Beyond the Bank – Lending Options for Investors

But it won’t cash flowwwww…. wines every investor, under traditional loan terms.

Demand for great apartments or commercial investment properties has surged again, and the supply of properties for sale has been very limited.

The demand has kept prices elevated, with the biggest lid on value not from demand, but from loan parameters, which at today’s interest rates have made many deals hard to pencil.

Additionally, many apartments trading now are still behind the curve with low rents, when these rents could be much higher with ongoing increases. This means the value in the future will be more- but obtaining the financing on the current lower rents can be tough.

Much of 2024 lending activity has been driven by refinancing, as many owners face maturing loans amid a sluggish property sales market.

Note: We love banks and consider them a vital part of the CRE lending landscape. This is not a hating on banks, just a reminder there are options out there!

So what other options are out there for investors hungry to get deals done, beyond the typical bank?

1. Credit Unions

While Credit Unions seem to fall right into the bank category, they are able to offer more favorable terms, as their profit margin has more flexibility in it. The best rates we have seen recently outside of Fannie/Freddie loans are from credit unions

• Tip: Ask for 30 year amortizations. Even if they don’t offer openly, it may be an option, even on Commercial loans we have seen recently.
• Competitive 5 year term interest rates
• Higher LTVs if cash flow support it
• Recourse loans 

2. Private Lending Funds

If you are in need of more flexibility for projects that have a value add component, then private lenders may be the answer. Private commercial real estate lenders are generally non-bank entities that lend their own money to commercial real estate investors. 

The main benefit of choosing a private lender for a multifamily or commercial real estate project is flexibility. Most banks and CMBS lenders have strict lending guidelines; for example, they often have strict net worth and credit score requirements. Private lenders can offer greatly flexibility, able to tailor loan options for deals that need creativity.

• Flexible loan terms
• Interest only terms
• Typically shorter term loan solutions
• Can be tailored for many different property solutions

3. CMBS

CMBS loans, also known as conduit loans, are typically much easier to apply for and get approved for than bank or agency loans. While banks generally keep loans on their balance sheets and will usually put a lot of emphasis on a borrower’s credit score, net worth, and commercial real estate experience, this is not the case for CMBS financing. The property itself is the most important factor in the loan approval process. CMBS lenders pool their loans together, creating commercial mortgage backed securities, and sell them to investors on the secondary market.

• Can be up to 30 year Amortizations
• Interest rates generally near bank rates
• Interest only options
• Fully Assumable, Non-Recourse
• Up to 75-80% LTV
• Generally for $2M loan and up
• Beware pre- payment penalties

CMBS loans grew substantially last year as many borrowers refinanced and needed more flexible options on their refinance.  

4. DSCR loans

Debt Service Coverage Ratio loans are made on the basis of the cash flow of the property which is great for smaller 1-4 unit properties, or Short Term Rentals. These are very common on STRs and for independent investors living off property cash flows.

• Great option for smaller 1-4 unit non owner occupied residential
• 30 year Amortizations
• At or above market interest rates
• Recourse lending, but based on the cash flow of the property
• Easier to qualify for

5. Fannie Mae/ Freddie Mac apartment loans

Backed by the good faith of the US government, the agencies tasked with providing liquidity into the market are able to do so with interest rates about 100 basis points lower than other lending sources because of the safety provided by the GSEs.

• Usually, the best interest rate available for apartments
• Amortizations up to 30 years w/ interest only options
• Loan amounts starting at $1M for Small Balance
• Non-Recourse
• May limit the LTV with the strict underwriting criteria

Conclusion

With the interest rate expected to remain elevated for the immediate term, having more lending options for your investment acquisitions can be the difference in buying good assets at the right price when the opportunity presents itself.

Remember once the lending atmosphere is easy for your average investor, the deals available to buy will likely also be average as well. Seeking out other lending options may help secure better deal options in the interim.

Many investors we work with are able to grow their wealth through creative strategies we suggest in order to get the deal done and grow in their financial freedom. Contact us for a consultation on growing in your investments.