Private Money Has Become Semi-Institutional
What Does the Future Hold for These Capital Sources?
by Barry Harari
Are you a real estate investor looking for funding capital? As plentiful as cash seems to be right now, real estate speculators may find it challenging to secure the capital they seek to get a project off the ground. While cash is king and yes, there is plenty of it out there, it helps to know where to look.
Conventional lending institutions likely offer the most mainstream approach to securing funding for today’s real estate investing. The advantages are obvious, including reliable liquidity sourcing and the ability to forge a relationship with a specific lender that will be there for current as well as future needs. Conventional sources will always be the cheapest way to get one’s hands on needed funding both from an interest rate perspective as well as origination costs. No other source can compete with the low cost of capital offered by conventional players. Conventional lenders also offer much longer loan terms (5-20 years) when compared to other available channels.
Private Money Today
“Private Money” sources have blossomed into a popular and more widely available funding approach for today’s real estate investor. Formerly referred to as “hard-money” lenders, private lenders are considerably costlier (both in up-front fees and interest rates) and they offer much shorter loan terms (1-5 years in most cases). Why would anyone opt to go the private money route considering the higher costs? Private money lenders mostly care about the collateral profile and are willing to overlook many other underwriting challenges that a borrower may run into during under-writing. Many private money lenders do not check the credit history of the borrower. If a borrower has no criminal record or bankruptcy history, they are likely to avoid any serious setbacks from a lender’s file review protocols. Sure, private money lenders have much stricter limits when it comes to loan amounts. Most private money lenders top out at 70% of a project’s finished value. Conventional sources may go higher especially if they have plenty of favorable experience with the borrower from prior projects.
Private money lenders were known as being more of a niche player in real estate funding for many years. Nothing could be further from the truth today. Today, these lenders have become semi-institutional, obtaining their funding sources from family office funds, hedge funds, regional banks and national banking institutions. Some of these capital sources normally eschew pursuing these types of loan applicants themselves opting to “purchase” this type of debt on the secondary market straight from the originating lenders themselves. Many of these semi-institutional private money lenders are the silent partner funding source to local-market lending operations. The bottom line is this… a borrower doesn’t care from where the money comes as long as it’s green. If a borrower knows the market terrain well enough, they will be plenty aware of the various risks and costs attributed to each type of lender out there.
Private Money Tomorrow
So, what does the future hold for these capital sources? To answer that question, one must first examine the near and mid-term prospects for the real estate market as a whole. Walk the floor of an industry conference and the general sentiment one will hear is optimism. People in the real estate industry ranging from lenders to borrowers and all types of service providers (think appraisers, trustees, fund controllers, contractors, etc) have a vested interest in seeing this bull market continue its run of the last dozen or so years; however, experts also can read the writing on the wall when it’s dubious. The general sentiment on the street is one of confidence and optimism. Many pundits and experts believe that the real estate market, especially the SFR product (single family residential) has enough wind in its sails to carry it at least another two years before we see any headwinds. If a pandemic couldn’t derail this red-hot market, few things will. Interest rates made their move upward and many believe stability has returned there as well. If the market remains strong, so will the flow of capital coming from the lenders’ spigots.
