3 Alternative Funding Options When Seeking Capital
One thing that can be said for the period leading up to the 2008 downturn is that capital was easy to come by. Since then, with credit tightening noticeably, it has become more challenging for many developers to secure funding for new projects, despite the demand for new property in many markets.
Development is brisk in mixed use and multi-family markets. Repurposing existing urban buildings is also an important trend in CRE, and to get into the game some developers are exploring alternatives to traditional funding routes. The most promising new options becoming available are those that use our enhanced ability to connect through technology.
The basic idea of crowdfunding is that you can often raise capital faster by appealing to a very large pool of smaller investors. This is especially true with development projects tagged at under $5 million. Projects of that size are usually beneath the notice of institutional investors, so they can languish for months or years waiting for funding that may never materialize. By the same token developers may have more difficulty qualifying for a commercial loan at this level.
Thanks to the concept of crowdfunding, small individual investors have access to projects of which they would never have been aware before. By the same token, developers can now reach a huge pool of potential investors via digital portals. Sites like FundRise, RealtyMogul, and PatchofLand have thousands of registered users, and investors can participate with as little as $1,000. FundRise alone has more than 80,000 members, and has handled over $3 billion in real estate deals since launching in 2012.
Peer to Peer (P2P) Lending
A similar strategy is to borrow from several small investors through peer to peer lending. This approach offers advantages over working with a large financial institution, including a fast turnaround and less paperwork.
Transferring funds online is more secure than ever, and projects can often get full funding in very short order –often a matter of days -when their message reaches the right audience. Documents are shared online, signed electronically, and available to all involved 24/7. Payment terms can vary depending on the project, and short term rates can be below 10%.
Another viable option for developers looking for capital is to work with so-called “hard lenders.” These individuals or companies have more flexible requirements for making loans for commercial investment projects. Hard money loans are backed by the value of the property, not by the creditworthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, hard money loans have lower loan-to-value (LTV) ratios than traditional loans.
Rates for these loans, also called bridge loans, are high, so they are generally best as a short-term option. Current hard-money rates are 10-18%, and hard money loans are sometimes referred to as the loan of last resort.
Despite more restricted access to commercial loans, real estate developers are finding ways to finance deserving projects. As we become more accustomed to conducting business online, it seems likely that investment and funding options will continue to expand.