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Where Do Lenders Get All That Dough (… and Why Do I Care)?

ifc volatility

May 2022 

Higher interest rates, inflation, and the war in Ukraine is leading to volatility in the real estate investment lending market.  

We are seeing higher long-term interest rates for rental properties, and our bridge loans are feeling the heat.  

Ok, so loan rates are going up. What other impact could economic volatility have on your investment project and your ability to continue building your real estate portfolio? 

Well, depending on where a lender is getting their money, an unstable market can impact how a lender handles loans to real estate investors.

And, unfortunately, some lenders’ funds tighten up, just as investors want to step on the gas.  

Working with a lender that has an ultra-reliable and diverse foundation of funding could mean the difference between you getting your future projects funded … or not. 

 

What Different Lenders Do in Highly Volatile Markets  

In an ongoing, highly volatile market, a lender’s source of funds determines how they lend. Generally, in continued, unsettled market conditions: 

  • Private Lenders: Get nervous. Pull back. 
  • Regional Bank Lenders: Slow or Stop Lending. 
  • Alternative Lenders: Use funding adaptability to remain flexible and reliable. 
  • Hard Money Lenders: Fund most qualified projects and buyers. 

 

Where Lenders Get the Money That They Loan to You 

As a real estate investor, you want access to real estate funding regardless of what the economy around you is doing. If your source of funding dries up, and you do not have a relationship with a lender who still has funding, and who is willing to lend to you, then your ability to grow your portfolio will stall out. 

Let’s look at where several types of lenders get the money that they then loan to you.

 

Private Investors/Limited Partners 

This investor is usually a private citizen lending out of their savings, or 401K’s or other eligible funds. This investor could also be a small group of like-minded individuals that have pulled some money together to invest.  

The private investor or limited partner is most often in the game as a passive investor, and in unsettled conditions, these types of investors get nervous and pull back. 

 

Bank Lenders 

Regional bank lenders use something called a “diversified capital stack,” meaning that the legitimate ones run and fund with both their own capital and investor capital.  

These investors do large volumes, but they do not keep very many of those loans on their books. They typically sell some of their loans in a secondary lending market to large private equity companies. This allows them to keep a continuous flow of money to help grow their borrowers’ real estate portfolios. 

Banks always have the most stringent lending criteria in any market. (Their extensive underwriting process allows them to choose the lowest risk investments which, in turn, allows them to offer borrowers the lowest rates.) 

In super volatile markets, they may slow down their lending, or stop altogether. 

 

Alternative Lenders  

Alternative lenders do not rely on the same lending markets as everyone else. For example, at i Fund Cities, we have a big, private, real estate debt fund.  

This means that our money comes from many places. Our deep fund allows us lots of options for when and how we lend. We can sell our loans, or we can keep them on our own balance sheet. 

We have retail (non-professional, non-institutional investors who are investing for themselves), small banking investors, institutional banking investors, and family office money (family offices are firms that manage the money of wealthy people). 

All these people loan money to investors. When something major happens in the economy, even if one or two of them pull back, there are still other groups who want to lend.  

For the borrower, this type of a lender translates to more flexibility during “normal” times, and more reliability during tumultuous times. Just as diversified, balanced investments add stability to an investor’s portfolio, a diversified and balanced source of funding adds stability to a lender’s ability to lend. 

Especially when there is a major market shift and traditional capital markets shut down, like what happened during Covid, this adaptability is crucial. In fact, as investors ourselves, we saw first-hand the problems that lending gaps created for us and our colleagues who were trying to scale portfolios during what some investors considered the best time of the market to buy. 

It was clear to us that a lender with a diversified source of funding has a greater ability to continue funding during economic uncertainty than those reliant on institutional funding sources. That is why we created a unique, hybrid, lending platform that would give investors a superior funding process and capital source, that was less controlled by outside and cyclic market forces.  

In times of economic turmoil, we use our adaptability to remain flexible and reliable, and we continue to fund investors.  

 

Hard Money Lenders 

Hard money lenders are more difficult to define under just one lending umbrella, so it is more complex to identify where they get their lending funds.  

Most hard money lenders are also “private” lenders, and the terms “hard money” lender and “private lender” or “private money lender” are often used interchangeably. 

Yes, there are also some hard money “institutional” lenders, who are getting funds from large, formal lending institutions, but these are the exception. 

Another group of hard money lenders operate something called a “private debt fund.” In this type of fund, investors use both their own capital, as well as money raised from outside investors (this is known as a “fund syndication”), to lend to individual real estate operators. 

In unsettled markets, hard money lenders often adjust their focus to funding the most qualified projects and buyers. 

 

The Bottom Line 

And there you have it. 

Knowing where your lender is sourcing their funds could have a major long-term impact on your ability to scale your portfolio and could determine your future success in real estate. 

 

Stay cool investors! 

The i Fund Cities Team 

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