Funding Alternative Lending Strategies
Four Options for the Real Estate Investor
by Marc Connelly
With traditional lending institutions pulling back, and 4.5 million individuals, couples, and families struggling to find suitable units amid the housing shortage, investors, developers, and homebuilders across the nation are doing their part to close the gap — with the help of some surprisingly innovative financing options. Here are four options built with investors in mind:
Option One
PRIVATE LENDERS
This option, for many real estate investors and developers, checks all the boxes — flexibility, speed, and more accessibility than traditional bank financing — with funding options to suit almost every scenario, budget, and deadline. Think hard money loans which are ideal for fix-and-flip projects, bridge loans for when it’s a race against time to sign on the dotted line, and long-term loans for those lengthy repayment periods.
Private money is often used in three scenarios: when traditional financing is unavailable, for investment properties, and for time-sensitive fix-and-flip scenarios. Private lending is championed for its ability to shape the loan around the investor’s needs, not vice versa. By focusing on the property’s potential — not just the borrowers’ credit — while tailoring the terms and structures to their needs, this flexibility is what makes private lending so sought-after by investors.
Yet, with this immediate access to capital and the ability to fund unconventional projects come higher interest rates and, usually, shorter repayment periods. It is a compromise that many investors choose to make, as bank institutions face a lack of equity liquidity, without enough supply to fill the demand. In 2024, $820 billion worth of commercial property loans are due to mature, with ‘at least 45% of the loans scheduled to come due in 2025, 2026 and 2027’ being behind – something that will make it even more difficult to secure a traditional loan.
Here are some private funding alternatives:
» Bridge Loans // This financing option is designed to fill short-term gaps in financing, such as for light renovation projects, until projects are stabilized or sold, or long-term financing is secured. Bridge loans allow investors to leverage equity from other projects to take advantage of opportunities quickly and compete with cash buyers.
» Fix and Flip Loans // There short-term loans enable an investor to buy and renovate a property quickly and sell for a profit.
» DSCR Loans // Debt Service Coverage Ratio loans are qualified based on the property’s income and its ability to carry the proposed debt. This long-term loan is used for investment properties and does not need personal income verification to qualify, retiring short term debt.
» Ground up Construction Loans // These loans are designed to support new construction projects from the ground up incorporating land acquisition and building costs.
Option Two
FAMILY OFFICE FUNDING SOURCES
Family Office funding has emerged as a significant alternative funding source for real estate transactions. According to a recent study by UBS Global Family Office, 78% of family offices are invested in real estate. Aligning with the right fund could provide an investor with a great partnership for liquidity, thus enabling faster growth. Here are some ways that family offices are providing funding:
» Direct Investment // The Family Office invests directly in a project instead of going to an intermediary such as a REIT, allowing direct control over investment decisions and asset management. Direct investment requires more internal expertise and steady deal flow to meet fund obligations, making it an ideal partner for the experienced operator seeking growth.
» Flexible Financing // Bridge loans, construction loans, and mezzanine debt are capital structures utilized in this option. Direct equity can be aligned with debt and to also create a Preferred or JV-Hybrid approach.
» Co-GP Investments // This type of financing allows a Family Office to lever up its capital stack, making a larger investment, while leveraging the Sponsor/ Developer expertise and infrastructure to get deals done.
» “Programmatic Equity” // An alternative has emerged for smaller investors who need additional down payment and closing costs to close more deals. Emerging equity funds provide the capital for a share of the profit. Leveraging the Private Lender guidelines, these funds allow smaller experienced investors new access to capital to help grow their businesses.
Option Three
SELLER FINANCING
In theory, seller financing is simple — instead of paying the property seller in full, investors pay in monthly installments, allowing them to reserve some equity to plunge into more projects, while also saving on closing costs, capital gains tax, property tax, and homeowners insurance. It is an attractive option, especially for those struggling to secure traditional financing.
Yet, in practice, it is not quite as straightforward. Facing large down payments, higher interest rates, fewer regulations, and the risk of the seller not keeping up with their mortgage payments, it’s vital for investors to protect themselves both through due diligence and rigorous contracts.
With that said, here are some of the many advantages:
» Flexibility // By liaising 1-on-1 with the seller, investors can propose terms and rates that work for them.
» Speed // Investors can expect to close within days without the red tape.
» Unconventional Terms // Borrowers can get creative with their terms, supporting unique projects and scenarios.
» Tax Benefits // Investors will avoid many of the usual taxes associated with purchasing — and owning — a property, namely capital gains tax.
» Accessibility // Investors who are unable to access traditional lending options will be considered, as well as homes in disrepair that cannot be considered for mortgage purchases.
Option Four
BLOCKCHAIN
It is easy to think of Blockchain as an opportunity for tomorrow’s investors. But what is all the fuss about — and is it really an opportunity for today’s investors?
Blockchain opportunities are endless, with many nicknaming blockchain the “internet of value.” From effortlessly converting investments into digital tokens to the way contracts can be managed, blockchain is changing the face of real estate investments — for good. Here’s how:
» Tokenization // By converting investments into digital blockchain tokens, investors have more flexibility, whether that is trading tokens to increase liquidity, inviting investors to participate, improving accessibility by lowering investment minimums, or easily raising capital.
» Smart Contracts // In short, blockchain can make the financing process simple, from supporting secure transactions to automating payments and loan agreements — and even tapping into crowdfunding.
Blockchain is a new approach to real estate funding, where developers can connect directly with a pool of investors, borders are no longer a barrier to investment opportunities, and traditional banking institutions are no longer the people investors must answer to. Instead, they can tap into easy transactions, simple due diligence, and a streamlined way of tracking what is coming in and what is going out.
Still, it’s important to note that blockchain is still in its infancy – and so, the regulatory framework isn’t as advanced as many investors might like it to be.
