The Innovative Approach to Real Estate You Can Learn from Commercial Lenders

By Charles Sells

If you are like most real estate investors, you probably do not pay too much attention to what really big commercial lenders are doing. Particularly in 2020, when much of the commercial real estate market was in total upheaval anyway, real estate investors preferred mainly to focus on their own markets (generally residential in nature) and leave the “guys in the really big buildings” off the radar. However, now that we are moving quickly toward the second quarter of 2021, it’s time to broaden your scope and take a look around. You might learn something from the “big boys” most residential investors spend most of their time ignoring completely.

Here’s the deal:

A recently released forecast of direct lenders and financial intermediaries conducted by France Media, a business-to-business media company that specializes in publishing materials for a wide variety of real estate industries, indicates that 84 percent of the respondents to the survey “expect the total dollar amount of commercial and multifamily loans closed by their firm this year to increase when compared with 2020 deal volume.”

At first, that might not seem particularly groundbreaking. After all, despite the pandemic, our county is in the middle of a real estate boom that may well turn out to be as unprecedented as COVID-19 and pretty much the whole of 2020. However, when the research team breaks down the numbers, things start to get really interesting.

These big financial firms are not expecting little leaps in lending volume; they are expecting 50 percent (or more) loan volume growth in many cases, and 10-20 percent on the low end. Furthermore, they are not shying away from retail, office, and hospitality space even though those industries were still struggling at the end of Q1 2021 with no clear end in sight.

This group is extremely optimistic, and real estate investors struggling in competitive markets at present can take a few lessons from the lenders’ outlooks.

It’s Not the End of Multifamily

One of the biggest takeaways from the report is that multifamily is “the most frequently cited property sector by respondents” as the answer to where the “most attractive financing opportunities” exist today. In fact, 93 percent of the respondents cited multifamily. This has several ramifications for real estate investors:

  1. If you thought the “era of multifamily residential living” was over, you were probably wrong.
  2. Single-family residential investors may not experience the windfall of financing many expected to come their way as financial firms that historically funded multifamily deals began to search for alternatives.
  3. Nontraditional multifamily residential is definitely an emerging asset class (another topic for another day).

Even if an investor is not interested in buying multifamily properties themselves, they will benefit from an awareness that these projects still represent a viable piece of the market. Many “homegrown” experts have sprung up during the pandemic, warning over Zoom calls and Facebook Live sessions that a multifamily exodus is coming. Investors should take those warnings with a grain of salt, given that these big lenders think multifamily properties are among the best bets around.

More Multifamily for Them Means Bigger Opportunities in Single-Family

While huge, single-family, build-to-rent projects may attract the attention of many of the respondents in this survey soon, the fact that they are not having any trouble finding opportunities to lend their capital could make finding funding a little harder for single-family investors. Active fix-and-flip and rehab-to-rent investors should take note and expect to look a little harder for the private and hard money they need to get deals done in 2021.

On the other hand, if you are a real estate investor with a solid understanding of the single-family space and capital to lend, this may be the year to take your cue from “Big Lending” and start looking at increasing your own private loan portfolio. Whether you have already been making the occasional hard-money loan or you have never considered it before, there is going to be a rising demand for private money as the year progresses. Real estate investors with experience actively doing deals are among the best-qualified private lenders out there because they tend to understand exactly what the pros and cons are on potential deals.

Of course, most real estate investors just getting involved in private lending tend to stick to the areas in which they have experience. If you like jumping into something new with both feet, however, then take a word of warning from the FranceMedia survey. One survey respondent, Ben Kadish of Maverick Commercial Mortgage in Chicago, called sectors other than multifamily “the Wild West.” Lenders also predicted that the retail and restaurant sectors would need at least three years (36 percent) to recover, while another third predicted two-and-a-half years would be needed; 41 percent said two years would be needed.

“Borrowers will need to envision entirely new uses/concepts for their assets and invest heavily to reposition properties for success in a very different world,” Charles Krawitz, vice president of commercial lending and loan trading at Alliant Credit Union, predicted. Another respondent said his firm is, not surprisingly, “bullish on the build-to-rent, single-family residential product.”

How to Apply This Information to Your Capital Situation

So, now that we know where big financial firms are placing their bets in 2021, it is time to talk about your financial situation and your investment strategies. Many real estate investors are finding this year to be extremely hard due to the highly competitive nature of nearly every market in the country.

With so many retail buyers out there bidding aggressively on single-family properties, it can be difficult to adhere to the classic “buy-low/sell-high” adage that real estate investors love so well. Unfortunately, if an investor bids like a retail buyer, that investor will probably end up with little or no profit margin when the time comes to exit the deal.

Sure, some “wealth experts” will tell you that it’s OK to even buy over retail value if you are going to hold the property as a rental (and, in some cases, if you are very, very sure of your market, it could be), but generally speaking that is not sound advice. Also, generally speaking these experts are selling turnkey rentals priced far above market value. Unfortunately, this means that the pickings are getting slim for many real estate investors out there in 2021.

Fortunately, there is a solution: private lending and hard-money lending. By definition, a private loan can be a short- or long-term loan transaction, but usually when these loans are made in real estate they are for a period of months or, at most, a few years. There are huge advantages to private lending, including:

  • You simply collect payments and interest rather than trying to race to get a deal done when there are supply and labor shortages.
  • The asset, the private note, is backed by equity-rich property, since private loans tend to be for 70 percent of the after-repair value (ARV), if not for even less.
  • Unlike real estate, in which it currently may be hard to find someone to sell you a property, there is a huge demand for private lenders in the real estate space at present.

Also, while private lending and hard-money lending often feel like solo endeavors, real estate investors should remember that there are boutique investment firms that will work with new private lenders to help them find and then lend on individual deals. This year will be the year for private lenders to thrive even as some real estate investors struggle to maintain their transaction volumes.

If you have concerns about the competition and the prices in your market, then making private or hard-money loans could be the best solution for you.

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