If you’re looking for an investment vehicle that generates solid short-term returns without the volatility of growth stocks, private lending may be for you.
If you’re looking for an investment vehicle that generates solid short-term returns without the volatility of growth stocks, private lending may be for you.
Becoming a private lender is not as complex as it might seem. All you really need is a comfortable amount of underutilized capital, a risk tolerance higher than zero and access to a good real estate lawyer — because you’re going to be targeting real estate investors and funding their projects.
Experts say there are two reasons why private lenders tend to focus on real estate.
First, from flippers who need money for renos to commercial investors in search of bridge loans, there is reliable, consistent demand for cash from the real estate sector. While larger developers and builders generally have lines of credit set up to cover these costs, smaller operations will seek cash in the private market.
The short-term nature of these investors’ projects means you can charge comparable interest rates to what would likely be offered by mainstream lenders. In Canada, an interest rate of ten per cent or more on private deals isn’t unheard of, according to real estate experts, although seven-to-ten per cent is more common.
Second, because your loans will be secured with your borrowers’ real estate assets, the collateral involved will generally be worth far more than the amount you’ll be lending. That helps keep your risk in check.
As a private lender, your returns come in many forms. There’s the interest, of course, but some lenders also charge exit fees or “points” — fees that are paid by borrowers in exchange for lower interest rates. Some lenders opt for a profit split on the projects they help complete, but experts say those deals carry more risk because of the uncertainty involved with budgets, timelines and putting a finished project on the open market.
Finding borrowers can be a challenge for first-time private lenders. You’ll need to get your name out there, so putting some work into your social media feeds is a smart move. Joining a local real estate investment group or two will help you meet investors who are actively looking for cash. You can also strike up relationships with mortgage brokers who specialize in private lending.
But you won’t get far in the private lending business without an experienced, qualified real estate lawyer in your corner to negotiate your deals and review the contracts, experts say. A good real estate lawyer can also be a reliable source of leads.
As simple as private lending sounds — and it often results in surprisingly frictionless transactions — there are always risks involved. A good strategy for your first deal is to start small and keep it local. Meet with the builders and developers you’ll work with face to face and have them tell you about their projects.
Work closely with your lawyer to get a successful deal or two under your belt. Doing those things will give you a clearer idea of how much risk you’re comfortable with, and how much you might stand to gain.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Sonoma County office and retail real estate have been facing challenges throughout the coronavirus pandemic on when workers and consumers would return, but the local market for space to build, store and ship products continues to hum along.
Sonoma County’s office market during the pandemic has benefited from being farther away from the Bay Area’s densest urban areas, something that proved challenging for recruiters of younger, skilled talent beforehand.
Nineteen months into the dramatic shift in how a number of office-oriented businesses, particularly those deemed “nonessential,” approach remote work, Santa Rosa area offices anecdotally have more people actually working in the leased space than markets traveling south along the Highway 101 corridor, according to Dave Peterson, a partner of Santa Rosa-based brokerage Keegan & Coppin Co. Inc.
“Our agents in Petaluma are not seeing the activity level in office as we’ve seen in Santa Rosa,” he said.
But the Sonoma County market also has not seen the large blocks of office space coming back onto the market for sublease as in San Francisco, Peterson noted.
Office vacancy in Sonoma County moved from 12.2% in the first quarter of last year to 14.1% by the middle of that year, according to Keegan & Coppin. That reversed a slow decline in vacancy since the Great Recession of 2007–2009. Vacancy was 14.4% of 14.8 million square feet in mid-2021, but sublease space amounted to only 0.9%, with most of it in Petaluma.
Companies shopping for office space these days are looking for locations that can be flexible, even accommodating partial remote and in-person work, Peterson said. A hot size requirement is for 5,000–10,000 square feet, but mostly that’s a move to another site, rather than an expansion, he said.
Like in Solano and Napa counties, industrial real estate remains one of the hottest commercial property types in Sonoma County. But the shortage of available modern space is a challenge, according to Peterson.
“There’s very little inventory available,” Peterson said. “There are only two or three buildings with over 20,000 square feet available, and we’re seeing prices increasing for sale and rent.”
Only 4.6% of 25.4 million square feet of Sonoma County industrial space was vacant at the end of the second quarter of this year, according to Santa Rosa-based brokerage Keegan & Coppin. That’s down from the pandemic peak of 5.7% at the end of last year but on par with where vacancy was at before the virus.
This tight inventory, together with escalating prices for construction, are pushing rents up 10%–20% in the past 12 months, Peterson said. Some triple-net rents for newer spaces that were around $1 a square foot 12 months ago are now $1.15.
“A lot of buildings on the market are obsolete, without the power needed for equipment or ceiling height for stacking purposes,” Peterson said.
Nowadays, tenants are looking for a clear height of at least 22 to 24 feet in buildings, he said.
Recent deals speak to local industrial real estate market activity. Dermody Properties leased 29,000 square feet at its newly built LogistiCenter project in Rohnert Park to heating, ventilation and air conditioning supplier Ferguson.
Billa Enterprises is in escrow to sell its most recently completed 70,000-square-foot warehouse at the Billa Landing development near Charles M. Schulz–Sonoma County Airport to an affiliate of the undisclosed company planning to occupy it, according to Peterson, part of the listing team. The first two buildings built, each with 45,000 square feet, are fully occupied. The site for the last two buildings, with 70,000 and 140,000 square feet, is being prepared for construction to start on one or both soon because of demand, Peterson said.
Just to the north, along Airport Boulevard leading to the airport, Airport Business Center is working on building a 161,000-square-foot warehouse for Amazon on 41 acres.
The e-commerce giant has said little about what it plans to do there, but it would be on the small side of its distribution facilities, which tend to have several hundred thousand to a few million square feet, like the 617,000-square-foot fulfillment center under construction in Vacaville.
The retailer opened a 201,000-square-foot “last-mile” delivery station in American Canyon this summer and has proposed to put one in the already completed 250,000-square-foot Victory Station project just south of the city of Sonoma. These hubs are where Amazon takes packages that it intends to deliver with its own fleet of trucks, which until the Napa Valley station opened had to travel to North Bay addresses from the East Bay.
A back door has opened for young adults who want to own property, but find themselves priced out of the market.
Fractional real estate investing on platforms such as BuyProperly and Addy allows you to own a small slice of equity in residential or commercial properties, such as apartments or business parks. You can’t live in these properties, but you can benefit if they’re sold later at a profit and receive a little rental income while you wait. You could also lose money if a property is sold for less than the purchase price.
Investing fractionally is officially a thing. Wealthsimple Trade lets you do it with a growing number of stocks, and it’s also possible to buy part ownership of art, stamps and royalties generated by music. But fractional real estate investing is by far the biggest breakthrough, both in helpful and unhelpful ways.
The positives are as much emotional as financial. You can invest successfully over a lifetime without direct property holdings, but a lot of money has been made in real estate lately and those who cannot afford to buy in are feeling the burn. Fractional real estate investing addresses this frustration.
But it also feeds a trend called the financialization of housing, or homes being treated as commodities and investments. Along with low interest rates and pandemic-driven lifestyle changes, the financialization of housing explains why home prices have risen so much.
We see financialization in the growing number of people who own multiple properties. Why sell your starter home to move up when you can own two properties? Another example is a Toronto condo developer, Core Development Group Ltd., buying single-family homes to rent out. Canada Mortgage and Housing Corp. recently created a Financialization of Housing Lab to study the trend.
BuyProperly is a fractional investing platform where you invest a minimum $2,500 in a house or condo unit and receive both a quarterly flow of rental income and the potential to profit when the property is sold.
“Fractional real estate investing is about buying shares of a house like you buy shares of a company, basically,” said Khushboo Jha, founder and chief executive officer of BuyProperly.
BuyProperly makes money by charging a fee pegged at 2.5 per cent of your upfront investment. Ms. Jha said that after applying this fee against rental income paid by tenants, you’re left with a return of 1 per cent to 2 per cent a year while you wait for a property to be sold.
With Addy, clients pay a $25 annual membership fee that allows them to invest as little as $1 in commercial properties such as apartment buildings and business parks, with a limit of $1,500 per property.
“Let’s say there’s an apartment building available in a neighbourhood and it cost $1-million,” Addy founder and CEO Michael Stephenson said. “Addy will buy it and then we’ll issue a million shares, each for $1, and anybody, including tenants in the building, can own a piece of the building.”
Money invested through BuyProperly is technically locked in for five years, but the company maintains a secondary market allowing people to sell before that. Addy’s lock-up periods range from three to 10 years, and there’s no means to sell your holdings in advance.
BuyProperly has about 300 investors who have bought into 11 or so deals in the past year, while Addy’s 7,000 or so investors have a stake in about 15 properties. Fractional real estate companies aren’t yet buying up enough properties to stoke demand and, in turn, prices. But that’s where we may be headed if the financialization of real estate spreads – more buyers chasing a limited supply.
Ms. Jha of BuyProperly disputed whether real estate being treated like a commodity is anything new. “I would say that real estate has always been a financial asset,” she said. “It’s just that it wasn’t available to regular people.”
BuyProperly clients divide into two main groups – young people in their 20s who aspire to buy a house in the future and people who already have a house and want to invest in a second property without making a big financial commitment.
Properties for sale on the site have been largely located in Ontario – in places such as Hamilton, the Niagara Region, London and Ottawa. Perhaps reflecting the impact of the financialization of housing, there’s nothing for sale right now in Toronto.
“We haven’t been able to zero in on anything in Toronto,” Ms. Jha said. “We would love to and customers would want to, but it doesn’t make sense, returns-wise.”
Coming soon: An investor’s take on fractional real estate, including fees and risks.
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Not only has COVID-19 upended the lives of millions of Canadians, but the pandemic has caused a tidal wave of setbacks: thousands of deaths, closed borders, political conflicts, shuttered workplaces, and economic turmoil. Of course, the Canadian real estate market has experienced this unprecedented crisis in its own unique way too.
Throughout the pandemic, Canada’s real estate market saw months of volatility in which large cities lost residents in droves when the work-from-home phenomenon took hold, with large cities like Toronto seeing record population loss during the height of the pandemic.
As a result, a tsunami of demand flooded smaller, suburban areas, with buyers snatching up the already limited inventory, driving up prices (even higher) in the process.
Fundamental forces of change, such as this, continue to reshape the real estate industry, according to PwC Canada and the Urban Land Institute’s Emerging latest Trends in Real Estate (ETRE) report. The annual survey of the Canadian real estate industry suggests feelings of optimism, with business prospects for 2022 returning to above pre-pandemic levels.
While COVID-19 concerns still loom, real estate businesses have proven successful. With the worst of the pandemic behind us, the report says the Canadian housing market has boomed, industrial real estate continues to strengthen, segments of the retail sector fared better than expected, and the office sector, while under continued pressure, has shown some positive signs.
According to the report, Canada’s leading real estate businesses will keep a close eye on the key forces reshaping real estate. This includes the significant shifts in the workplace and ways of working, the increasing significance of environmental, social and governance (ESG), and rising costs and competition.
“Renewed strategies on innovation, transformation and repositioning portfolios are essential for real estate businesses to successfully embrace these disruptions in the industry,” said Frank Magliocco, National Real Estate Leader PwC Canada. “Technology and data analytics can assist with analyzing opportunities of growth and making better-informed investments.”
Richard Joy, Executive Director of Urban Land Institute Toronto, also noted that these trends would have a “transformative” impact on the industry. “Working together to find creative solutions to these challenges will enable real estate leaders to shape the future and uncover new opportunities,” said Joy.
While the Vancouver and Toronto real estate markets continue to lead Canadian cities in terms of investment and development prospects, every region has its own opportunities and challenges. According to the report, for the third year in a row, Vancouver remains the top market to watch.
“Investors and developers alike are feeling optimistic given Vancouver’s strong economic outlook, the restart of immigration activity and an abundance of capital,” reads the report.
The next market to watch is Toronto. The Greater Toronto Area’s real estate market is a crucial source of strength from industrial assets to housing as the region’s economy kicks into gear after multiple lockdowns. However, the report says the power of these sectors is also creating challenges for Canada’s largest city.
Other major cities to watch include Montreal, Calgary, Ottawa, Halifax, Winnipeg, Edmonton, Saskatoon, and Quebec City.
Amid the pandemic, building and buying single-family homes across Canada has been particularly strong, with products moving quickly and prices continuing to rise. While the expectation is that this segment will slow after a buying frenzy during the pandemic, the survey believes activity will remain strong.
Affordability remains an issue, even in cities where it previously wasn’t. As a percentage of household income, ownership costs reached 56.8% for single-detached homes in January 2021, RBC Economics noted in its June 2021 housing trends and affordability report. This was the highest since 1990.
Compared to single-family homes, affordability has improved for condominiums. However, some developers say they are cautious about starting new projects, even with an improving outlook for condos, given cost uncertainties.
“Broadly speaking, real estate players identified multifamily housing as a strong category, and that demand will be steadfast in many cities as people struggle with homeownership affordability,” reads the report.
The survey found a growing interest in single-family rental housing as a means to offset ownership affordability challenges. However, interviewees from this year’s ETRE report are divided on whether single-family rental housing in Canada will be a success, as it has been south of the border.
“Regardless, innovation and collaboration with governments are necessary to help address the affordability crisis in Canada,” the report said.
As the real estate industry navigates these trends and other business pressures — including the growing concern about housing affordability — in 2022 and beyond, real estate companies have an opportunity to “embrace creative solutions to stay ahead of the challenges and plot their growth strategies for the future.”
You can read the full report here.
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