Something BIG is happening for real estate … and while it’s not a surprise, it’s a development every real estate investor should be aware of.
Here’s some context …
First, remember real estate investing is essentially a business of managing debt, equity, and cashflow.
That’s YOUR job. You can get your property managers and team to handle most everything else.
Equity (the difference between the value and the debt) comes from savings (down payment), the market (value increase), or amortization (pay down of loan).
Cashflow is a function of rental income, operating expenses, debt service, and taxes.
Debt is like the air in a jump house. When it’s flowing in, it props everything up. When it stops, everything deflates pretty fast.
That’s why real estate investors (should) pay close attention to debt markets.
The 2008 financial crisis devastated the supply chain of debt into real estate. Mortgage companies failed in droves. We know. We owned one.
Real estate went from too-easy-to-finance to nearly impossible. Lack of lending crashed real estate prices and created a big mess. The air came out.
It’s why we became such outspoken advocates for syndication. There was (and still is) a huge need and opportunity to aggregate capital for real estate.
Banks and Wall Street had been the primary channels for capital aggregation and distribution. But they were broken. Main Street needed to be empowered.
The government agreed.
So in 2012, the JOBS Act passed. And since September 2013, regulations are in place which make raising private capital MUCH easier. We like it.
But while the JOBS Act helps investors raise EQUITY …
… earlier legislation (the Dodd-Frank Wall Street Reform and Consumer Protection Act) actually impedes lending … especially at the local level.
But now that’s changing … and it’s an EXCITING development!
You may have seen this headline …
Trump signs bipartisan bill rolling back some Dodd-Frank bank regulations – Los Angeles Times, 5/24/18
“ … with the key support of some Senate Democrats, the legislation focuses relief on small and medium-sized banks …”
“‘This is a great day for Main Street in rural America, and a big testament to what’s possible when members of Congress put partisanship aside and work together to help our communities grow and thrive,’ [Sen. Heidi Heitkamp (D-N.D.)] said in a statement after the signing.”
“Community banks, which enjoy broad support among Republicans and Democrats, will be freed from Dodd-Frank’s mortgage rules if they make fewer than 500 mortgages a year.”
Even in today’s highly charged political environment, this bipartisan effort shows Main Street real estate is very important to politicians.
The Dodd-Frank rollback aims to improve the flow of money into real estate, which is awesome for real estate investors.
Of course, just because politicians aim at something, doesn’t mean they hit it. Politicians are notoriously bad shots.
So what do LENDERS think of the Dodd-Frank rollback?
Local bankers say reforms to Dodd-Frank are welcome – Herald-Whig, 6/5/18
“Mark Field, president and chairman of Liberty Bank, said most of the benefits from the recent reforms … involve mortgages.”
“… allows banks to give automatic qualified mortgage status to customers they know if the banks are using their own money for loans.”
“‘Character and knowing people counts for something again,’ Field said.”
This is GREAT news … and although time will tell (after all, this is very recent) … we think it will open up capital flows into real estate.
Of course, as we’ve said before, we think more money will be finding its way into real estate lending. It’s both inevitable and reassuring.
For individual investors and syndicators alike, this new playing field promises to open up new sources of lending … and terms.
Because even though lending has loosened since the depths of the recession …
… it’s remained tight for borrowers and projects that didn’t fit into the tightly-regulated box created by Dodd-Frank.
Not to get too far in the weeds, but the 2008 credit crisis had its roots in Wall Street’s casino mentality.
In its zeal to create more poker chips, Wall Street cast aside sound lending practices because they could bury the risk in complex securities and sell them to unsuspecting investors.
Wall Street didn’t really care if loans went bad … because they wouldn’t be holding them when it happened.
So Dodd-Frank created strict rules attempting to prevent the bad behavior of Wall Street and big banks. (Good luck with that.)
We could go on … but the point is that Dodd-Frank took professional judgment out of lending … from EVERYONE … including community banks, credit unions, and other portfolio lenders (those who hold loans instead of flip them).
Even though the financial crisis had its roots in Wall Street, not Main Street … Dodd-Frank took many Main Street lenders off-line.
The Dodd-Frank rollback intends to take the shackles off local lenders.
There’s a HUGE difference dealing with a local lender on a PERSONAL basis … one who’s going to hold the loan … and can consider the many factors which don’t fit into some bureaucratic one-size-fits-all checklist.
And while we need to do more research, a side-benefit for syndicators may be that setting up lending funds might get easier too.
In any case, now that local lending laws are loosening, let’s take a look at moves you can make to take advantage of the changes …
Build relationships with community bankers. If you’ve only been investing since 2008, this is a funding source you’ve probably ignored. It’s time to fix that.
Open accounts with community banks in markets where you invest. Establish a personal relationship with the bankers. It’s a VERY different experience than doing business with a too-big-to-jail bank. You’ll like it.
Use professional selling skills to find out what the banker’s goals and objectives are. What makes the relationship a win for the banker?
Present yourself as the IDEAL client for the banker. Do some deals … even if you don’t really need the money. SHOW the banker you’re a person of character and capability. Build TRUST.
It’s even BETTER if you’re a syndicator because you can bring bigger deposits, bigger loans, more transaction volume, and maybe even more referrals.
In fact, one of the secrets of successful syndication is having your individual investors make deposits in the community bank you’re borrowing from.
Go with the flow …
When the rules change, so does the flow of money. Sometimes it works against you. Sometimes it works FOR you.
And while there are certainly some long term economic trends every investor … real estate or otherwise … should be concerned about …
… this is a development which should have real estate investors smiling.
We think these updates to Dodd-Frank will work FOR real estate investors … at least those careful to pay attention and take effective action.
Of course, you’ve read all the way to the bottom, so you’re already ahead of the game.
Until next time … good investing!
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