Imagine being a real estate investor attempting to build a portfolio of single-family residences. You have your eye on a couple of properties you think will sell quickly. You run to a hard money lender for a bridge loan, only to find out that lender doesn’t lend to residential investors. Now what?
Salt Lake City’s Actium Partners says it is not unusual for hard money lenders in some markets to stay away from residential projects. They might invest in apartment buildings and other large-scale projects, but single-family homes are out of the question. Why is not clear. But fallout from the coronavirus crisis could change things.
Declining Commercial Real Estate
It is clear that the commercial real estate markets in cities like New York and San Francisco are suffering. Their problems are directly related to a new understanding that it might not be necessary to lease expensive office space. Companies are realizing that workers who have stayed home for the last 11 months can do so permanently.
Interest in high density housing is also declining in America’s big cities. People are opting to head to the suburbs and single-family homes offering increased privacy and green space. None of this bodes well for hard money lenders who specialize in urban real estate deals. Assuming urban real estate continues to falter, they may have to transition to single-family residential in suburban and rural areas.
Bridge Loans for Landlords
Offering bridge funding to landlords isn’t entirely unheard of. A minority of hard money lenders have been doing it for years. They have provided bridge loans to help landlords add new properties to their portfolios. In return, rents generated by those properties have gone back into repaying the loans.
This can be risky to lenders if clients are investing in properties they cannot rent. But residential real estate has a distinct advantage over its commercial counterpart: people will always need housing. Even if businesses were to abandon the idea of renting office space, people still need homes and apartments. That will not change. So the real risk of bridge funding for landlords is that they might spend too much to acquire new properties.
Bridge Loans for House Flipping
Actium Partners says that funding house flipping projects is even less desirable. Investors look for enough money to cover both acquisition and renovations. They do so in hopes that future sales will more than cover what was borrowed.
House flipping works just fine in a hot seller’s market. So now, with housing prices steadily increasing at a nice clip, flipping seems to be an effective strategy for making money in residential real estate. But all could change in a heartbeat. Far too many investors learned that the hard way at the start of the housing crisis back in 2008. Fortunes turned overnight and big money was lost. That’s what hard money lenders fear most from residential real estate.
Nowhere Else to Go
If predictions of the future stability of commercial real estate hold true, some hard money lenders may find they have nowhere else to go but residential projects. There may not be enough business in the commercial arena to sustain them.
Of course, there are other ways to make bridge funding work. For instance, lenders already write loans to businesses looking to finance existing debt. They also provide bridge funding for acquisition and expansion. In other words, they are not locked into real estate projects. They prefer real estate because it is fast and easy, but there are other avenues to pursue if hard money lenders don’t want to transition to the residential market.