It is going to become harder and harder to get private lenders to write a check against the purchase of a property in the months and years to come. Newbie investors will be locked out of the private lending universe completely and seasoned investors will see themselves either paying high interest rates or shorter payback periods – either of the two situations really unacceptable in most cases.
Here are my reasons for that:
1. Interest rates are rising, seem to stabilize and stay around high. We tend to have short term memories and we kind of take 4.75% interest rates on 30 year mortgages and 3.5% interest rates on Home Equity Line of Credit granted for a while. Gone are the days and they are not coming back anytime soon.
I remember only couple of years ago and looking at house that Nora and me both wanted to buy – around 5 years ago before we built our own. Her first cousin owned a mortgage brokerage and she was working in one also – we had excellent credit - we got the best possible rate – no points, PAR, lowest you can get without buying down – wanna guess what the rate was?
It was 8.50% and we both thought it was pretty good actually. We did not ended up getting the house and luckily for us when we did – the interest rate slide had started and we ended up gettting a really low rate.
During this time of low interest rates, it made perfect sense to take a home equity line of credit on your house at 4% and flip the money to a private real estate investor at 9% or 10%. Well that is not happening any time soon, with HELOC rates rising and rising some more in the last couple of months.
Incidentally the rise in the HELOC rates have also caused defaults because homeowners cannot afford the new high payment on their maxed out HELOC. Add to the double whammy of HELOC issuing bank punishing the homeowners who missed the payment by “raising” the interest rate. Just like a credit card!
2. Domino effect of that is for the first time in months, the money market accounts and Certificates of Deposits have started to pay a little decent return. Although not as high a real estate investor jumping in with his 10% deal in his hands – but still you have to do a lot better with your offer than what you could 12 – 24 months ago.
3. The profile of private lender is changing – for two big reasons. Number one is that a large number of previously passive investors are themselves becoming investors in real estate – kind of sort indirectly – by buying land and new constructions in Florida, Arizona, Las Vegas etc.
Gone are the days when Private Lenders looked frustrated at their lack of time and skills and agreed to act as silent bankers knowing fully well that You, my dear real estate investor were raking it in.
They wanted the big fat returns – just could not bear the effort of finding good deals, fixing the house and selling it. But belive me, they wanted the darn thing.
Now for the first time they can – one phone call and wire transfer away you are the proud owner of a condo in Naples, Florida, appreciating a cool 12% to 120% per year, depending on what you read.
All this was not there 5 years ago – they turn CNBC on – they are talking about real estate, MONEY magazine, a mainstream magazine traditionally dedicated to all things stocks and bonds is including articles on real estate investing.
They see it all day along and then when they are in Arizona for the Golf tournament – they put up a deposit to buy 3 ranch homes, feeling pretty good about themselves and in control. The down payment for these condo’s came from the same checkbook that used to write you and me a check.
4. What is the age group of your typical private lender? Is she 26 or 46? Do you know that baby boomers in their 40’s and 50’s is “THE” heavily marketed segment for financial planners, brokerage houses and mutual funds – they want the same money that you want and they are doing a one hell of a job convincing Dr. John Smith to write them a check.
Real estate investors, on the other hands are contemplating whether to get business cards or not.
If you pay attention to the environment around you, and I do, there is a massive marketing effort to suck up every single available dollar that is out there to be invested, by firms who are in the business of money.
Real estate investors are too busy in runinng their day to day business to stop and pay attention to this. I will admit freely that most entrepreneurs / small business owners and real estate investors - well at least the successful ones - fall into that category, pay scant or no attention at all in putting their name and what they can do in front of their target audience.
Bring marketing in front of them and their eyes do a collective glaze over. But truth of the matter is that you are competing against all the “others” who want the same greenbacks that you do. And you future private lenders are not going to give it to you just because you casually stroll over to them
An old adage is that the only thing constant in life and universe in change itself. It is very true in real estate investing also - whether you are playing this game in Michigan real estate or Anchorage, Alaska.
Things change – and sometime they change and never came back to the way they were. The nature of private lending is changing, rapidly and there is a wave of discomfort even amongst the seasoned real estate investors on how to meet the rising demands of private lenders and still do deals that make sense.
That is why it is important that “if” you want to succeed in this or any kind of business then you need to feed your brain the same way you feed your body – on a regular basis.
So what is the solution to all this coming challenge? If you have an existing real estate investing business which is heavily dependant on private investing then how can you reduce your exposure? NOW? While you still have time?
If you are new to Michigan real estate and want to learn real estate investing – buy and sell houses or may be buy and hold houses, duplexes and apartment complexes and use private funds for that purposes – how do you set your business from day 1 the right way so you don’t get affected by this change that is happening in the world of private lending.
Interesting questions? Are they not?
