eXp Commercial | Chicago Multifamily Brokerage

Sunday, December 18, 2022

Multifamily Rent Roll Curation - Next Steps in Portfolio Management

Real estate investors typically diversify their geographic footprint to reduce their overall portfolio risk profile. But what if investors dug deeper and proactively diversified their property-level rent roll to minimize risk exposure for a given asset? Multifamily owners could soften the impact of market downturns on their portfolio and potentially take a more bullish approach to other risk levers in the portfolio, such as leverage or geographic concentration if high conviction opportunities presented themselves.

Portfolio Theory

"A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies." - Harry Markowitz.

Portfolio Theory is a framework for investing. It states that if you combine assets with low or negative correlations, you reduce the overall risk of your portfolio. An example could be oil company stocks and airline stocks, which typically move in opposite directions as the price of oil changes (since oil is a significant expense for airlines).

Potential Multifamily Applications

Multifamily risks are likely higher than many investors realize. This asset class benefits from government-subsidized financing, which encourages higher leverage due to the lower interest rates. High leverage increases the risk profile of the investment, and when combined with higher pricing from the surge in investor interest in multifamily properties in recent years, the financial risk profile of multifamily is increasing.

Tenant rent roll curation can lower risk at the individual property level. For example, in an economic downturn, your property performance could be higher than the overall market or submarket (lowering your property's beta) because you, the owner, have proactively selected tenants that collectively reduce your risk profile. Your rents may still fall, but at lower rates than the submarket.

Additionally, the proactive tenant curation model can offer valuable insights into the risk profile of your tenant base, allowing for more accurate forecasting and portfolio-level risk assessments.

How It Works

Let's consider a multifamily property in Las Vegas.

Las Vegas was one of the most impacted markets during the Great Recession of the late 2000s. The employment loss was significant, and investors suffered from lower rents and decreasing values.

However, not all employment sectors fared equally.

Source: Bureau of Labor Statistics

The Education and Health sector (defined by the BLS) performed much stronger than the broader employment trend. The Education and Health segment never reached year-over-year negative job losses as the industry was insulated from the broader economic trends of the day. This sector comprised 10.7% of the Las Vegas employee market as of June 2022.

Property in Las Vegas (a highly cyclical market) with a high proportion of tenants from stable employment sectors should have improved performance compared to comparable properties with tenants from more volatile sectors.

Great. I’ll buy a property next to a medical center.

The Great Recession was one of the most severe recessions in recent times (before Covid-19) and could be a helpful benchmark in the absence of a global pandemic.

Yes, you can invest in an asset adjacent to a medical center where investors can benefit from these strong and stable employment trends. But market participants already know this - thus, the price will likely command a premium. Intuitively, many investors assume that medical or educational employers (like universities or hospitals) are anchor employers that offer growth opportunities and stabilize the surrounding job market.

Yes, you can acquire it, but you'll pay a premium for the luxury of tenants with stable employment bases.

There Is Another Solution – Remote Work

The Covid-19 pandemic has offered employers (and employees) an experiment in remote work. Millions of people are no longer geographically tied to their employers. From a real estate perspective, they have become free agents.

The distribution of these remote workers is still shifting as employees assess their options. According to McKinsey, an estimated 35% of employees can work from home five days a week, which offers the possibility of migration to a better lifestyle or financial opportunities.

Since remote workers are not tied to their geography, they can tap into the national remote labor market, which is much larger. Although data on the topic seems sparse (since it’s a new phenomenon), it seems possible that skilled remote workers could benefit from lower overall unemployment rates since their employment pool is deeper and more liquid.

We are likely at the beginning of an unprecedented sorting wave as the population assesses their options across national and international borders. Multifamily investors can take advantage of this process by targeting remote workers directly. They can use remote workers as the portfolio management tool to curate their rent roll and position it for success according to their goals.

How To Do It?

Organize your property to appeal to the target audience. Remote workers likely value the basic amenities, such as high-speed and reliable internet access, as well as community-focused amenities, such as expansive WeWork-style common areas, since they don’t have physical meetings with colleagues.

A disproportionate investment in amenities that appeal to the target audience is a solid signal to the target market that they are sought-after.

Additionally, financial incentives can be tailored to the target audience. For example, multifamily owners have long used tools such as preferred employer discounts to entice residents to rent their units. Unfortunately, these discounts are usually expensive (3% of gross rent) and lack precision (targeting only the largest employers in the area). Instead of ongoing discounts, upfront cash incentives can be used as a lower-cost option.

Much more can be done to attract and retain these targeted residents, and these ideas need to be crafted into a distinct marketing strategy.

The Potential Impact

The above example, based on Indeed.com job listing data (for Pre-Covid and May 2022), illustrates the potential diversification benefits of remote worker hubs at multifamily properties. The nationalization of the tenant risk profile from (9.4% to 40%) should reduce the overall risk exposure – possible without reducing the property’s Net Operating Income.

However, investors would not need to immediately target this proportion of units to the strategy to experience benefits. Instead, a step-by-step approach could be implemented with a handful of units being tested until the strategy has been proven.

The addition of high-income tenants who don’t rely on the local labor market can be used to bolster valuations. Additional monetization opportunities could be researched to capture a higher wallet share of the target tenant base.

Summary

Portfolio management can move from macro to micro through the proactive use of job category targeting across individual property rent rolls and overall diversification benefits from lower reliance on local labor markets. This curation can unlock significant additional value above and beyond the expected return from a multifamily property in that location (your beta).

We are in the early innings of remote worker sorting across the country. It will present opportunities for investors and workers to create more win-win dynamics as new needs are recognized and satisfied in the market.

Source: Multifamily Rent Roll Curation – Next Steps in Portfolio Management

https://www.creconsult.net/market-trends/multifamily-rent-roll-curation-next-steps-in-portfolio-management/

Saturday, December 17, 2022

If You're Hesitant To Hire A Broker For Your Multifamily Property Read This

Multifamily brokers frequently hear this comment from apartment property owners: “I don’t want to list, but you can bring me a buyer.” Their reasons sometimes include previous bad experiences, fear of getting “tied up” in a formal agreement, tenants finding out the building is for sale and making anxious calls to management, thinking the commission will be halved, or not really being interested in selling. Whatever the reluctance, the reality is that if an investor wants or needs to sell, the best thing they can do is hire a broker. Let’s address a few of those common objections first.

If you had a previous bad experience, more than likely, you hired the wrong broker. The specific agent you hire or the firm they work for should have experience in both the geographic market and transaction size — ask for their track record. While you’re at it, ask for references from clients, and make sure at least one is for a listing that did not sell. These simple steps will give you insight into whether you’re working with a pro.

As for getting “tied up” or having anxious tenants because the building is selling, a professional broker typically allows you a cancellation right for the listing. If there are deadlines you need to meet, make sure your broker understands. And while no broker can guarantee tenants won’t find out the building is being sold, experienced brokers can modify marketing by limiting showings to only vacant units, specific hours for low visibility, limiting digital footprint tenants might see, etc., to reduce the probability of tenants finding out.

That said, the best course is simply to announce to tenants that the building has been listed for sale, explain the sale may not be successful, and assure them that their lease runs with the building, not the owner, and is their protection during the lease term against rent increases or being forced to move.

These are certainly not the only reasons clients are reluctant to list but whatever is yours, talk to your broker about your real concerns. A seasoned broker will most likely have previously faced a similar challenge and should be able to address your concern. But this only addresses your concerns about why you shouldn't hire a broker — it doesn’t explain why you should.

The first benefit is understanding the value of your property. A professional, qualified broker who specializes in your asset or area will be able to give you a price range to expect so that you can decide whether selling makes sense. If you move forward, this specialist will also have databases of the most qualified, active investors in the market and have relationships and influence with them. The ultimate buyer of your property will more than likely come from one of these relationships. But a broker won’t rely exclusively on these relationships. A good broker will also create a professional marketing plan with appropriate amounts of promotion across email, mail, websites, and listing services.

All this leads to the most important part of hiring a broker: competition. Trying to sell your building by letting a broker “bring you a buyer” is like having an auction for a painting, and one person shows up to bid. If the building is priced correctly, a professional marketing plan will create a competitive environment for investors so that the process itself determines not what the market wants to bid but what the market is willing to bid.

Larger portfolio owners might be reluctant to list with a specific broker because they have relationships with numerous brokers or firms in the market, and they don’t want to offend anyone by choosing a competitor. Instead, they tell every relationship to “bring me a buyer.” If this is you, think a few more steps down the chain of events.

First, this may only create chaos. You not only have brokers racing each other to bring clients, but each is advocating to you why their buyer is the best so that they can get the commission. Then you ultimately have to pick one buyer/broker anyway and disappoint the others after they’ve put work in. Alternatively, a listing agreement assures a commission for the listing agent if the property sells; therefore, there is no incentive to advocate for any one specific buyer.

An additional benefit of listing a property with a broker comes after a sale contract is signed. Any number of unexpected or challenging issues can arise during the escrow period of a sale. A seasoned broker has probably experienced something similar before. This person will also quarterback the entire process of due diligence, appraisal, and loan approval.

The most important benefit of exclusively listing your property with a broker is representation. You will have a hired gun with a fiduciary obligation to advocate for your best position in a deal. A professional broker will be ethical, transparent, and fair but will also be your personal fighter in the arena of marketing, negotiation, and escrow management.

This short list does not address every objection an owner would have for not listing, nor every benefit you receive from hiring a professional broker, but hopefully, it gives you a few things to consider. If you want to maximize your price and minimize your anxiety with the selling process, hire a broker. The benefits far outweigh the cost.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

Source: If You’re Hesitant To Hire A Broker For Your Multifamily Property Read This

https://www.creconsult.net/market-trends/if-youre-hesitant-to-hire-a-broker-for-your-multifamily-property-read-this/

Friday, December 16, 2022

Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

Thursday, December 15, 2022

10 Charts That Summarize The U.S. Economy - Hint: It's A Mixed Bag

We’re going to talk about the economy. I’m not going to make economic predictions here, but I’m going to try to assess where we are (or might be) in this crazy economy.

Are we in a recession?
Are we about to enter a recession?
What is the biggest risk to our financial future?

Are We in a Recession?

A lot of experts, pundits, and screaming headlines would say yes.

JP Morgan Chase CEO Jamie Dimon thinks we are headed for a recession. Cantor Fitzgerald doesn’t think the bear market is over. The S&P 500 has lost about 17% year-to-date. With all of these negative headlines, the world seems awfully dark. But just how accurate are they?

“Recession” Comes Up More Often, But Do the Headlines Match Reality?

Nobel Prize-winning economist Richard Thaler says there’s no recession, despite two straight quarters of negative GDP growth earlier this year. According to Thaler, calling the U.S. economy recessionary is “just funny.”

Besides Thaler, we can always trust the government, right? The Deputy U.S. Treasury Chief predicts a soft landing. He believes the Fed may tame inflation and avoid a recession. Or at least that’s possible. He says we have the capacity to take steps to bring inflation down but also make the needed investments to make sure the economy continues to grow he said.

Lauren Baker of ITR Economics is a distinguished economist who can provide reliable information for the industry. She did a great job explaining at BPCON22 a contextually sensible view of why the economy might not be as bad as people think and why we may have a soft landing. I will show you several slides from her talk with a brief explanation.

While U.S. GDP declined two quarters in a row, Lauren pointed out that it’s still at near record levels. In fact, these would still be record quarters if the last quarter of 2021 hadn’t been so high. In context, the GDP looks very healthy.

Lauren used the following slide to explain that slowing economic growth will result in less supply chain pressure. Whether you are an investor, a consumer, a house flipper, or a college student, you’ve probably felt the pain of the supply chain issues since Covid started. Lauren explained that slowing economic growth would relieve some of these supply chain issues.

us supply chain — *Global Supply Chain Pressure Index to U.S. Purchasing Managers Index (2000-2022) – ITR Economics*

Lauren sure is upbeat! A fact that I really appreciate!

The Producer Price Index, which often leads the Consumer Price Index, showed a sharp decline. This could indicate that the Federal Reserve’s interest rate policies are working.

Government spending usually leads inflation by 23 months. After a record increase during the pandemic, government spending has dropped significantly, as you will see in the next graph. Will the Consumer Price Index follow?

CPI to government spending — *U.S. CPI to Total Government Spending (1992-2022) – ITR Economics*

Lauren used the following curve to show past and predict future inflation levels:

cpi — *U.S. CPI (1992-2022) – ITR Economics*

She also discussed the dreaded yield curve inversion. Many of you know that when short-term treasury yields surpass long-term rates, there is “always” a recession on the horizon.

Lauren explained, however, the inverted yield curve we recently saw was only for a few hours one afternoon. It was great for headlines, and newspapers loved it. But does it signal a recession? Lauren also pointed out that there are many yield curves that can be compared. Lauren concluded that this does not necessarily indicate a recession.

us long-term bond yields — *U.S. Long-Term Bond Yields to 3-Month Treasury Bond Yield (1998-2022) – ITR Economics*

The Federal Reserve shows very low commercial delinquencies, which is great news. This graph going back to the early 1990s is pretty impressive. Banks have every reason to be lending still—right?

delinquency rate on commercial real estate loans — *Delinquency Rate on Commercial Real Estate Loans (1992-2022) – St. Louis Federal Reserve*

Unemployment is shockingly low, and there are a lot of job openings right now. Lauren explained that the labor shortage would not end anytime soon, with millions of job openings. These four sectors alone have almost 2.1 million job openings.

us job openings — *U.S. Job Openings by Industry (2018-2022) – ITR Economics*

U.S. retail sales are slowing, but they are still near record rates.

Lauren explained that while interest rates are relatively high now, they are still negative when adjusting for inflation. Meaning that even if you took out a mortgage today, you could look at it like you are making money while borrowing money. Dave Ramsey would hate me for saying that.

us mortgage rates — *U.S. 30-Year Mortgage Rate to New Home Median Sales Price (1971-2022) – ITR Economics*

Lauren had a lot of great thoughts as she summarized. Here are her three main points on macroeconomic trends:

U.S. economic growth is dissipating into a “soft landing.”
Underlying fundamentals suggest commodity prices should stabilize: War is a risk
Supply chain issues to improve

Lauren concluded that a soft landing is possible. Even likely! That made me very happy, and the audience of about 2,000 in San Diego breathed a sigh of relief.

Should You Take Comfort in this Potential Soft Landing?

Not necessarily. Why? Because many factors could cause this economy to topple. The war in Europe is undoubtedly one of them. But there are others. One you might not have thought of—the squeeze on credit markets!

Source: 10 Charts That Summarize The U.S. Economy – Hint: It’s A Mixed Bag

https://www.creconsult.net/market-trends/10-charts-that-summarize-the-u-s-economy-hint-its-a-mixed-bag/

Wednesday, December 14, 2022

FHFA Announces 2023 Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac

Washington, D.C. – The Federal Housing Finance Agency (FHFA) announced today that the 2023 multifamily loan purchase caps for Fannie Mae and Freddie Mac (the Enterprises) will be $75 billion for each Enterprise, for a combined total of $150 billion to support the multifamily market. The 2023 caps reflect an anticipated contraction of the multifamily originations market in 2023.

To ensure a strong focus on affordable housing and traditionally underserved markets, FHFA will require that at least 50 percent of the Enterprises’ multifamily business be mission-driven affordable housing.

“The 2023 multifamily loan caps, coupled with a new mission-driven category for workforce housing properties, will continue to ensure that the Enterprises have a strong commitment to addressing the need for affordable housing,” said Director Sandra L. Thompson. “The new workforce housing category will provide incentives for conventional borrowers to maintain rents at affordable levels for extended periods of time.”

In addition, FHFA has changed certain definitions of multifamily mission-driven affordable housing in Appendix A of the Conservatorship Scorecard. In 2023, FHFA will allow loans to finance energy or water efficiency improvements with units affordable at or below 80 percent of AMI to be classified as mission-driven, up from 60 percent AMI in 2022. This increase will allow the Enterprises to expand their effort on energy and water conservation measures at workforce housing properties.

To ensure the Enterprises continue to provide sufficient liquidity and support in the multifamily mortgage market, FHFA will continue to monitor the multifamily mortgage market and will update the multifamily caps and mission-driven requirements if adjustments are warranted. However, to prevent market disruption, if FHFA determines that the actual size of the 2023 market is smaller than was initially projected, FHFA will not reduce the caps.

2023 Multifamily Caps Fact Sheet

2023 Appendix A

Source: FHFA Announces 2023 Multifamily Loan Purchase Caps for Fannie Mae and Freddie Mac

https://www.creconsult.net/market-trends/fhfa-announces-2023-multifamily-loan-purchase-caps-for-fannie-mae-and-freddie-mac/

Tuesday, December 13, 2022

Do You Know Where Your Money Is Coming From? Navigating Today's Lending Market

There is no doubt that the real estate market has been a wild ride since the pandemic changed the normal course of our lives over two years ago. Lending did not escape the effects of Covid-19, and many active investors have learned more about the loan process than they ever did before the pandemic.

In the spring of 2020, some lenders left active investors in a bind, closing their doors or halting lending while they evaluated the new risks in the marketplace. Over two years later, the market is changing again, and investors need to know how to pivot to keep their pipeline flowing. While everyone is watching rates increase, they are taking their eyes off the real question right now: Can they close this loan?

Realizing a preapproval and rate and term sheet are not set in stone will go a long way in the current lending environment. Lenders are changing underwriting criteria, not making as many or any exceptions to lending guidelines, and lowering loan-to-value midstream in the escrow process. Most investors never thought about the source of their capital before March 2020. The most concerning part of the lending process was getting through underwriting and receiving the message that you were approved and cleared to close. Whatever happened behind the scenes inside the lending machine wasn’t a concern to an active investor. As long as money made it to the closing table, they were happy. This strategy worked until the capital never made it to the closing table.

When lenders suddenly turned off the spigot to cheap capital, investors scrambled to save deals any way they could. This pushed private lenders with their own capital to lend to the forefront in the hunt for leverage. Active investors scrambled to find funding or negotiate contract extensions to restart the lending process.

Private lenders who lend their own capital have more control. Large nationwide or even regional lenders have significant strings attached to the capital they lend out, and those strings are pulled by forces outside the lender’s control.

For example, large institutional lenders are often funded by lines of credit from banks or even selling their loans on the secondary market. In both of those cases, there is another entity establishing what they can lend out, where they can lend it, and the pricing of those loans. These lenders require the line of credit to stay open or the capital markets to continue purchasing loans, so they have enough liquidity to keep new loans coming into the pipeline.

What does that mean for you as a borrower? It means that the rates and terms you are quoted may suddenly change, or funding, in general, may be halted at a moment’s notice. So how can you protect your real estate investing business in this period of turbulence?

Start asking questions about how the lender acquires their capital and diversify lending sources based on where they get their capital.

The Four Types of Lenders

For the sake of simplicity, you can think of capital in one of four buckets for alternative lending: national lenders, regional lenders, local lenders, and private loans from a lender who lends their own capital, including seller financing. While there are many flavors and options within each bucket, knowing the general purpose of each can help you decide what type of financing to use for which project.

Alternative lending automatically means it is not going to be the conforming conventional loans you may have used to purchase your own home. Since they are non-conforming loans, the variables offered are numerous and vary greatly. Having a conversation with your lender about the types of projects they fund and general guidelines for their loan products can go a long way to choosing the right lender for the right project.

National Lenders

National lenders are pretty easy to locate. Their brand and names are spoken widely across online platforms, forums, and even REI meetings. Their business model has the borrower and decision maker for the loan the furthest removed from each other. To these lenders, every application and, ultimately, file on their desk is a series of numbers and check marks. A business model like this shows up to the active investor (borrower) with high single-digit interest rates and lower fees, but those come at the cost of higher documentation requirements, full third-party appraisals, and a longer closing time. This group of lenders is often very sensitive to changes in the capital markets or economic outlooks. If you need a deal to close super quickly with minimal documentation, this may not be the best tool to use. On the other hand, if you have time for the closing such as a refinance into permanent debt, this may be a great option to pursue.

Regional Lenders

Regional lenders may not have the brand recognition of “the big guys,” but within their markets, they can be relatively well known. Their mid-range interest rates and somewhat higher fees often come with lower requirements for documentation and longer financing timeframes than national lenders. Depending on the lender, they may require a full appraisal or may opt to do an online valuation through a third party. These regional lenders can be a great option for borrowers that have some unique borrowing challenges, such as new employment or acquiring financing as a new business entity.

Local Lenders

Local lenders tend to be smaller asset-backed lenders or smaller bank/credit unions in the market. They tend to lend in just a certain area of a state or the entire state if it’s small enough (such as Delaware or Rhode Island). These local lenders usually have higher rates, especially if they are asset-backed, but also usually have low or no documentation requirements. This translates through to a borrower with higher rates and usually higher fees. These asset-based lenders can often close quicker and use some sort of in-house valuation methods for the real estate securing the loan. Credit unions may also use the same valuation tools but often want a higher level of documentation to understand the lending opportunity. For investors operating in one particular market, this classification of lender tends to be the most helpful since they are local. This class of lenders understands the market they are lending in and has experience with other lending opportunities in the same area.

Individuals

Lastly, we will look at loans that come from individuals, or what we term “private lenders .”These loans come from capital that an individual or their business entity has. These individuals are often seeking to have passive income or put their retirement funds to work in real estate versus the stock market. Depending on the amount of capital they have available to them, they may not always have the liquidity to fund a loan when the capital is needed. Many of these lenders work with established networks of borrowers, sometimes rolling capital from one deal to the next with the same borrower. These lenders may have very low documentation requirements, flexibility on the type of properties they are willing to lend on, and vary in terms of interest rates, fees, and length of the loan. They also can generally close very quickly, sometimes within a few days if needed. While they won’t be the cheapest or longest-term loan out there, the flexibility this type of lender offers more than makes up for it.

The Type of Lender Determines the Variables

As you can see, there is somewhat of a correlation between the documentation and underwriting guidelines and the rate being charged. When you, as a borrower, can show the standards a lender believes are lower risk, you can then be rewarded with a lower rate. In addition, other value-add components can also increase annualized interest rates and fees being charged. If a lender can get a deal closed in three days with minimal documentation, that can be a more expensive loan because the borrower needs to move quickly or is unable or unwilling to go through a more thorough vetting process for the loan.

Conclusion

Understanding what your needs are for financing each property really allows you to find not just a lender but the right lender for the job. The lender’s ability to close the loan is more important than rates and terms right now. Ask questions about the lender’s access to capital and if that access is likely to change in the next several weeks. Depending on the size of the lender you are speaking with, they may not be able to answer that question, but thinking about this as a borrower can never hurt to consider. Keeping another lender in your back pocket that may be able to close quickly, even if it is a higher rate, maybe the difference between closing or not.