4 Sources of Alternative Lending in Today’s Real Estate Market
4 Sources of Alternative Lending in Today’s Real Estate Market
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The financial meltdown of 2008 caused long lasting and permanent changes in the ability of commercial real estate borrowers to find the capital they need to refinance their debt or borrow money for new real estate investments. These borrowers were not alone.
The world of small business finance also suffered from a severe capital shortage as the largest banks drastically cut back funding loans to these types of borrowers. Today, there’s a new world of “Alternative Lenders” available, but who are these lenders and what alternative financing options can they offer?
Alternative Financing Sources in Commercial Real Estate
Alternative financing for commercial real estate refers to non-traditional funding sources outside of conventional bank loans, including credit unions, private lenders, crowdfunding platforms, and sale-leaseback. It offers investors and developers access to capital for purchasing, developing, or refinancing commercial properties when traditional financing is not available or suitable.
Credit Unions
Credit Unions are playing an ever larger and more aggressive role in funding commercial real estate (CRE) loans. Many credit unions are grouping together to create an underwriting and loan serving organization that serves multiple credit unions. As a result, credit unions now have access to the same professional skills that until now, they had been too small to obtain. In addition to becoming more active in the CRE lending arena, credit unions are expanding their role as SBA lenders. Look for this trend to continue.
Private Capital (Non-Bank) Lenders
Private capital lenders are non-bank players in the CRE market. There are an increasing number of groups filling the niche created by bank’s dysfunctional lending abilities which in turn were forced on them by the Federal Reserve regulators.
Private money lenders (i.e. hard money lenders) both locally and nationally are making a comeback. Some of these private money lenders operate off of lines of credit from large banks while others collect their money from private individuals through the creation of Limited Partnerships.
Full disclosure note: Montegra Capital – a Colorado based hard money lender – obtains its funds in this fashion. Montegra is owned and operated by Bob Amter, the author of this article.
Crowdfunding
Sometimes called “peer-to-peer financing,” this approach to raising capital has been used for some time in the high-tech world. Obtaining small amounts of money from many individuals has also been common in funding movies, Broadway shows, and providing startup funds for innovative companies. However, there is a new twist to this concept which is now just beginning to be used to fund CRE deals. Platforms like Yieldstreet allow investors to pool together their funds to offer a non traditional real estate loan. Sale-leaseback
This type of transaction, once very common, has come back into play as an alternative method of being able to control certain types of properties such as warehouses, industrial and manufacturing properties, and even single-tenant retail properties. This type of financing allows the tenant to either develop a new facility or raise capital by selling their existing facility to investors and then signing a long term lease that gives investors control of the property for a 20 to 25 year time frame.
What are the Benefits of Alternative Financing In Real Estate?
Alternative financing for real estate offers several benefits for investors, especially when traditional financing may not be accessible or the best option. Some of the key advantages include:
- Access to Capital: It provides access to funds for individuals who might not qualify for traditional bank loans due to poor credit scores, insufficient credit history, or unconventional income sources.
- Flexibility: Alternative financing options can be more flexible regarding loan terms, repayment schedules, monthly payments, and interest rates. This flexibility can be particularly beneficial for unique or non-standard real estate projects.
- Speed: The process of securing alternative financing is generally faster than traditional financial institutions. This speed can be crucial for real estate investors looking to close deals quickly in competitive markets.
- Lower Down Payments: Some alternative financing options may require lower down payments upfront compared to traditional lenders, which can make real estate investments more accessible to a broader range of investors.
- Development and Rehabilitation Projects: For real estate developers or investors looking to renovate or develop properties, alternative financing can provide the necessary capital for projects that might not qualify for traditional loans due to their riskier nature.
- Asset-Based Lending: Many alternative lenders focus on the value of the property or project itself rather than the borrower’s creditworthiness. This approach can benefit investors with significant assets but less-than-perfect credit.
While alternative financing provides numerous benefits, investors need to conduct thorough due diligence, understand the terms and risks associated with any financing method, and consider consulting with financial and legal professionals before proceeding.
Montegra Capital Resources is a private hard money lender with over 50 years of funding loans in Colorado. If you are searching for a loan for your Colorado real estate investment, reach out today or apply online.