PRIVATE DEBT MARKET HAS MORE THAN DOUBLED IN UNDER A DECADE
SOURCE: Bank of America
Value of private debt deals outstanding ($bn)
100 0 200 300 400 500 600 700
2010
2011
2012
2013
2014
2015
2016
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2018
HARDMONEY INTEREST RATESARE LOWER THAN EVER Consider how much has happened in lending over the past 10+ years. From 2009–2012, when the real estate market was at its lowest and little capital was available for private lending, hard money interest rates averaged 18 percent. But when institutional lenders clammed up, real estate entrepreneurs were forced to rely on true hard money from private lenders. Private lenders used this as an opportunity to fill in the void that Wall Street left behind, and to prove that private lending can be scalable. Today, as the real estate market continues to improve, interest rates on private loans have fallen as low as seven percent. Why have interest rates gone down so much? First, interest rate cuts made by the Federal Reserve in the 2010s have enabled private lenders to obtain cheaper capital, which allows them to offer better terms to real estate investors. Second, homogenization has driven the compression of rates and fees. Since 2011, private lenders have entered real estate lending at an alarming rate, including Lima One Capital which opened their doors in 2011; Finance of America (formerly B2R) in 2013; LendingHome in 2013; and Direct Lending Partners in 2015. Since the housing crisis, home flipping has gone mainstream, too. Television shows like Property Brothers (which first aired in 2011) teach millions how to fix and
the U.S. now exceeds $700 billion. Why did private lending rise to prominence so quickly? Due to the Great Recession, private lending has become a “workaround” form of financing for real estate investors frustrated with the Dodd-Frank Act. Consequently, private lenders, once considered “back alley operators” in the eyes of Wall Street, are now well- established, above-board enterprises with hundreds to thousands of employees and billions of dollars in AUM. Through smart private lending, enterprising real estate investors now enjoy access to a greater variety of investment opportunities, a wealth of choices for capital partners, and lower loan rates and terms. Additionally, private lending offers significant benefits to real estate investors, such as: Some lenders can often close loans in as few as seven days. You can’t get that speed and execution with traditional banks or Fannie Mae. Hard money lenders provide financing that includes rehab costs and use after-repair values (ARV) as part of how they analyze investment strategies. Private lenders take on more risks than banks, such as providing higher leverage. This creates more opportunities for capable real estate entrepreneurs. These benefits, combined with recent market conditions, have made private lending more common than ever. BETTER SPEED & EXECUTION UNIQUE LOAN TERMS MORE OPPORTUNITIES
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