In today’s world, the connecting of investors with promising real estate ventures has never been easier. Online Funding and Brokerage Services have made it possible for anyone to invest in real estate ventures. With this ease, however, come certain risks that would-be investors need to be aware of.
As an originator or investor in multifamily properties, you may not think much about how your debt or equity offerings can potentially impact your loan origination or secondary market deals.
However, these small details can have a major impact on the feasibility and profitability of your deal respectively. In this article Henry Stimler, an expert at origination and brokerage in multifamily debt and equity will highlight some key considerations to keep in mind when planning your own multifamily debt or equity offerings as well as possible pitfalls to avoid if you plan on going down that route.
What is Origination?
In the world of real estate finance, the term “origination” refers to the process of arranging a loan between a lender and borrower. Henry Stimler indicates that in order to originate a loan, a lender must first qualify a borrower. This includes demanding enough security, such as assets or cash, to ensure the loan is repaid. Once the lender and borrower are both qualified, the lender will arrange a loan on behalf of the borrower.
Henry Stimler shares that this can be done through a variety of channels, including online. At the core of origination is the underwriting process. Different types of borrowers and providing different levels of security will require lenders to do their due diligence before approving a given loan. Depending on the risk level of the loan, this can include performing underwriting due diligence reviews such as verifying the borrower’s financial situation, analyzing the project’s economics, and verifying the accuracy of the project’s stated rent and cash flow projections.
What is Brokerage?
Brokerage is a service that connects investors with real estate deals. Real estate investors can use online brokerage services to search through deals, conduct due diligence on deals, and potentially sign off on deals and make investments. There are a number of online brokerage services that investors are able to use. Some of the more common online brokerage services include Zillow, Trulia, and Loopnet. Among the most popular real estate investment platforms is Zillow. Zillow makes it easy for investors to find deals by allowing them to search for properties based in their country or abroad on multiple characteristics, including rentals, sale prices, and financial information, such as rent, income, and cash flow. Investors can also rely on Zillow’s hosting of a wealth of publicly available data, such as data from the National Association of Realtors.
How Origination and Brokerage Can Impact Your Multifamily Debt or Equity Offering
The process of obtaining a loan or other form of financial assistance is crucial to the success of any real estate deal. Henry Stimler, Executive Managing Director at Newmark – a leading transaction advisory firm, indicates that in the case of a debt deal, the lender obtains a promissory note from the borrower (you) as security for the loan. In the case of an equity deal, the investors obtain shares in the company that owns the real estate.
From the point of view of the lender, the most important factor is the debt-to-equity or debt-to-equity ratio. If a borrower has a large portion of the deal in debt, the lender is more likely to demand additional interest or a higher down payment. This is because the lender is concerned about the borrower defaulting on the loan. In the case of an equity deal, the investors are essentially purchasing a portion of the ownership of the company that owns the property. This is the most important factor for investors because they want to ensure that they receive a share of the profit when the property is eventually sold.
The Bottom Line
To get a loan or other form of financing, you must have a business plan that shows how you’ll repay the loan. Depending on your business plan and the amount of funding you need, you may choose to go down the debt or equity route. Debt is more stable, but it may be more expensive. Equity is riskier, but it can generate large returns. And, debt and equity can work together. If you have a strong business plan with a well-diversified revenue stream, you may be able to get both debt and equity financing. Depending on your specific circumstances, one of these three financing options may be right for you.