one that was intended to be sold immediately after repairs, but a change in market conditions has caused the investor to change his strategy to buy and hold mid-stream.
In either case, buying the property at the right price is essential to getting the return on investment expected.
Rehabilitate the Property
Whether you intend to flip the property or convert it to a rental, the rehab part of your project is very important. You don’t want to spend too much money on the rehab or it will eat into your profits. On the other hand, you want to ensure the property is functional after the repairs have been made. If possible, you want to focus on repairs that also add some value to the property, which is very important if you intend the sell the property later.
Rent to the Right Tenant
In a typical fix-and-flip project, immediately after the rehab phase of the project you’ll move into sales mode and try to find a willing buyer as soon as possible. Holding properties cost you money. However, if you are transitioning to a buy-and-hold strategy, then you’ve got to turn the property into a revenue generator as soon as possible. That means you need to find a tenant as soon as possible.
You want to do this before you refinance because most banks don’t want to refinance a property that isn’t occupied. Having an occupant will increase your chances of refinancing.
Refinance to More Favorable Terms
In order to refinance, you need to ensure you have some things in place first. For starters, you’ll need an appraisal.
As soon as you have tenants in place, make sure they know an appraiser will be stopping by to look at the property. You don’t want to surprise them. After you get your appraisal, interview a few banks and compare terms. Find out if the bank offers cashouts. If not, you want to find another one. The cash out is very important in the BRRRR strategy because it reduces your risk. Secondly, find out how long the bank’s seasoning period is. In other words, how long do you have to own the property before you can refinance it?
Seasoning periods are important because if you get stuck in a high-interest loan for long, it will slice into your profits. You want to get your interest down as soon as possible.
Repeat and Profit
When you find a strategy that works, you want to repeat it. Many buy-and-hold investors find that they like the BRRRR strategy and continue to implement it into their portfolios. There are several ways to do this:
- Go all-in – Some fix-and-flip investors convert to the buy-and-hold strategy completely. There are advantages and disadvantages to doing so. If you go all in, you’ll have a large portfolio of properties in your inventory that could be difficult to sell later if the market turns. It could also lower your liquid cash reserves as your capital will be tied up in properties. On the other hand, flipping produces short-term returns and higher capital reserves, which translates into more money for buying properties.
- Half and half – More popular than going all-in is the half-and-half method. Some fix-and-flip investors convert every other property into a buy-and-hold property. In effect, they flip one then hold one. That way, they can keep the short-term returns coming in while building their buy-and-hold portfolio.
- Create your own mix – Maybe you’d prefer to flip 60 percent of your portfolio, or one-third buy-and-hold matches your risk tolerance better. Creating your own strategy can also make you feel like you have more control.
The Benefits of the BRRRR Strategy
In a rising market, it’s usually better to buy and hold. The downside is, it is difficult to time the market. There is no fail-safe way to know the best time to sell. That’s why many BRRRR strategy investors use a 5-year benchmark. They buy, rehab, rent, refinance, and repeat, and in the fifth year, they put the property up for sale.
Using this strategy means you’ll always have properties on the market after the fifth year. If you buy your properties wisely, even in a market hostile to sellers, you could see returns on these transactions.
It’s still important to buy right. Using the same LTV formula you use for fix-and-flip properties will keep you on the right track. If it works for flipping properties, it should also work for your buy-and-hold strategy. The snag will be if you can’t find a renter during the rent phase. If that happens, you can still flip the property and aim for buy-and-hold on the next one.
Since real estate investing often means buying properties at a discount and selling them at full market value, the buy-and-hold strategy gives you an advantage, especially in a market where property values are on the rise. If the rental market is up and home sales are down, it’s also a good time to take advantage of the monthly cash flow that owning rental properties brings. However, you don’t want to get yourself in a bind by holding onto too many properties at once.
Be sure to calculate the costs of refinancing before you make a purchase. Lenders generally finance no more than 75 percent of a property’s value. If you aim for a 70 percent LTV, that gives you some wiggle room. Sixty-five percent is even better.
Banks also charge a refinancing fee. On top of that, you’ve got to pay for the appraisal, title work, and loan processing. It will be worth it if you can cash out your initial investment. That way, you have none of your own money tied up in the project while earning residual income. In the meantime, you can build equity. If you start with 25-30 percent built-in equity, you could be sitting on a gold mine.
Competition in private lending is driving interest rates down on several types of debt products, influencing debt terms. Between 2017 and 2018, private mortgage lending grew 37.8 percent, and that’s just one market segment. This growth is good for borrowers while lenders fight to stand out.
Take short-term bridge products, for example. Five years ago, it wasn’t unheard of to see loan rates at 12 or 13 percent. A couple of years later, they were around the 10 percent mark. In the last couple of years, they’ve fallen into the single digits, and it’s common to see rates in the 6 to 8 percent range. Give it another couple of years, if competition continues to proliferate, and I think it will, we could see interest rates dip below 5 percent.
This is already happening for large bridge loans. When you’re financing a couple of million dollars, the lower cost of capital translates into significant passive income.
In the fix-and-flip sector, lenders, six years ago, were funding 80 percent of the purchase and the same on rehabilitation costs. Loan rates were also in the double digits. But some significant changes in the private lending sector have driven these terms in a direction that is favorable to the borrower. Borrowers can now obtain 85 percent for acquisition and up to 100 percent for rehab costs. Advances at closing are also driving the market as lenders try to make their products more competitive. Again, interest rates are well below the double-digit mark and edging close to 5 percent, even as we’ve seen something of a slowdown in the fix-and-flip market.
Top 3 Drivers of Competitive Prices in Private Lending
It doesn’t matter what the sector is, private lending is growing. The JOBS Act of 2012 not only created new opportunities for lenders and new markets for borrowers, but it has also ensured the growth of these opportunities and markets for years to come. What it boils down to is that borrowers have their pick of the litter among the growing options. Lenders have to remain competitive if they’re going to stick around.
There are three general other market conditions influencing the direction of debt terms. Going into 2020, here are the top three drivers of competitive pricing in private lending:
- An influx of new lenders – The reason competition is heating up, fundamentally, is that new private lenders are entering the market every day. More than half of the $10.3 trillion in U.S. mortgage debt is provided by nonbank lenders. This will likely increase beyond 51 percent by the end of this year. According to ATTOM Data Solutions, the growth of private lending is due to banks not serving all borrowers’ needs.
- The influence of institutional investors – A good portion of these new lenders are institutional investors. Coming to the table with huge cash reserves, institutions that traditionally have not financed startups or introduced loan products are now beginning to do so.
- Broadening of the private lending sector – Private lenders are branching out into new loan categories. While mortgages are the most financed of private lending products, lenders are also financing student loans, home improvement, business startups, equipment, and business asset purchase and leasing, fix-and-flip projects, HELOCs and cash-out products, refinances, and more.
Each of these three drivers points to one main thing driving the terms in private lending: Competition. It’s a borrower’s market.
One More Thing Driving the Competition in Debt Terms
Private lenders are also faced with one more stark reality. There’s no loyalty among borrowers to any lender. The terms are dictating where borrowers go for their financing needs. That means lenders must treat their current customers well.
Whether we’re talking about marketplace lending platforms, institutional direct lending, or refinance products, existing customers expect royal treatment. If a lender has a borrower who has come back for several loans in the last three to five years, that borrower is going to be looking for better debt terms. There are several reasons for this:
- A borrower with a track record can prove they deliver results (and returns); that translates into lower risk
- Their successes, in a lot of cases, means they can personally guarantee their projects
- There’s another lender around the corner working to take that borrower away from you
When borrowers can walk in the door, plop down a half dozen closed and fulfilled contracts that turned a profit for the borrower (and the lender), can demonstrate their expertise in a particular type of real estate project, and show you a quote from your competitor, the only thing a smart lender can do is match or beat the competition’s offer. And that’s precisely what is happening in lending offices all over the country.
5 More Market Trends Developing in Private Lending
Competition in the private lending markets has the byproduct of creativity. What that means for the borrower are more options and better terms. What it means for the market as a whole is lenders doing whatever it takes to secure more business. That’s why these five market trends are beginning to develop now in the private lending markets, which will only make the market more efficient in the long run.
- A move toward long-term products – While fix-and-flips and bridge loans are still popular, there is a move toward long-term financing. Flippers are starting to see the opportunity in buying and holding properties, so they’ll take their rehab loan and convert it into a rental loan to create passive income streams from a percentage of their portfolios. This is being driven by housing prices that are out of reach for some would-be homebuyers. Another part of this is borrowers have some of their duplex and fourplex loans at Fannie Mae and Freddie Mac expiring, so they’re converting those loans into long-term products.
- Lender funds – As the competition heats up, lenders have to get creative. That’s why some are beginning to launch their own funds. The funds are going to happen anyway as more players get into the market. Savvy lenders create their own funds to keep the business in their doors.
- Partnerships – Lenders are beginning to partner with each other on certain types of products. As the private lending market matures, we’ll begin to see consolidations.
- Securitizations – Securitizations are also heating up.
- Floating terms – Borrowers favor ARMs and other floating terms. Cash-out refi is also popular items because they allow borrowers to lower their debt interest. They can then take that cash and reinvest it in other projects.
The current private lending market is a borrower’s market. Competition is high, and it’s driving down debt terms that lenders offer to borrowers. Borrowers can finance more projects, make larger acquisitions, and choose from among a diverse range of creative lending products. Loan underwriting is also tightening as more lenders take it in house.
Lenders want to ensure they get the right borrower. That’s why many private lenders now check FICO scores and verify information that a few years ago they didn’t bother verifying. To mitigate risk, large-project and high-risk lenders are looking at the construction and engineering reviews, judging environmental impact, and taking a closer look at project plans to ensure capital is well-invested. That’s another byproduct of the competitive environment.
One way lenders are controlling money flow is by requiring borrowers to access capital through draws and reimbursements. The property is security. Therefore, ensuring the project is done correctly protects the property and the borrower. Everyone wins in the long run.
Bottom line: Competition is benefitting borrowers at every level of the private lending market.
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We’ve written a lot lately about fixer-uppers, with articles on both finding real estate owned — or REO — properties and securing private lending for fix-and-flips. But the U.S. Department of Housing and Urban Development may have added a little more encouragement to those who seek to renovate distressed homes. While the recently upgraded program is intended for those who will be residing at the property as their primary residence, house flippers are bound to find ways around the letter of the law.
HUD’s Federal Housing Authority recently raised the ceiling for its rehab loan program by $15,000, so now you can apply for up $50,000 in the FHA’s 203(k) program. But there are restrictions — not to mention a ticking countdown timer.
“Thanks to a new rule, people buying in designated ‘Opportunity Zones’ can borrow up to $50,000 — giving them an extra $15,000 in renovating power,” Peter Miller wrote in a December post in The Mortgage Reports. “But the new rule is first-come, first-served. Only the first 15,000 applicants nationwide will be able to use the higher FHA 203k loan limit. So if you’re interested in a bigger 203(k) loan, check your eligibility and move fast.
(For more about OZs, we recently covered that in this space too.)
Beyond today’s news
It might surprise some to learn that 203(k) loans can be used for acquiring properties as well as fixing them up. The intent of 203(k)s is to eliminate an old Catch-22 of real estate investing: If the property isn’t up-to-code, you can’t get a loan to buy it, but you can’t buy it to bring it up-to-code without a loan.
“The 203(k) lets you buy and fix up a house in one transaction, allowing the lender to approve the loan despite its initial condition,” Tim Lucas writes for The Mortgage Reports.
We’d be remiss not to point out that HUD isn’t the lender. Its FHA serves as a mortgage insurer, taking a substantial amount of non-performance risk out of the loan, thus lowering the rate at which a private lender can offer it to you. FHA, by the way, is entirely self-funded. The good news is that there’s no guilt on your conscience about taking taxpayer money to finance your project. The bad news — and it’s not all that bad — is that FHA charges 1.75% upfront on your mortgage as an insurance premium, then 0.85% annually.
But not all lending institutions originate 203(k) loans and, at those that do, not all officers are equally versed in how they work. You might want to run the names of your available lenders through HUD’s database search page.
As for the principal amount, you need to keep the rehab portion below that $35,000 threshold — or $50,000 in an OZ — but you have to take out at least $5,000. Including the acquisition price of the property itself, the cap varies between $331,760 in low-cost counties and $765,600 in high-cost counties, NerdWallet reports. (OZs tend to be low-cost.) Your loan amount can’t exceed 110% of the project, according to The Balance.
Pluses and minuses
There are, then, plenty of reasons to go the 203(k) route, but it’s not without its potholes.
On the positive side, you need to put down only 3.5% of combined purchase and repair costs, and there doesn’t appear to be any restrictions on how you came up with the money. Also, your FICO score can be as low as 580 and you could still qualify. (At least for the mortgage insurance. Your lender might have other ideas.) Under the right circumstances, you can refinance a bridge loan with 203(k) funds or use them to pay the rent in temporary quarters while the project proceeds. While 203(k) interest rates are usually a percentage point higher than other FHA loans, they’re still below private-sector market rates.
Still, there are strings attached — beyond the loan value increase only applying to OZs. First, this isn’t intended for DIYers; you have to get receipts from contractors. Funds are then held in escrow until they’re distributed directly to those contractors. Not only that, you have to get bids from multiple vendors before you can finalize the deal with FHA, and they have to be licensed, insured full-timers. It’s best if those bids are computed on a cost-plus basis because an appraiser has to sign off on it and it’ll be an obvious red flag if a bid looks like a SWAG.
Also, and this pretty much goes without saying when you’re dealing with Washington, it generally takes longer to close than if you were dealing with a private mortgage insurer, and involves a ton more paperwork. So make sure your lender has experience with 203(k) loans and is willing to walk both you and FHA through the process.
Also, you don’t have complete autonomy over what modifications you can make. FHA is a stickler for taking care of health-and-safety remediation — mold, lead, asbestos, termite damage, broken windows, missing banisters — first. After that, you can see if there’s any money left over to remodel bathrooms, install appliances, paint, lay carpet or improve energy efficiency.
The 203(k) program’s “limited” or “streamlined” loans specifically exclude structural repairs — you’d need to find some other source to fund those — although it permits replacing the roof. Structural repairs are allowed under a “standard” 203(k) loan, but there are restrictions that apply under either version, but these are at least partially subject to interpretation. “Major” landscaping is permitted but “minor” isn’t. Such “luxury” amenities as tennis courts are forbidden but you can fully trick out a kitchen; there’s a whole lot of gray in the middle. But whatever you do, the project has to be completed within six months.
Oh, and you can’t buy furniture. All fixtures have to be permanent.
And that includes you. The 203(k) program is specifically not intended for fix-and-flip. That said, guidance is sort of loose-goosey in this regard. It’s expected that you’ll be moving in yourself. Once you’ve done that, though, you can move out after a year. Also, if you’re buying a multi-family building, there’s nothing stopping you from renting out another unit or two or three. While co-ops are not allowed, 203(k) rules do permit condos under certain circumstances, according to Zillow. Also, as Holly Johnson at LendingTree reports, the property can be mixed-use, as long as at least 51% of the structure is residential.
One more helpful hint: For those who can undertake a project under the auspices of a not-for-profit organization, there’s a carve-out for that.
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Since the financial crisis of 2008-2009, banks and traditional lenders have scaled back their funding of real estate projects. However, private lenders have stepped up to fill the gap.
The private lending landscape is made up of both individual and institutional investors. Data collected by ATTOM Data Solutions indicates that one prominent real estate marketplace lending platform saw a 70 percent increase in home flipping loan dollar volume in 2017 over the year before, and a 50 percent increase in loan originations. Another prominent fix-and-flip lender experienced a 100 percent increase in loan originations. The average gross return on investment (ROI) for flipped properties that year, according to ATTOM, was $68,143.
The data shows that house flipping is growing in popularity. As a result, house flippers are getting deals financed in record numbers. But they’re not going to banks. They’re going to private lenders and marketplace platforms where lenders pool their money to fund real estate investments.
Why Private Lenders Should Fund Your Next Real Estate Project
Private lenders fund more than fix-and-flips. In fact, private lenders may fund virtually any type of real estate investment. That includes mortgages, home improvement projects, HELOCs, commercial and industrial ground-up developments and leases, and more.
They also use a variety of different business models, including marketplace lending, direct lending, and hybrid approaches.
The JOBS Act of 2012 opened the door to private lending for many real estate professionals who have struggled to find funding for their projects. The landmark legislation allowed lenders to use technology in new ways to market their products to potential borrowers. As a result, online lenders, most of them private lenders, have proliferated.
According to the Federal Reserve Bank of New York, online mortgage lenders have improved efficiency and benefited borrowers. They are able to process transactions more quickly than traditional lenders and respond more agilely to demand fluctuations and market conditions. The same is true of online lenders in every vertical.
With more than 200 real estate crowdfunding platforms in the U.S. alone, and billions of dollars funding investments each year ($33.7 billion in 2017), there has never been a better time for real estate developers and investors to find private capital for their deals. You just have to know where to look.
Private lenders do not place as much emphasis on FICO scores as traditional lenders. Rather, they look more closely at deal structure, real estate experience and track record, and project financials. Due to innovation in underwriting and risk assessment practices, private lenders have expanded their influence and helped more real estate pros realize greater profits and fund more deals.
Expectations for the Future Growth of Private Lending in Real Estate
In May 2019, The American Association of Private Lenders (AAPL) surveyed members of its Government Relations Committee to ask them about expectations for private lending in the next five years. The answers were interesting. Industry professionals said they expect
- the number and size of private lenders to grow;
- increased “professionalization”;
- new capital infusion to meet housing demands;
- private lenders to specialize in specific niches;
- private lending to drive platform innovation;
- higher returns with fewer players;
- private lenders to embrace technology;
- private lending to outperform banking;
- significant consolidation among capital providers and originators;
- increased state regulation.
In other words, it appears that private lending insiders expect the market to mature, and since real estate is one of the hottest markets for private lenders, we should expect the real estate lending market overall to mature.
Another thing that could impact the growth of real estate private lending are proposed rule changes for accredited investors. Among these proposed changes, the Securities and Exchange Commission is considering the addition of new investor classes based on occupation and certifications. Other classifications that could gain accredited status include registered investment advisors, rural business investment companies, family offices, and Indian tribes that meet certain investment criteria. If these proposed changes are passed, it would widen the door of demand on private capital, which will lead to market newcomers, new lending products, and a rise in private lending volume. The public comment period for these proposed changes ends mid-February.
How to Find a Private Lender for Your Next Real Estate Project
While market demand for private capital is growing and opportunities for investors are better now than ever, there is intense competition among private lenders, and among investors and developers for private money. That’s a good thing. Still, different real estate projects have different capital needs. Therefore, a search for capital should begin with identifying the type and amount of funding necessary for project completion.
Next, make a list of private lenders who can potentially fill that need. This will require some research.
When evaluating private lenders, look for the types of investments they focus on. If a lender specializes in home improvement projects and your project is a commercial ground-up development, that is not a good match.
You also want to look for a private lender who’s funding criteria match your project capital needs. Does the lender have a minimum or a maximum? Some lenders look for small deals in the range of $50,000 to $100,000. If your project requires millions of dollars in financing, then there’s an obvious non-match. On the other hand, if your project is a smaller project and a lender typically finances larger deals, you can eliminate that lender from your list of potential capital providers.
Another area where you’ll find a lot of diversity is with credit risk terms. Some lenders only fund projects if a developer provides some of their own capital. Others require a strong FICO score or a certain amount of experience. Some lenders use a loose risk assessment analysis while others are quite stringent. You’re looking for potential lenders whose terms match your ability to meet them.
Narrow your list to 3-5 potential lenders before making a final decision. Try to include a mix of lending models — for instance, direct lenders as well as marketplace lenders. You may even include friends and family members.
After you’ve got a solid list of 3-5 potential private lenders, create a presentation with your project details. It should include all project parameters, from acquisition costs to material requirements. Anything pertinent that a potential project funder would want to know should be included. In the case of marketplace lenders, find out what their project deal parameters are and make yours conform.
Finally, you’ll want to perform your due diligence on each potential private lender. What is their reputation among real estate professionals? How many deals of your type have they funded? What is their success rate? Create a list of criteria that are important to you and evaluate each lending candidate according to that criteria. You want to create an apples-to-apples comparison so that you can choose the best lender for your real estate project. When you arrive at your conclusion, you should feel good about the funding source you have chosen and its match with your project.
In the competitive landscape of private lending, it’s important for real estate developers to find a lender who is the perfect match for them and their project. Marketplace lending is an excellent funding model for some projects, but it isn’t for everyone. Perform your due diligence based on your project, its funding requirements, and your personal values.
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According to a Freddie Mac sponsored article at National Real Estate Investor online, small apartment communities consisting of five to 50 units house up to 70 percent renters. Still, the majority of multifamily financing goes to larger multifamily projects. Thanks to private lending, this can change.
7 Ways Private Lending Can Help Small Multifamily Projects
It’s difficult for small multifamily projects to receive funding because banks are not financing as many projects as they used to. They have implemented stricter risk management controls, and prefer to finance larger projects where income earned from interest is more justifiable based on the cost of capital. Still, that does not leave developers of small multifamily projects in the lurch. Here are seven ways small multifamily projects can benefit from private lending.
- Access to capital – The most obvious benefit is access to capital that might not otherwise be available to small project developers. Since bank lending has practically dried up, unless you personally know the lender, small developers must seek capital elsewhere. Private lending is an open door.
- More diversified lending base – Through marketplace lending platforms, small multifamily project developers have access to a more diversified lending base. Instead of seeking capital from one source, the borrower can receive capital from multiple sources even while proving their risk worthiness to only one source. Due to this nature of private lending, these loans are often easier to obtain.
- Better terms – Borrowers often get better terms from private lenders. That’s partly because private lenders often don’t have the huge overhead and underwriting expenses that banks and institutional lenders have. There is also a lot of competition among private lenders now to fill the gap in lending for small developer projects. That competition means better terms for the borrowers.
- Faster access to capital – Whether seeking capital for a ground-up development, a mezzanine loan to keep a project afloat, or seeking capital for another level within the capital stack, real estate developers can gain access to much needed capital faster from private lenders. This capital is typically taken from stocks, mutual funds, certificates of deposit, and similar investment vehicles. Therefore, it’s more accessible. When acquired through a marketplace lending platform, many private lenders keep a minimum amount of money in their account on such platforms in order to fund projects quickly.
- Lenders are able to finance smaller amounts – Institutional lenders usually have minimums. Borrowers seeking capital below a lender’s minimum requirement will be denied outright. Your chances of obtaining a loan are nil before you apply. Private lenders, on the other hand, typically will lend smaller amounts. That makes it easy, and a perfect match, for small multifamily development projects.
- Private lenders will often take a personal guarantee – If your risk profile is bad, or you have bad credit, private lenders will often loan on the basis of a personal guarantee. If a developer can back their loan by proving they have cash to cover the loan amount in the event of default, obtaining a loan from the private lender is fast, easy, and comes with no strings.
- Private lenders are more flexible – Many private lenders are also more flexible in their terms and repayment options.
If you are a developer working on a small multifamily project and are seeking financing for that project, your best bet is to seek a loan from a private lender or marketplace lending platform.
Landlords, multifamily developers, and investors in rental properties would do themselves a favor to take a look at what apartment renters actually want in a property. After all, your profits are directly tied to your ability to deliver on those expectations. An annual survey by NMHC and Kingsley Associates, and reported by National Real Estate Investor Online, has the answer for you.
For starters, the number one feature renters want is central air conditioning. That might not be a huge surprise, but did you know they’d rather have on-site child care than a fitness center?
There are other interesting results, as well.
What Renters Are Willing To Pay for Creature Comforts
While knowing what apartment renters want is one thing, knowing how much they’ll pay is quite another. According to the survey, 95 percent want air conditioning and are willing to pay a $40.98 per-month premium for it. The 94 percent who want soundproof walls are willing to pay $37.94 per month. The will rate for a garbage disposal is $27.09 per month. Ninety-two percent of respondents said they want a garbage disposal.
Ninety-one percent of apartment renters want reliable cell reception, but only 85 percent want a swimming pool and controlled access. They’ll pay $44.78 more in rent per month for on-site child care, $38.86 more for valet parking, and $30 more for reliable cell service.
What Apartment Renters Are Not Interested In
What they don’t want is just as interesting as what they do. Sixty-nine percent are definitely not interested in co-living spaces. Sixteen percent said they
“probably” would not be interested. Twelve percent said it depends on price, and four percent are definitely interested.
For voice-activated technology, 66 percent are not interested versus 34 percent that are.
What Apartment Renters Wanted in 2018
The same survey was conducted in 2017, asking what apartment renters wanted for 2018. The results may surprise you.
Eighty-two percent wanted fitness centers if they don’t use them. In fact, 41 percent said they rarely use them. Nevertheless, renters were willing to pay $31.75 per month for the opportunity to stay in shape.
Two years ago, renters wanted package lockers. Fifty-seven percent were interested or highly interested. Forty-seven percent reported receiving at least three packages per month.
Outdoors, four out of five apartment renters wanted a patio or a balcony in 2018. Two-thirds were interested in shared outdoor spaces and common barbeque grills. Almost half noted a playground or community dog park on their list of desired amenities.
One area renters two years ago had in common with those today was the lack of interest in smart technology. Only 14 to 17 percent said they wouldn’t rent an apartment if it didn’t have a smart thermostat, smart lighting, or smart locks. They were willing to pay $30 per month extra for them, however, if an apartment had those features.
What Does This Mean For Rental Investors Today?
It’s one thing to know what renters want, and don’t want, but it’s another thing entirely to deliver on it. When it comes to changing apartment amenities to meet the demands of renters, investors should consider a few things first:
- What are the local desires of renters in your area? This is important because geographical differences can play a part in renter expectations.
- Will the cost of changing amenities result in a return on investment enough to make it worth your while. This is where you’ll have to do that math.
- This information illustrates that renter desires change rapidly. Two years is not a long time. Do you really want to convert that fitness center into a child care center only to find out two years from now that renters want a fitness center? What will you do with all that equipment in the meantime?
The bottom line is, you’re in business to make money. If you’re developing from the ground up, it makes sense to build for today’s expectations. If you’re buying an apartment built with amenities from two-year-old expectation, it might not be worth the expense to convert your amenities. Do your own due diligence and do what is best for your pocketbook. That goes for investors in marketplace properties, too.
There used to be a sharp divide between the commercial world of multi-family real estate and the white picket fence dream of a family living their lives in a single-family house.
But, just as with broadcast news standards or appropriate business attire, the rules around what constitutes a family home keep changing.
It’s not news that grand old manors — or even modest but relatively spacious brownstones — get subdivided into multi-family units. This kind of rehabbing has been going on since at least the 1940s and typically provides living spaces for two or three or possibly four or more households. This might pale in comparison to the bouquets of new towers sprouting in city centers across America but, considering how tight the housing market remains, every little bit counts.
Which is why it’s troubling that so many buildings are moving the other direction. Homes that had once been single-family and subsequently divvied into duplexes, triplexes or quadplexes are boomeranging back into single units. Occasionally, even homes that were originally constructed as twins or row houses are losing their dividing walls. This countercurrent appears to have sprung up around 2013, started getting some press coverage in 2016, and has just kept building steam ever since.
To those in the real estate business, this might seem absurd: buying a building that could be generating passive revenue every month just for a little more space and privacy. I mean, why not just buy a detached home to begin with?
There are three answers to this: Location, location, location. Sometimes, if you’re trying to find a place near but not in an urban core, row homes and duplexes are just the housing stock available.
Second, why hire movers? If you already live in one of the units and you have a cordial relationship with owners, why not just buy them out when you’re ready to upsize rather than pack everything up and move out past the airport? If you don’t mind waiting until your neighbor’s lease is up, this might just be the sensible thing to do.
Lastly: a little more space and privacy. You can effectively eliminate disagreements about parking or taking care of the yard.
And those who convert multifamily buildings into their own private domain shouldn’t bewail the loss of potential income. As New York-centric The Real Deal reports, they’ll get their money on the back end.
“Such homes have higher average price per square foot than two-family and three-to five family homes,” according to Dusica Sue Malesevic’s 2016 article citing appraisal firm Miller Samuel. “Last year , the average price per square foot for single-family homes in Manhattan was $2,137 while it was $1,584 for or a two-family home, and $1,371 for a three- to five-family home.”
These urban homesteads generally range from 3,000 to 6,000 square feet. That is to say, it’s like having a suburban colonial a block from the subway.
Malesevic goes on to state that “the price increase was partially attributed to the well-established trend of multi-family homes being purchased for conversion into single-family homes.”
“It isn’t just individual buyers who are renovating multifamily buildings into single-family homes, either. Developers are getting in on the action, too,” according to a 2016 article in Professional Builder. “Greystone Development development paid $10.45 million for a New York apartment building in the West Village and spent two years renovating the10 apartments into a 7,000-square-foot, six-bedroom home. The property then sold the same day it was staged for $21 million.”
You can’t fight City Hall, but maybe you’re on the same side
That premium is due, of course, to scarcity and desirability — which has municipalities struggling to keep up from a policy perspective. For the longest time, communities have wanted to reduce population density and have zoned for single-family use exclusively. Depending on whom you were related to, you could get an easement to convert a garage into a guest cottage or your basement into an off-campus rental for college students. But there was no way City Hall was going to let you convert your Cape Dutch into three units for income while you retire to Sarasota.
But as the housing market continues its constriction, the public might be better served by having more units rather than fewer. Of course, it takes elected officials a long time to get the message and their deep municipality functionaries a long time to administer changes based on new direction. So, for the time being, it doesn’t appear to be much of a permitting issue to turn a multifamily building into a single-family home. But sooner or later, City Hall is bound to wise up. If you’re thinking of doing this, you might want to do it now.
Houston is one of the fastest-growing major cities in the U.S., and with a metro area that is bigger than the state of New Jersey, it has room to grow. With 2.2 million residents, Houston is the fourth most populated city in the United States. It’s the largest city in the South and the Southwest and it attracts a wonderful mix of arts, business, pro-sports, and award-winning cuisine. Houston is known for its mild, year-round temperatures and has a lot of culture-filled neighborhoods, gallery spaces, and attractions such as the famous The Lyndon B. Johnson Space Center where human spaceflight training, research, and flight control are conducted. There are also 25 companies on the Fortune 500 list that are located in The Energy Capital of the World, as Houston is known. Houstonians also take barbecue pretty seriously and are known for some big-name BBQ joints as well some no-frill, hole-in-the-wall places.
But let’s talk about real estate trends in Houston considering Texas is quickly becoming the most moved to-state in the US next to Florida according to Life Storage Blog. The blog also notes that living in Houston is much more affordable than many other large cities across the country. All things considered, Houston’s cost of living is very reasonable, but it does fluctuate based on several factors, including where you live, where you shop and what you enjoy doing to occupy your time. In a city like Houston, living close to work can save you money on gas and commute time, but might cost you more in living expenses. Movoto says as the population grows in Houston, so does the younger crowd. The median age in Houston is now 33 and according to Metrodepth, the Real estate market predictions for Houston suggest that home prices will likely continue to rise through 2019. Supply is a big part of the outlook. The Houston housing market is still experiencing a shortage of inventory relative to the demand from buyers in the market because unemployment rates in Houston are down tremendously. As of 2019, the unemployment rate is close to 3.7%. Since low unemployment and housing markets typically go hand in hand, inventory is also low. Metrodepth also reports that according to a January 2019 report from the Houston Association of REALTORS® (HAR), the average home price in Houston rose to $306,314 in December 2018. That was an increase of 4.7% from a year earlier. The median price for a single-family home rose 3.4% to land at $240,000 in December.
Sharestates has formed many relationships with builders in Houston over the years, and recently funded a handful of exciting properties. The first property is located in a neighborhood called River Oaks. This is a residential neighborhood that is located in a very central part of Houston. This area was named one of the most expensive neighborhoods in Houston. The median home price is over $2.5M. River Oaks has its own police force and River Oaks elementary school was ranked best in Houston.
This property is a 4 bedroom, 5 bathroom house that is a little over 5,000 square feet. Rehab consisted of a new roof, demolition, electrical work, plumbing, new kitchen, and bathroom cabinets, all new appliances and much more.
- Loan Amount: $2,660,000
- Loan Type: Purchase
- Property Type: Residential
- Rehab Budget: $370,700
- LTV: 77%
- LTC: 79%
- ARV: 65%
This next property is a commercial property located in the heart of the business district of Houston very close to Minute Maid Park (home of the World Series championship team, the Houston Astros). Property rehab included drywall, appliances, countertops, and interior paint.
- Loan Amount: $1,950,000
- Loan Type: Refinance
- Property Type: Commercial
- Rehab Budget: $53,500
- LTV: 65%
- LTC: 62%
- ARV: 63%
The next property is located in an area called Memorial Village. Memorial Village is made up of 6 small villages each with its own independent charm. This property was a complete “fix & flip”. The total rehab budget was over $500K. Rehab included demolition, a new kitchen, painting, new HVAC system, water & sewer system, drywall & spackle, roofing, and much more.
- Loan Amount: $1,800,000
- Loan Type: Refinance
- Property Type: Residential
- Rehab Budget: $535,000
- LTV: 71%
- LTC: 110%
- ARV: 64%
For more information on properties we have funded or for more information about our loan programs click below.
Homeowner trends from 2002 to 2018 show that fewer people overall own their own homes. Demographically, people are moving from rural areas to urban areas where homeownership levels are generally higher. Also, homeownership among the white population is about 70 percent versus 50 percent for blacks and Hispanics. Homeownership is also lower among people under 35 than for older people. In fact, the stats show that the older a person is, the more likely they are to own their home.
In 2004, 82 percent of people between 55 and 64 owned their homes, but that level had dropped to 75 percent in 2018. Seventy-seven percent of people 45 to 54 owned their own homes in 2004 versus 70 percent in 2018. Among 35 to 44-year-olds, homeownership dropped from 69 percent in 2004 to 60 percent in 2018. For Americans 35 and under, homeownership peaked at 43 percent in 2004 and had fallen to 36 percent by 2018. These stats may be alarming, but it indicates a growing market for rental properties.
Builders Should Look to New Construction on Rentals
Single-family rental properties have been the norm in metro areas all across the U.S. But that could be changing as cities and states all across the country are doing away with zoning ordinances that favor single-family only residential areas. That could mean there is about to be a shift to multifamily rental properties from New York to California. If that is the case, then I’d expect a run on commercial financing for these property construction projects.
Millennials have been putting off big decisions in their lives for later than previous ages. That means they tend to rent instead of buying well into their 30s and 40s, which is why we have such a low degree of homeownership. It also means they are a key market for multifamily housing. Builders who want to compete in the urban markets would do well to look toward multifamily.
Single-Family Rentals Aren’t Going Anywhere
While there will likely be a surge in multifamily rental property construction and financing beginning within the next two to five years, single-family rental properties won’t disappear. That’s because institutional investors have been on a buying spree. They’re buying up starter homes and renting them out to young families. As long as there is a rental market for single-family residential units, you can bet institutional investors will hold onto those properties. They won’t sell until the market shifts to accommodate more buyers.
What this means for builders and borrowers is that single-family construction likely won’t be going away just because multifamily picks up. In fact, you might find a lucrative market to build and sell single-family rentals to institutional investors.
What Kind of Financing Is Available For Rental Construction Projects?
Builders looking to get into single-family or multifamily new construction projects will have to figure out the financing on those projects early in the planning phase. Will you seek traditional bank financing or look for alternative funding channels? Don’t forget there is a new class of private investor with cash in the pocket ready to help you finance your projects. Real estate crowdfunding platforms allow private accredited investors to finance new real estate projects, whether they be single-family or multifamily.
To get access to this investor money, you simply create an account at Sharestates and present your project for review. Using a 34-point underwriting process, your project will be vetted to see if it meets the expectations of our investors. If it does, you can have your new rental construction project funded from more than one funding source. The process is faster than going the traditional money route.