Building your portfolio as an investor requires a constant infusion of funds.
Traditional lenders such as large national banks are often willing to lend investors money for the first few properties, but generally, limit loans to fewer than ten properties.
This can present a problem for many investors, especially those who have already exhausted financing from friends and family, yet don’t have enough equity in the properties they own.
Fortunately, there is plenty of sources of funding, so much so that lenders are now niching down in order to attract more borrowers, decrease competition, and better serve customers.
Bank Loans Are Harder To Get
Due to the recession, banks have faced an increasing amount of regulation. Major financial institutions have yet to completely recover, and gun shy, have greatly decreased the number of loans they are willing to give.
Few banks are willing to give non-recourse loans and require a certain amount of personal recourse.
At the same time, there are a number of laws that make it hard even for sponsors with an excellent track record to get loans.
For example, developers seeking construction loans are required by most banks to give a certain amount of personal recourse. This is despite regulations from HVCRE that limit the amount of equity an individual can count towards a sponsor’s equity requirement – making it even harder to qualify for certain types of loans.
Thus newer developers lacking a proven track record and deep pockets will find it hard to qualify for a loan, even though a particular property can be shown to have clear profit potential.
As a result, many investors have begun to search for alternative forms of capital to fund promising projects.
Boutique Lenders Offer Custom Solutions
While banks are often confined to stiff regulations about the types of loans they can offer, smaller lenders looking for loans can be more flexible. Non-recourse loans, empty buildings, and unstabilized properties are just a few projects they are often willing to tackle.
Others are willing to finance discounted payoffs and maturity defaults, focusing more on the strength of the real estate than the investor alone.
Some boutique owners prefer to specialize in a bridge and owner-user financing for office, industrial, retail, self-storage, and mixed-use properties, offering short-term loans of two or three years, intermediate loans, and more conventional ten-year loans.
As you can see, there are lenders for pretty much every type of investment property, for nearly all kinds of loans. But before you approach a lender, consider the following tips.
TIP #1: Interested In Getting A Loan From A Boutique Lender? Don’t Hide Past Mistakes
If you’re interested in getting a loan from a lender, here’s one of the most important tips you’ll ever get: don’t try and hide failures in previous projects or transactions.
Not only do these always come up when the lender does their own due diligence, but you lose the chance to show you’ve learned from your mistakes, and jeopardize your relationship with the lender.
Instead, be upfront about issues that have come up in the past.
This will allow you to present the steps you’re taking in order to ensure the same problem doesn’t happen again while giving you the opportunity to structure the deal in the most advantageous way possible.
As long you can show the property has profit potential, it’s quite likely you’ll still get financing, even if it’s not according to the terms you prefer.
TIP #2: Make Sure You Know Your Market
Boutique lenders are experienced professionals who have done dozens of deals and seen or heard about hundreds more.
When you present your deal, it’s critical you take the time to present a clearly defined strategy for ensuring the property succeeds. Outline pitfalls common (and uncommon) to the asset type, location, and property itself – then give detailed steps as to how you plan on handling each one.
TIP #3: Don’t Be Afraid To Highlight Your Track Record
Investors seem to fall into two groups when it comes to talking about their experience in the commercial real estate. Either they de-emphasize the importance of their successes, or they go on and on about how much success they’ve seen, without providing proof or showing lenders how their past successes relate to the present deal.
When presenting past deals that have gone well, be sure to focus on how the experience you’ve gained will help you ensure the success of this deal. In addition, use third-party testimonials and impartial sources to prove any claims you make.
Not only does it add to the believability of your claim, but it bolsters the rest of your presentation as well.
Private Lenders And Funds Bring More To The Table Than Just Money
Although private lenders and funds may cost more than banks, they are naturally more open to working with a variety of investors and project types.
Financing costs may be higher, but higher costs are easily balanced out by the flexibility of the underwriting process as well as higher leverage. Closing times are also significantly less than traditional lenders, which can be a critical factor for many investors.