📉 Interest Rates, Inflation & Private Money – Are You Changing How You Fund Deals?

Question

With all the recent news around inflation pressures and uncertainty around rate cuts, I’m wondering how other investors are adjusting their funding strategies.

Are you:

• Relying more on private money or hard money lenders?
• Holding off on deals until rates shift again?
• Negotiating different terms or LTVs with your lenders?

Relying more on private money or hard money lenders?

Holding off on deals until rates shift again?

Negotiating different terms or LTVs with your lenders?

I work in the private lending space and I’m seeing a mix, some investors are doubling down, others are pausing. Curious to hear how you're navigating today’s lending landscape. Has your approach to financing changed lately?

Stacy Raskin · Answer

There are many investors out there who are finding deals where sellers are offering credits to offset closing costs. These credits are usually limited by the lender if a larger lending institution- for DSCR loans they are often capped at 4-6% of the purchase price

Investors are in many markets facing less competition as some investors are waiting on the sidelines. From being in the market when rates were 2-4% around 2020-2021, many investors end up being in bidding wars and overpaying for properties when rates are much lower.

Warren Buffet once said that it's wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful.” He was talking about the stock market but the same applies to the real estate market.

Also, most loan program guidelines haven't changed and rates are lower than they were, for example, several years ago once they surged.

There are clients using DSCR loans to continue to scale their portfolio whether it's their first DSCR loan or their tenth.

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Joyce Ann Magallanes · Answer

Hi, Joe!

Let’s think in reverse for a moment:
When fewer people are buying and financing becomes a concern, sellers who really need to sell have fewer options—and that’s when they start offering better terms. This is exactly why it becomes easier to find below-market deals in times like these.

Buying at a discount not only improves cash flow but also sets you up for a solid profit when it's time to sell.

Remember how, during the early weeks of COVID, private lenders completely pulled back? That’s not the case today. If you’re financially qualified, now is the time to use that to your advantage. Just be sure the seller is motivated and the property has been on the market long enough to reflect shifts in buyer activity.

Be patient, watch the market—and good luck!

Orlando De Los Santos · Answer

we have become more conservative when underwriting deals, primarily compressing LTVs. we have kept our rates competitive.

Chris Seveney · Answer

We are on the other end (lending):

What we are seeing:

1. More relying on private capital

2. More focusing on trying to stay afloat with their portfolio vs. acquiring  - seeing many attempting to refinannce because they are in deep trouble. Have two right now working on  with both over $10M in assets and my guess is in the next 12-18 months both will be in BK or foreclosure.

3. Negotiating LTV with lenders today will not work - lenders are tightening standards not loosening them. One example is many are not lending in Florida and some are lending but not on condos. The capital markets sees what is coming but the consumer does not want to believe it.

Richard Mark · Answer

Hey Joe, good question. I'm in the private lending space in California so can speak from our experience recently. We have kept our rates the same in all our deals, but are lowering the our leverage thresholds by 5% to hedge against potential market disruptions in the coming months. For ex. land purchase we are usually at 50% and are now quoting 45%. Fix & flip we were at 80% LTC and are now at 75% LTC. We haven't had much pushback from our borrowers (real estate investors) to our surprise.