Temporary Financing for Investors Available in the Market

Introduction

The COVID pandemic has changed, practically all we knew about capital markets, financing, and doing real estate deals. It has absolutely decimated the ideology that the markets are invincible to outside factors and that only an infrastructural collapse can shift business in an astronomical way (like 2008). However, this situation has forced everyone to rally together to figure out a way to cope and get by. This includes, borrowers, lenders, banks, investors, landlords, tenants, and essential employees. No one is immune to this threat and no one is above this threat. It is an equalizer placed on society. Even though we will see the end of the situation, we are all still pressing on and there seems to be a glimmer of hope every now and then.

There is no replacement for market liquidity. The secondary markets keep the ebb and flow of the primary markets by replenishing liquidity to vendors who are originating and financing the deals in the real estate market on a day to day basis. We need to understand that for a healthy market, there is no speculation or fear in the secondary markets. If secondary markets do not operate the way they are supposed to, then the troubles will eventually reach the primary market, as we have seen exactly in this situation.

The Status of Money

Money today is stagnant for the most part. This is the best way to describe it because the flow has been crippled. You see, if you haven’t noticed by now, the economy is essentially one big game of hot potato.

Whereas the hot potato represents the ability to make money. The potato in this market is cool and is not being passed to anyone because everyone wants the potato they already have. If they pass their potato, they're afraid they won’t get another potato.

It’s an interesting analogy, but that’s a good depiction of what’s going on. All of the market flows depend on secondary markets (primary market operations sell their notes to the secondary market to keep liquidity and keep funding loans).

What has been so aptly demonstrated to us in this particular recession is that ANY force, physical or non-physical can stop the flow of the secondary market and thus ‘pause’ the economy like we have seen here.

CASH will be king for the next upcoming months and investors looking to take advantage of a 5-10% price reductions on new acquisitions will need all of their ducks in a row in order to execute.

Programs For Investors Now

Right now, about 90% of the investor marketplace is short term bridge financing. Long term rental financing has all but completely dried up, except for very few players going 60-65% LTV on refinances and acquisitions.

Many of the capital buckets come out with temporary COVID programs to continue originations and fundings (rather than cease operations all together). These temporary programs are usually for investors who have done 3 or more deals in the last 3 years. This is used as a hedge against experience related risk.

Financiers don’t need to take on market uncertainty risk and inexperience risk for these deals. They want to cherry pick with the investors that will do their projects, get them sold and move on.

Another thing to mention is that the famous BRRR (buy, rehab, rent, refi) method of doing deals is also on pause because many lenders will not accept refinance as an exit strategy (only under certain circumstances). They only want to see a sale exit because they know long term financing is hard to come by right now. 

Luckily, there has been traction in the marketplace and I am now seeing some type of long-term debt come back to the market. It will still be months before it reaches full steam ahead.

Conclusion

To summarize, the illiquidity in the market is still prevalent and the health of the secondary market will not return to normal until the government starts easing on travel restrictions, stay at home orders, and other executive orders that have limited the flow of consumer capital.

Investors need to keep their head up for opportunity and tap into their sphere of influence to see who they can partner with to do deals and take advantage of some pricing inefficiencies in their local geographic region.

Explain your confident stance in the comments. I would love to hear your thoughts, opinions, critiques, and suggestions for future content.