The global rental real estate market is set to take off in 2021 for multiple reasons. Real estate investors across the world are bound to take advantage of this, buying up properties for which there is pent-up demand. But how does this impact the real estate lender? How can you take advantage of the upcoming shifts in macroeconomic conditions?
How does that knowledge serve you as a real estate lender? Here are some tips for making the new potential boom in rental real estate a win-win proposition for you and your real estate investors:
Who Should You Work With?
The most important thing from the lender’s perspective is that you learn how to discern a reputable investor—someone who has recent experience or is partnered with other experienced individuals—from someone who might be passionate but doesn’t have the experience to know what they’re getting into.
How do you determine which is which?
Start by asking lots of questions. Get a sense of what sort of experience the investor uses to evaluate a potential rental property:
- How did they come to find this property? Their answer will tell you a lot about their experience and processes.
- What do they plan on doing with the property? Do they seem to have a long-term strategy prepared, or are they still talking about “researching the market”?
- Ask them market-specific questions. How well do they know an existing market? Do they know about things like how well-located a property is to nearby schools, restaurants, and shopping centers? Or are they left scratching their head when you ask these questions?
The more you ask questions that force prospective borrowers to reveal their insights, the more you’ll learn about their experience and background. And it never hurts to ask those questions upfront.
What Should You Look For in a Rental Property Investor?
With the above in mind, you’ll have a better sense of experience. But experience isn’t the sole determining factor here.
You’ll also want to pay attention to other signs that a rental property investor looking for project financing is going about things the right way.
- Look at their preparation. Do they have firm answers to your qualifying questions? Maybe they’re inexperienced, but if they’ve done a lot of homework, it’s much less of a red flag than someone who is coming into the process with no idea about the next steps, save “borrowing money.”
- Don’t overrate “passion.” Cartoonist Scott Adams, also a bestselling author of nonfiction business books, says that when he began in business, a loan officer once told him not to invest in someone’s passion project. Why? What made money more often, in the officer’s experience, were simply good ideas in which the math worked out in the loan’s favor. Passion is not a reason to loan; a sound investment is.
Tips for Understanding Mortgage Risks and Rental Issues, Post-COVID-19
Post-COVID-19, of course, things may change. So here are some tips for understanding the risks of real estate investing after things get back to normal, or at least, a new normal:
- Look at changes in lease terms. As the National Law Review notes, now’s the time to reconsider how leases look, in light of the problems highlighted by COVID-19. How can one handle term extensions? What about issues with the definition of property and premises in the light of changes to social distancing? The time to address these issues is in writing, which means it’s something mortgage lenders have to think about now, rather than later.
- Consider the price-to-rent ratio. This is a time-honored way for mortgage lenders to gauge the value of an investment property. The price-to-rent ratio is the gauge of the home price compared to the annualized rent of that home in its location. Of course, this won’t be a rock-solid number that will always tell you whether to proceed with a property or not. But it is an important gauge. And even in the post-COVID-19 world, it helps to know whether a property in consideration is a deal, given its relationship to the price-to-rent ratio.
- Addressing the possibility of changing costs. Mortgage lenders have to be cognizant of the potential changes to costs, given the unprecedented events of the pandemic. What if there were to be a new surge in COVID-19 numbers during a season? Would that affect the potential risk of a property, for example, if a renter is more likely to miss payments? Even post-COVID-19, these are risks mortgage lenders are going to have to consider.
Post-COVID-19, the way mortgage lenders think about properties is going to change. And though the real estate environment may change, good business practices will always be the core of a successful investment. Mortgage lenders should consider the new risks that exist and take them into account with every transaction—even as the world around us opens up.
Asset Based Lending, LLC (ABL) is a private commercial lender that has been featured in the Scotsman Guide, Inc. magazine, Yahoo Finance, NBC and FOX among other publications. Their mission is to help real estate investors, quickly and efficiently, finance their business activities. They have Funded over 3,000 loans of $650 million worth of volume for residential and mixed-use commercial properties.
