If you’re reading this, the odds are you are actively seeking answers to questions we hear every day: what are the best real estate alternative financing options for real estate developers?
Here at Equity Door, we focus on clearing the barriers that would be difficult to maneuver without us. With more than 20-years’ experience real estate investing and leveraging the power of crowdfunding, we understand what it takes to avoid traditional banking options.
You are not alone. Whether it’s a commercial or residential project, there is no question real estate developers need real estate alternative financing options and sources. Are you one of them?
Top 4 Alternate Financing Possibilities for Real Estate Developers
Let’s review the four top real estate financing alternatives for real estate developers to consider using
#1 – Mezzanine Loans for Real Estate Developers
What are Mezzanine Loans? A mezzanine loan is a creative alternative for real estate funding for developers that fills in the gap when traditional lenders are unwilling to provide what you need.
- Mezzanine loans involve loans and equity-based finance combined.
- You give the lender the rights to your business equity, to be exercised only if you default on payments.
- The sources you use will generally seek high-value borrowers with good assets.
- They come with a higher cost due to their low priority.
Where Do I Find Mezzanine Loan Sources? Traditional lenders such as banks can provide such funding as well as alternative lending platforms.
Well-known resources to obtain mezzanine financing include:
- Alternative Lending Platforms
- Private Investors
- Insurance Companies
- Mutual Funds
- Pension Funds
#2 – Hard Money Loans for Real Estate Developers
If you are a real estate developer considering if you should get a hard money loan for your real estate development, take into account what it is, first:
Although interest rates on hard loans are generally much higher than with conventional sources of financing, it’s a short-term type of loan secured by real estate.
Real estate developers consider a hard money loan for the following reasons:
- Private investors issue hard money loans. They are meant to provide funding for real estate development projects, while conventional lenders are not intended for real estate development projects.
- Hard money loans can be used to begin work. When sufficient work has been done to make this viable enough for conventional lenders, you can then leave the hard money loan.
#3 – Bridge Loans for Real Estate Developers
Real Estate Developers are asking, “Should I get a bridge loan at any point during my real estate development?”
Bridge loans as a real estate financing alternative can be beneficial at the outset of any real estate plan. These can be taken out when you expect more substantial funds later, but you need to make a start sooner rather than later. If you have capital tied up somewhere else, then a bridge loan is also a useful option to have.
It’s like having access to a credit line, so you don’t have to miss out on opportunistic properties while waiting to fund a transaction.
Bridge Loan Pros:
- Adaptability as well as flexibility.
- Increased availability of cash and acquisitions.
- Lesser chance of missing out on opportunities
#4 – Crowdfunding for Real Estate Developers
Crowdfunding for real estate developers allows the investor to use an online platform along with large groups of like-minded investors. The power to track transactions from beginning to end is what real estate developers love the most.
Real estate developers seeking financing alternatives for their projects are using crowdfunding because of several perks, but not limited to:
- Crowdfunding connects investors to mid-market investments of billions of dollars.
- On our platform, you can start with as little as $1000.
- You can examine project offers and legal documents so you can make an informed decision.
Learn more about how crowdfunding works.
5 Tips Before Choosing Real Estate Alternative Financing
If you or a real estate developer you know is looking for an alternative solution for financing real estate, you want to be entirely sure you select a trusted source – one who understands the alternative solutions in real estate investing.
The real estate financing sector has seen a recent boom in alternative financing. You need to consider the following when searching for a trustworthy lending source.
#1 – Successful Track Record.
You should always take a close look at how long the lender has been trading. Checking out their success rate in financing new contracts is a start. Due diligence requires that you scrutinize these things in a volatile market; unreliable sources will not have the staying power that you need to look out for.
#2 – Management and Staff are Experienced.
You can be sure that, if their key people are experienced, this is a good indicator of both trustworthiness and reliability.
Equity Door has more than 20 years’ experience in both commercial and residential real estate investing. Not to mention the decades of experience helping others raise capital using alternative financing.
#3 – Loan Underwriting Requirements.
Each lending platform has its own set of requirements, and you need to be sure of these. Ask specific questions about underwriting requirements – questions that you should consider a vital process for expert teams:
- What sort of a review procedure do you have?
- Do you check things like zoning laws, architectural plans, project timelines, and budgetary constraints?
- Do you understand the demographics of a given market?
#4 – Borrower Assessment.
Alternative finance sources will have borrower assessment practices that are just as robust as their conventional peers.
#5 – Quick Turnaround.
You need your source of financing to offer a swift turnaround time. For example, quick funding puts you in a more favorable position when placing offers – it’s almost as fast as having the cash you need in hand.
Frequently Asked Questions for Developers Considering Alternative Real Estate Financing
Do I need alternative sources of finance for real estate development?
Conventional financing does, of course, present its own limitations, and there are distinct advantages in seeking alternatives. So, you may feel that alternative finance for your real estate development would be a good idea for a variety of reasons.
Cons to Conventional Financing for Real Estate Developers
- Approval Process is Time Consuming. You may well find that this process is, in fact, unjustifiably time-consuming. Of course, this can be annoying and can even be disruptive when your plans are composed of several stages that need to follow each other in sequence.
- Feeling Trapped. The long-term nature of conventional financing will tend to trap you into a situation which prohibits the early closure of the loan. In turn, incurring prepayment penalties (depending on the remaining term the loan has to run, these prepayments may well be up to five years’ worth of interest payments). Alternative financing, by contrast, presents you with no such penalties, mainly due to their short-term attributes.
Pros to Alternative Financing for Real Estate Developers
- Flexibility. You will find that the various alternative means of financing are considerably more flexible, their lending sources much more accommodating and sympathetic to individual needs. The terms and conditions will be much more versatile.
- Greater Loan-to-Value (LTV). With alternative financing, you’ll find a higher Loan-to-Value (LTV) ratio than with conventional sources, which will generally not exceed 70 percent. Going the traditional route means that you’ll have to find more of your own money for what you need. Alternative financing will provide an LTV ratio of 80 percent.
How Should I Prepare to Apply for Alternative Financing?
Here are some of the requirements you should consider when looking at alternative financing sources.
- Have the Correct Documents. The proper documentation is required for alternative financing. You should have the right deeds of ownership, proof of liquidity, and balance sheets.
- Quality of Your People. Alternative financing sources will want to have confidence in the quality of your key personnel. This also shows your own commitment to your development idea and will inspire confidence in all stakeholders concerned.
- Present A Pitch Deck. It will help your position if you have a face-to-face presentation in which you could pitch your idea to the prospective lending source. Such an approach will make your proposal seem more achievable and inspire greater confidence.
- Having A Plan. Have a plan as well as an exit strategy in place when applying for funding.
Are There Any Disadvantages in Conventional Commercial Real Estate Finance?
Conventional real estate financing is highly regulated. You should bear in mind that there are considerable disadvantages to traditional real estate finance.
This includes the fact that it must fully conform to all the High Volatility Commercial Real Estate (HVCRE) regulations. In practice, this means that only more substantial corporations with deeper pockets are accepted.
There are 2 main downfalls to conventional Commercial Real Estate Finance
Downfall #1 – The time it takes to get approval can be lengthy, and the necessary documentation is strictly observed. You should also note that the maximum LTV ratio is usually pegged at 70 percent.
Downfall #2 – Conventional commercial real estate lending sources will always favor the large firms and do not take kindly to smaller, less well-established participants.
It’s All About Trusting the Best Financing Sources for Real Estate Development
Since the recession, real estate developers are continuing to run into bank lending policies with tight criteria. So, it’s no surprise you are seeking help to find alternative solutions for financing real estate as a developer, investor, or project owner. According to the US Census Bureau, the real estate construction continues to grow every year.
There’s no safer time than now to hop on the bandwagon by considering the above financing alternatives for your real estate development projects. The new marketplace lending model (known as the alternative method of financing) continues to trend upwards.
Trust is Built on Experience
Equity Door has more than 20 years’ experience with real estate investing. Our passion for emerging technologies gives you a new path that bypasses the traditional ways of real estate financing.
It’s no surprise we’ve made everyday men and women pleased with a game-changing experience while leveraging the power of crowdfunding. Call now for more information: 877-963-DOOR. Avoid the cost and hassle of dealing with traditional banks, or visit our real estate crowfunding platform.