Real Estate Lending Under Pressure: A Behind-the-Scenes Look
The real estate market is buzzing with talk of pressure on lending. Historic interest rate spikes and inflation have made underwriting deals more complex than ever. For investors, navigating this environment requires a clear understanding of the challenges and opportunities at play.
This article offers a behind-the-scenes look at the state of real estate lending. Drawing on insights from industry experts Collin Schwartz and Owen Dashner, we’ll explore how market conditions are affecting lenders and investors, and what it takes to succeed when the pressure is on.
The Current State of Lending: More Than Just Interest Rates
When you invest with a company like Liquid Lending, your money doesn't sit in an account. It's pooled with other funds to provide short-term loans to real estate investors. These borrowers use the capital for projects like fix-and-flips or acquiring rental properties.
The interest and fees paid by these borrowers generate revenue that is then distributed back to the capital partners. It’s a symbiotic relationship: borrowers get the fast funding they need to seize opportunities, and investors earn passive income from the interest generated.
A Look at Liquid Lending's Financial Impact
When people say lending is “under pressure,” they often point to interest rates. Yes, rates are a major factor, but the truth is that this pressure is extending even deeper.
Higher interest rates have made many commercial and residential assets more difficult to underwrite. Owen explains that deals have become tougher to pencil out since rates have nearly doubled in the last few years. This has a direct impact on cash flow, a primary concern for investors today:
“I think just squeezing out cash flow is something that investors and borrowers are really zeroed in on right now. And it's tough to get when you're buying stuff at a six cap and the interest rates are seven.”
Collin notes that expenses like materials and insurance have "exploded," and properties are taking longer to sell. This combination of factors puts a tight squeeze on profitability.
How Lenders Are Adjusting Their Strategies
Lenders are adapting to this new reality by changing how they evaluate deals. One of the most significant shifts involves the debt service coverage ratio (DSCR), which compares a property's income to its mortgage payments.
With higher interest rates, many properties no longer generate enough income to meet traditional DSCR requirements. As a result, banks often require larger down payments, sometimes up to 40-50% on unstabilized properties. Collin explains the effect this has: "If your rents are too low, the lender is going to look at that and say, 'Okay, we're only going to lend, you know, maybe 50-60% on that.'"
What This Means for Real Estate Investors
For investors, the current environment demands a more disciplined and strategic approach. Here’s what you need to focus on to succeed in today's high-pressure market:
Master Your Underwriting: Now more than ever, accurate underwriting is non-negotiable. Stress-test your numbers and use conservative sales comps. "Being really, really accurate on your numbers is never more important than it is right now," says Dashner.
Account for All Carrying Costs: Don't overlook expenses like insurance, property taxes, lawn care, and loan costs. These "prorations add up," Dashner warns, and can significantly impact your bottom line, especially as project timelines expand.
Make Your Money When You Buy: In a buyer's market, your purchase price is your best defense. As Schwartz puts it, "You make your money when you buy." A strong cash offer, often facilitated by hard money, can give you the leverage to negotiate a lower price.
Don't Bank on Rate Drops: While many hope for lower interest rates, it's risky to build your strategy around that assumption. "If the deal does not function in today's current interest rate environment, then you need to either adjust the pricing or adjust your creativity," advises Schwartz.
Finding Opportunity Amidst the Pressure
While the challenges are real, this market is also ripe with opportunity. Many property owners who bought in 2020 and 2021 are now facing resetting debt, which has created a wave of motivated sellers.
Owen agrees: “There is a lot of opportunity out there. We're seeing a lot more deals now that are coming on the market where debt's been resetting... if you are quick on your feet, there's going to be a lot of deals that you could probably snap up.”
A Look Ahead
Navigating a high-pressure lending environment requires more than just capital; it requires expertise, discipline, and the right financing partners. By mastering your underwriting, accounting for every cost, and being prepared to act on opportunities, you can withstand the pressure and find success.
The market is tough, but for the prepared investor, the rewards are there for the taking.
