How Investors Can Determine if Private Funding is Right for Them
by Andy Bates
For real estate investors, one of the most crucial considerations for their business is financing the deal. Newer investors may lean towards traditional lending sources such as banks, while established investors with accumulated capital might wonder why they should borrow at all.
Over the past 15 years many forms of alternative financing have come to the forefront. In the industry today, investors are faced with a dizzying number of options to discover, learn, and compare. One such option is engineered for investor audiences. This is an option noted for its speed, flexibility, and the value it brings to investor business. It’s called private lending and there are number of ways investors can determine if private lending is right for them.
Financing for Investors
Investing may begin as a side project for some, but strong real estate investing can become its own mainstay for the investor. As investors grow in confidence and experience, many find themselves doing multiple deals a year or even in a month.
In this event, conventional lenders who check for things like personal debt-to-income can be prohibitive for the repeat investor as it can signal “higher risk” and lead to less favorable terms. In this same vein, checks for standard W-2 income and tax history can also inhibit the investor. Private money is structured with the investor, and their business, in mind.
Many private lenders will forgo these checks in favor of other metrics to ensure strength on the deal and this change of emphasis enables investors to pursue more repeat business. These lenders will still look into borrower criteria like credit and experience but otherwise will focus primarily on the asset. Factors such as purchase price, after repair value, and rent rolls will often have a direct role in private lenders’ decision to approve deals and provide terms.
When investors become more active and increase their volume of acquisitions, this can lead to the development of a portfolio of properties. Continuing to keep investors in mind, private lenders will also have options for portfolio management. These programs help the investor to leverage the equity in their portfolio to continue to expand their business.
Private Lending Particulars
Another reason private money can be so beneficial to investors is lender specialization. The world of commercial real estate is rather broad. The word itself, commercial, conjures to mind images of large buildings, factories, warehouses, office spaces, etc. However, to only consider these options omits many others. When a residential property is purchased not as a primary residence to be used by the owner, but as an investment property to be sold or held for rental cashflow, then any lender funding the deal is underwriting a commercial loan. In this way, any deal on a residential investment property is considered distinct from a conventional mortgage and falls into the category of commercial lending.
Because of this broader definition for commercial, many private lenders will focus on a select array of property types to lend on. This specialization means two major things for the investor. The first is that investors should prioritize working with the right lender for the right property type. A lender who focuses on “true commercial” properties like warehouse or retail spaces likely won’t be best fit for a deal on a single-family rental property and vice versa. What’s more, no two lenders are guaranteed to be the same. One private lender focusing on residential investments may only service properties of up to ten units or a certain dollar amount on the loan. Another lender may only work with deals above a certain dollar amount, handling larger apartment complexes with dozens of units.
Since different lenders are going to be the best fit for different deals, the second thing for investors to consider is getting to know multiple lenders. With private lenders focusing on their own buy-box, it is wise for investors to establish relationships with multiple lenders for differing asset classes. In this way, investors secure coverage for a wider range of investment opportunities and will always have a place to bring a deal of any variety, allowing them to expand their business.
Flexibility, Speed, and Customization
Not only does private lending afford investors flexibility in a variety of asset classes to invest in, but private lenders themselves provide flexibility on the deals they service. Many private lenders will have processing and underwriting done in-house, which enables them to be more flexible on approvals, exceptions, and underwriting in general. These lenders also control the documents they require on a loan file. When doc requirements are kept to a minimum, and underwriting is flexible, it’s a winning recipe for faster turn times and closings than conventional or other forms of lending.
Private lenders are also known for the options they provide to borrowers to customize the deal. Term extensions, interest-only periods, adjustable prepayment penalties, and amortization options mean the investor has room to structure the deal in a way that is most favorable for them.
Making the Call
The most successful real estate investors understand that financing is not just about securing capital; it is about securing the right capital at the right time. Investors can ensure this by reaching out to private lenders today to learn about their programs and offerings.
With a clearly defined investment strategy, and by building relationships with multiple private lenders, investors can operate with greater flexibility and accelerate their growth. More than just an alternative financing option, private lending is a tool for scaling real estate investment businesses with private lenders offering the speed, flexibility, and investor-focused approaches that can make all the difference when closing a profitable deal.
