We are often asked questions about setting up banking relationships for real estate investors. I was a banking executive with an expertise in lending and real estate for more than 25 years before managing real estate-related portfolios for Castle Rock, so I know something about this topic. Let’s talk about your options.
BIG BANKS: Big, national banks continue to be more and more automated. Most decisions have been taken out of the hands of bankers on a local level with virtually no decision-making authority given to branch bankers. If you need tons of ATMs all over the country, but you don’t need any outside of the box thinking, then a big bank might be right for you. If you are a real estate investor that plans on flipping or renting single-family homes, I would certainly not expect a big bank to accommodate you.
CREDIT UNIONS: Credit unions are fantastic for someone that keeps very small balances in the bank. They, however, tend to be very limited on their services. They are known to have very low employee goals and they tend to pay employees very little in relation to other financial institutions. That being said, they tend to not hire out-of-the-box thinkers. They are great at car loans and CDs, but they usually aren’t strong real estate lenders.
COMMUNITY BANKS: Believe it or not, smaller community banks are the places that seasoned big bankers tend to graduate to. The managers of community bank offices are very different from big-bank managers as they tend to have much more authority, including underwriting authority. Not all community banks, however, have the same appetites for the types of lending they do. They will be more likely to do things that “make sense” more than a big bank would. A good thing to do is to look up the community banks in your county and then visit the county clerk’s web site. Use the search function to search for mortgages or deeds of trust (depending upon your state) that the bank has made. You will then see the types of properties that they lend on. If you find one that lends to real estate investors, then you might have found your institution.
HARD-MONEY LENDERS: You will quickly find private lenders willing to give you money once you start investing. Most of these lenders are simply local people that will give you money if you are putting a substantial amount down on your deal. They will also be very, very expensive. If you have nowhere else to turn and you know you have the perfect deal, then they might work for you, but count on most of your profit being eaten up by high interest rates and fees.
INSTITUTIONAL LENDERS: In the past few years, many private equity funds have popped up that specialize in lending to real estate that flip or rent property. Their rates and fees are slightly higher than banks normally charge, but they specialize in lending to investors. Through our Private Client and Executive Programs, we often gain guidance lines through these lenders for those we work with. We were able to get one client a $5 million line for both flipping property and building rental portfolios. The negative to these groups is simply that they don’t handle deposit relationships like banks and credit unions.
Each type of lender serves different types of clients. Just like real estate-related investors, no two clients are alike. You simply need to decide what your needs are and choose the institution or lender that makes the most sense for you and your business.