Achieving consistent returns with real estate has been getting increasingly more difficult, with low inventory limiting potential acquisitions and higher interest rates decreasing profit margins on most deals. Conventional mortgage programs can be another limiting factor, as the slow timeline and strict criteria of these loans causes investors to miss out on the few opportunities that are available. Having a financing program you can rely on is crucial for growth in today’s highly competitive market. That’s why real estate investors are turning to private loan programs, like DSCR and bridge loans, that make it easier to scale their portfolios. Brokers and lending partners can also benefit from offering these programs, since it allows them to fund a wider range of deals with fewer overall restrictions.
Interested in learning more about private real estate loans? Continue reading as we go over the basics of these programs, how they’re different from traditional mortgages, and how they can help investors scale faster in today’s market.
Private real estate financing refers to any type of loan provided outside of the channels of conventional banks and credit unions. Although this is a fairly broad category, investors typically work with established lenders who are active in the real estate space. These lenders place a greater emphasis on the property and its investment potential than the borrower’s income or credit history, and this allows for much more flexibility when it comes to loan terms. The added flexibility means lenders can match financing to the investor’s specific needs, and they can support any kind of investment strategy. There are many different types of loans investors can utilize, ranging from long-term DSCR financing to fix & flip, bridge, and ground-up construction loans which have much shorter durations.
Conventional mortgages are often not the best fit for real estate investors because they’re designed for securing a primary residence rather than a non-owner-occupied investment property. These loans tend to come with a lengthy underwriting process and extensive documentation requirements, where certain borrowers or types of properties may not qualify at all. For example, there are self-employed investors and full-time landlords who don’t have W-2 income, and it can be difficult to secure a renovation loan if a lender deems the project too risky. This can create additional challenges in time-sensitive scenarios, where the unnecessary back and forth can cause investors to miss valuable opportunities. Investors need financing they can rely on to help them secure properties, even if the deal is complex, and that’s where private loans step into the picture.
Let’s start with one of the greatest benefits private financing offers to investors: speed. Unlike traditional mortgages which have a lengthy underwriting process, private lenders are more focused on the value of the property being financed, and this helps streamline underwriting. In practice, it means simpler documentation requirements, with most deals getting funded in as little as two weeks after application. Speed matters when investors are pursuing time-sensitive opportunities, such as auctions or foreclosures, or if they’re competing with multiple offers on a lucrative deal. It also means faster scaling; an investor who’s able to efficiently complete one deal can redeploy their capital sooner and continue growing their portfolio.
Another benefit to asset-based underwriting is more flexibility with loan terms, which opens the door to a wider range of investment opportunities. Along with time-sensitive transactions, we also mentioned that it can be difficult to finance a renovation project when working with conventional lenders. Private lenders are much more willing to approve financing for these deals, so long as the numbers make sense.
Sometimes, investors need financing to make a smoother transition to their next deal. Let’s say for example, that an investor wants to purchase a new property, but their funds are tied up in the pending sale of an existing home. A short-term bridge loan allows them to move forward with the purchase, and simply repay the loan once permanent funding is available. Investors can also use transitional loans to make upgrades to existing rental properties, stabilizing income and allowing them to secure more favorable long-term financing.
The amount of liquid cash an investor has on hand can determine how many projects they can pursue at one time. Private loan programs can finance both the acquisition and renovation costs of a property, freeing up the investor’s capital and improving cash-on-cash returns. This can be a huge advantage since it allows borrowers to focus their funds on completing their project, because there are often unexpected costs that crop up during the process which cause delays. Experienced investors may be able to spread their available capital across multiple projects; this leads to improved scaling and for lending partners, it means more closed deals.
Private real estate loans are versatile and can be tailored to the needs of any investment scenario. When you look at the BRRRR strategy, you can see multiple occasions where private loans can provide an advantage. A borrower can use bridge or fix-and-flip financing to acquire a distressed property, then complete renovations to improve occupancy or strengthen rental income. Then, they can refinance into a long-term DSCR loan once the property is stabilized. Eventually, they can also use cash-out refinancing to support further acquisition. This is why discussing exit strategies with your clients is so important. Taking extra time to plan can reduce delays and make it easier for investors to carry out their strategies.
RCN Capital is the leading nationwide wholesale lender for real estate investments. We lend to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you’re looking to offer a better experience to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.