Global economic uncertainty and big banking failures have opened the doors for private lending growth. Private credit loans and private mortgage funding are breaking records, with real estate in particular presenting a massive opportunity. The Mortgage Bankers Association categorized big banks as "super conservative" in their strategies this year, as their projected lending dropped 20% from $816 billion last year to $654 billion.
We recommend the following considerations for private lenders looking to seize this opportunity and become a top real estate lender in 2024 and beyond.
1. Upgrade Technology to Improve Operations and Customer Experiences
The FinTech industry is projected to reach $1.5 trillion by 2030 as businesses embrace digital transformation and more and more financial transactions are managed exclusively online. Even the biggest banks are investing significant dollars to create a standout digital experience for their customers - take Bank of America’s 9% YoY increased investment in technology.
Borrowers today expect a seamless digital experience for lending and loan management. This means up-to-date information, quick customer service responses through digital channels, and convenient online access to their loan status and account information. By implementing user-friendly borrower portals and online loan applications, private lenders can provide a seamless customer experience.
Investors also want instant, digital visibility into loan products, investment opportunities, projected yield, and timelines. Technology that provides real-time updates and insights can strengthen relationships with investors and create a sense of trust and transparency.
Upgrading technology and software systems can also significantly streamline business operations for private lenders. Most lenders use over 10 software systems to manage their day-to-day lending operations, including loan origination, loan servicing, underwriting systems, online customer portals, and more. Lenders who seek opportunities to consolidate their tech can streamline processes, operate more efficiently and maximize profitability.
Investing in digital transformation doesn’t need to be a complex effort of emerging ‘buzz-word’ technologies like emerging AI, blockchain, and Smart Contracts. It can be done with a crawl, walk, run approach focused on optimizing existing strategy and providing user-friendly experiences. Technology should support and enhance well-laid plans and processes, not derail them.
2. Diversify Real Estate Investments to Grow Sustainably
One of the keys to success in private lending is managing a diverse investment portfolio. Diversification spreads risk and ensures that the business isn't overly reliant on a single market segment.
This recent Forbes article does a thorough job of exploring the considerations of different real estate investment avenues, from commercial properties to agricultural land and apartment buildings. Experts advise balancing a real estate portfolio with a mix of these versatile investments, to protect funds from macro-economic trends that might negatively impact one avenue but not the other.
Diversification can also come from capital raising. Consider the portfolio of your investors as a sort of “crowdsourcing” of your capital. This helps mitigate potential lost investments by spreading resources across a network instead of one or two sources.
It's important to approach diversification with caution, and avoid high-risk temptations or unsustainable expansion. Thorough research and analysis of potential investments are paramount, particularly in uncertain times. Lower risk opportunities will provide a safeguard against unexpected market changes.
3. Play Defense: Maintain Adequate Reserves and Proactively Mitigate Unforeseen Crisis
A diverse portfolio can protect lender assets from the regular twists and turns of the real estate industry. But if the global community has learned anything from the events of the last few years, it’s to be prepared for unforeseen crises. The same logic should be applied to a private lending business, particularly in real estate as it’s been especially turbulent.
Big banks and private lenders alike must maintain adequate financial reserves to serve as a critical buffer during economic downturns, global disasters, federal reserve policy changes, or any other big events. Wells Fargo is one example of a large financial institution proactively building up reserves in today’s market, particularly to prepare for losses from commercial real estate investments.
But how much is enough? There’s no ‘right’ answer, as this largely depends on risk tolerance. Consider how long the business could survive on only reserves, taking into account its monthly operating expenses and outstanding loan obligations.
