A gap in the lending market

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Today I want to talk about a major gap I see in the lending market.

As a real estate entrepreneur, your choices for loans generally boil down to:

  1. Bank loans, which cost in the range of 3.5-4.5% but are painful to get (because of the underwriting process) and take 30-60 days to close; or
  2. Private money, which is less painful and closes faster (10-20 days), but costs 8-10%

In our business, neither works well. Why?

Let’s start with private money. Here’s our problem: We generally raise money from rich people with excess capital sitting around looking for good yield. Can you imagine how they would respond if I told them their project is going to borrow from some loan shark at 9%? They’d ask me to get my head examined.

But bank money is pretty bad, too. Why? Because our deals generally need to close in something like 21 days. Even the banks with whom we have good relationships can’t get things done that quickly.

The perfect money for us would:

  1. Cost around 5%;
  2. Close within 21 days with a minimum of hassle;
  3. Have something like a 2 year term with a pre-payment penalty in year 1.

To get this money, I would be happy to limit my leverage to, say, 50-60% of the purchase price.

If you think about it from a lender’s perspective, this is a pretty sweet deal. We’re experienced, the leverage is low (meaning less chance of default and more protection for the bank if we do), and the term is short (meaning the lender is less exposed to interest rate risk).

We did two loans like this on the Fund 3 projects, but I’m not sure whether I can get the lender to do more (because he’s found opportunities to put out money at higher rates).

If anyone knows of a lender (bank or individual) who wants to do loans like this, in the range of, say $500k-1MM, get in touch!

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