Investing in commercial real estate in 2021 and for the foreseeable future does not come without its anxieties. Not only have real estate (and residential housing) prices skyrocketed in the wake of COVID-19 and its many variants, but the prices of the products you’ll need for renovations, like lumber and steel, have also gone up significantly. That is, you get the products at all with the supply-chain bottleneck that has literally gripped the nation.
According to a recent business article, if you’re an investor you are well aware of the apprehension that can go with attempting to finance real estate properties, even prior to the pandemic. The search for the perfect lender who can offer the perfect rates and terms can seem endless and all too often frustrating. In the words of one real estate professional, “the task can seem daunting.”
It doesn’t matter if you’re a newbie to the commercial real estate investment world or an experienced professional, the massive amount of financing information available at your fingertips on the world wide web can leave you with a severe case of agita. But take a deep breath and relax. There are terrific lending opportunities out there so long as you learn to sift out the bad ones from the good ones.
That said, the best most painless opportunity might just come in the form of private money lenders.
Differentiating between Private Lenders and Banks
Like you might assume, there are some pretty big differences between traditional centralized banks and private lenders. However, financial experts will tell you that banks are usually the first “go to” for the best financing terms and rates.
But, when you look at the small print, only a very small percentage of banks are actually willing to approve real estate-related financing loans, even if your business is both highly regarded and your credit/assets, in stellar shape. In these days of serious economic slowdown, high inflation, and soaring fuel prices which have been instituted by design by the current administration, lending to real estate businesses is seen as risky at best, disastrous at worst.
Also, banks fall under the jurisdiction of heavy federal and state government regulation which can possibly only get worse (one recent candidate for a high Washington DC banking regulation post supports allowing banks to go bankrupt in order to create a single, centralized, government operated entity, the likes of which you might see in Communist China).
Traditional Bank Borrower Requirements
The list of requirements a potential borrower must meet in order to even be considered for bank financing on behalf of a commercial real estate project include but are not limited to the following:
–Not only a “perfect credit score,” but zero credit issues at all, including credit issues from many years past.
–The property you are seeking to invest in must be “stabilized.” That is, the property must be able to DSCR (debt-service) to refinance and/or purchase outright.
–Your loan limit will be small. No more than $15 million.
–Despite there being a small loan cap, the property you are seeking to invest in must be located in a Metropolitan Statistical Area (MSA) or what you might think of as a major city.
Real estate experts will tell you that if you do indeed meet all of these qualifications and more, a human being won’t be in charge of approving your loan, a computer software program will. Plus, you will be subject to outrageous fees such as a document preparation fee which can run upwards of $15,000. And did we mention the three month average wait time to see if you’re approved?
Said to be entirely different from commercial bank lending, private investing has therefore garnered a bit of a bad reputation among the big banks. Rumors abound that private lending rates and fees are astronomically high which means you would never make a profit on your commercial real estate venture. But this is simply false information or FUD (fear, uncertainty, and doubt).
With that mind, these are some of the major advantages of choosing private lending over that of the banks:
–You can get financed even with a credit score as low as 620 since all credit issues are examined on a “case-by-case basis.”
–Offsetting factors like possession of strong assets such as housing, precious metals, stock market investments, crypto portfolios, and more, combined with three years of recent real estate investment experience goes a long way in the approval of a loan and may even override a relatively poor credit score.
–Private lending offers flexible rules and guidelines which allow market rents for DSCR conditions along with a three month grace period for property leasing.
–Investment is smaller cities is encouraged. Even cities with populations as low as 150,000.
–It’s not unusual for residential and commercial loans of up to $100 Million to be approved.
–A human loan officer approves your loan. Not a piece of software.
–Approval process can take as little as two working weeks.