Stay informed about the evolving landscape of private lending. In this episode, we delve into the state of private lending, drawing insights from the American Association of Private Lenders. We explore the growing market for bridge loans, DSCR loans, and other short-term business purpose loans, including residential transition loans and ground-up construction financing. Gain valuable perspectives on the trends driving growth in this sector and how investors can capitalize on the opportunities within the private lending space.

—

Watch the episode here

 

Listen to the podcast here

 

The State Of Private Lending: Trends And Insights For 2025

In this episode, I want to talk about, again, some of the things we are seeing in the marketplace. I was reviewing a State of the Union article by the American Association of Private Lenders. I really thought this was interesting because many of us are investors and whether you want be a passive investor, active investor, we want to try and provide you information that allows you to make informed decisions. Let me share with you what is going on or what they’re seeing.

Bridge Loans Vs. DSCR Loans: Key Differences And Growing Demand

One of the areas that we’ve seen a lot of movement is in regards to lending space and investors getting either a bridge loan or a DSCR loan. Let’s dive into that a little bit more. First, a bridge loan. It’s a short-term business purpose loan. Now, when we say business purpose, it’s not a restaurant or things like that. We got asked that question by the SEC actually of you’re giving loans to businesses. No, it’s an LLC, but it’s secured typically by 1-to-4-unit residential property.

People know these by fix and flip loans, Non-QM and new term RTL, Residential Transition Loan. There’s also ground up construction, private lender loans, even the so-called the Dirty Bird of hard money loans. Technically, residential transition loan is the most accurate description because the assets in some type of transition. Typically, they’re using a short-term twelve-month bridge to either sell it or seek out long-term financing.

Now the other is what’s called DSCR, Debt Service Coverage Ratio. Those loans are based off of monthly income compared to your mortgage payment and taxes and insurance as well. Let’s say that you have a rental that can bring in $1,000 a month and the debt service is $800. $1,000 divided by $800 is 1.25. Unlike bridge loans, which are short-term, DSCR for 30 years.

Bridge is, to give an example, you’re buying a dilapidated property that can hold for rental. You’ll start with a bridge loan, get the money to fix it up, then you’ll refinance it into longer-term debt, which typically might be a DSCR loan into a permanent product. The benefits of these DSCR loans is they don’t go against your credit. They don’t go against your debt to income. They’re solely based on how that property performs. Just remember that at the end of the day, you’re probably still responsible for that if they make you sign a personal guarantee. Industry on multifamily, for example, 1.25% or higher is what you’ll typically need. Some lenders will go to DSCR as a 0.7%, meaning you’ll come out of pocket every month but must have very low loan-to-values.

 

I talk about this because in 2024, the demand has gone up about 30% year over year. As these have become securitized and basically institutional money has poured into this space, it has really started to see an uptick in the number of loans/the growth that you’re seeing in this space. I believe now basically from a volume perspective, just several quarter over quarter in 2024 was anywhere from 3,000 to 4,000 loans per quarter. Significant growth. DSCR, again, very similar growth within both spaces.

How Interest Rates, Credit Scores, And Down Payments Affect Loan Costs

Now, one thing about these loans that people need to understand, they’re more expensive. What do I mean by that? Bridge loans, of course, are much higher. The interest rate varies across the country and so forth. The national average towards the end of 2024 was about 11.25%. I know people are thinking that’s high. Let’s step back for a second.

One thing about these loans that people need to understand is that they are more expensive. Original loans have much higher interest rates. Share on X

The loans are typically easier to get and let’s say it’s a $100,000 loan, you’re going to pay $11,250 in interest over that course of the year. Whereas if it was a traditional loan, you’re paying 8%, you’re paying, call it $8,000. It’s $3,000 more, which is a lot, but some people look at it from it’s simpler, it’s easier, it’s faster. If I can get the loan faster, I can get the property done faster, which I can collect interest and money on the property faster. Upside, downside.

It varied. Up in Wayne Michigan, they’re over 13%. Dallas, they’re high, over 12%. Fulton County, Georgia, a lot of activity there. It’s still high, over 12.5%. Average loan amounts. Interestingly enough, Dallas was $750,000. Georgia, $500,000, Michigan, $150,000. You can see the rates vary also there. It’s really interesting overall.

They have shifted a little bit over the course of 2024. They’re up over 11.5%, went down to 11% and again, fluctuating throughout. It’s interesting because Massachusetts, for some reason, had higher rates, higher balances, though, typically correlate to higher interest rates. What I found interesting is I know some people in California say they can get to hard money loans from 9%. On the average on the graphs here, it’s still showing well over 10% in those areas.

That’s on the bridge side. DSCR loans, again, in January of ’24, they’re over 8%, which is really high. By October, they’re down to 7.25%. Now, they’re floating right around to 6% and 7.25%. You’ve got to remember, almost 50% of loans still price in that 6% range, but it’s really average. Here’s a big factor that I think people need to understand about these types of loans.

When you go back and you hear me say they were based off of property performance is one factor, but you as an individual play a huge critical role in that. What do I mean by that? For people who are, again, passive and active investors out there, you are looking for financing. These are two very good options for you. Just realize we priced a loan for somebody on a DSCR loan. If I was buying it, my credit score is above 780, so it came in at 6.875%. That same person with a 710 score pumped in at 7.5%. Basically, almost a half a point difference because of the credit.

The other factor is down payment. How much equity? There are the teaser rates out there that say starting at 6.5%. Yeah, if they are on someone with 800 credit and 50% loan-to-value, you can get a loan like that. If you’re at a DSCR of floating around one, you’re at 80% LTV, which is the most they’ll go and your credit’s low, right now you’re probably going to be in the mid-sevens on those loans.

What’s nice about them is they don’t impact your debt to income. A lot of people acquiring investment properties can use this to expand their portfolio. It is a great product, but interest rates are little bit higher. What do the fees look like on these types of loans? Of course, they’re upfront fees. When I talk about upfront fees, I need people to understand this is fees that are paid at closing.

Do not ever in 1 million years send somebody money directly or before closing. Don’t do it. If you do, you will never see that money again. If you’re a borrower, everything goes through an escrow agent or title company. That is the way it should go. Let’s talk about fees. There’s document prep, which is $1,000 to $1,500, processing the loan, again, $1,000 to $1,500, underwriting the loan, which is typically $1,500 to $2,500, probably average around $1,500. There’s also points.

Hidden Costs In Private Lending: Broker Fees, Points, And Overpriced Deals

What are points? Here’s the dirty little secret of how this works. Most people who provide these types of loans are not the actual lender. They’re a broker and they could get table funded, they could get white labeled. One thing we’re looking at is doing correspondent, which was we originate them and then we sell them off. Here’s how it typically works.

You reach out to a broker and the broker will take all your information and submit that to a lender and the lender will tell you they have standard documentation processing underwriting fees. That broker gets paid by points. A lender will typically charge anywhere from 0.25 to 1 point. Everything above that is typically a broker fee.

On average, brokers get between 35 basis points and 1 point to 1.5 points. It really depends. Bridge loans average 2.33, DSCR, 2.43. Think about you’re going to be paying 2 to 2.5 points on the loan. Just understand that. Typically if those loans, if you pay them off early, the lender will come back after the broker and recoup some of those points, by the way. Let me share a story with you about deals we’ve seen that have gotten killed because of brokers.

If you pay off these loans early, the lender will often come back after the broker to recoup some of the points they charged. Share on X

We had a loan that we were looking at a bridge loan in Texas or needed about $500,000 originally to finish construction. There was a small first on it for like $300,000 and property was 80% somewhat construction and property easily was $1.5 million, $2 million property. The broker wanted five points. He wanted $25,000 on a $500,000 loan and we’re like, “You’re going to kill the deal. This isn’t going to get done.” He is like, “No, they’ve agreed.” I’m like, “We’re going to want two points. We’re the one taking all the risk on the loan,” so seven points. As we dug into it, first, we weren’t told about the first. We found out there was a first. We went to go bump the loan up to $800,000 because we would only be in first position.

The broker still wanted five points. Instead of $25,000, now he wants $40,000. We countered and said, “You can get two points on this deal. That’s the most you’re going to do or you’re going to kill the deal.” He’s like, “No.” We got everything done. I made the broker put $2,500 into an escrow account because I wasn’t preparing all the documents and stuff because the borrower had not signed a term sheet.

The broker’s like, “He’s coming to closing. Don’t worry.” I’m like, “Good. Put $2,500 in escrow,” and if the deal falls through, I get to keep that $2,500, which was all the document processing, all those fees. He’s like, “Sure, they’re going to close. He’s told me he’s closing.”

I get all the documents prepped by some title company and he never shows up to closing. Come to find out, he had found somebody cheaper. He was actually paying a higher interest rate than this, but they’re only at 2.5 points. The broker was pissed. He lost $2,500 and tried to blame us. We told them, “You killed the deal from the outset because of greed.”

We learned a lesson that anytime a broker comes to us and wants more than typically a point, now we’re not even just entertaining the conversation with them because it’s probably a really bad loan that nobody else will want to touch. They probably already shopped it around to everybody and anybody. I just wanted to share that.

Anytime a broker comes and wants more than typically a point, do not even entertain the conversation because it's probably a really bad loan that nobody else wanted. Share on X

Understanding Default Interest Rates And Dutch Interest In Private Lending

For those who do private lending and do these types of loans call it from your balance sheet, especially on the bridge side, one of the benefits is default interest. On a residential loan, if somebody owns a home, typically you can’t charge default interest. Now it’s just a regular interest rate. On bridge loans, even DSCR, you can charge a default interest rate.

Typically, it’s between 15% and 25%. Median is 18%. It’s actually something that has really been unaddressed in the space and not really very well regulated. The space is actually trying to come up with a standard. Fannie and Freddie have a default interest rate 4% above the note rate. This industry should come up with something. I don’t know if it’s 4 % or 6%. They should come up with something but now should come up with some type of standard that would then probably be better if there were a lot of suits being filed against this. 1% are above 30%, 3% are between 25% and 30%, 23% are between 20% and 25%, at 40% are between 15% and 19%, 24% are between 10% and 14% and then the rest all below.

As you can see, the majority are again between that 15% and 25% as I mentioned. What’s beneficial about it, if you’re a private money lender, is it defaults and gets a high interest. If you try and sell the loan as non-performer, it will sell pretty close to par value because it’s clocking in that default interest compared to regular loan that will sell a significant discount. Something there to consider and benefit.

Another little creative aspect of the industry is on construction loans. Either ground up construction or fix and flip loans and what is called Dutch interest. Dutch interest is when I give you a $500,000 loan, but you have construction draws, you’re paying interest on the full $500,000. It doesn’t matter if you haven’t taken all the money because I, as a lender, have to make sure we have that money held in either a reserve account or available for it, so we should get paid to have that money sitting there.

 

What’s interesting though is only 20% of loans had Dutch interest. I thought it would be higher. Now, 72% didn’t. I thought it would be much higher, to be frank with you. As we wrap up, we focused on this episode really on private lending loans, the bridge and the DSCR. What I think is valuable also is for those who are considering, “I invested in a fund. I want to diversify and do some private lending,” or, “I’ve done private lending and you want to invest in a fund,” reach out at 7eInvestments.com. Where’s the deal flow? Where are we seeing deals?

Where Investors Are Finding The Best Deals And Future Lending Trends

On bridge loans, which are typically rehab loans, typically they’re major metropolitan areas. LA, San Diego, Chicago, Orange County, Miami, Dallas, Atlanta, Southwest Florida and other aspects of California. You get California, Florida, Texas, Georgia. That is pretty much where all the a lot of the rehabs are going. Rental, which is interesting because when you think rental, people do these for cashflow. Not as much appreciation. It’s not going to be the top markets. It’s more of cashflowing markets.

Cleveland, Philadelphia or Illinois, Texas, St. Louis, Michigan, Duval or whatever is from that Jacksonville coach, Duval, Florida on in southern Ohio as well. Cincinnati, Columbus. You can see where people are flowing based off of the types of properties, cash lowing or Midwest, Southeast. Renovation projects, which are fix and flippers, typically. Where are most people? California, Texas, Miami.

As we wrap up this episode, which I hope you found valuable just on me throwing out numbers, but I think gives some insights or tidbits that people can take away and just realize, “If I want to invest, it’s not always the same market, same area.” It really has to be based on what it is you’re trying to accomplish. Whatever the case is, just remember that this market, this avenue is growing at over 30%per year.

It’s not by accident. There’s institutions really driving the growth in this space from the Apollos to the Blackstones and getting involved because they don’t want to own the real estate. Some will do build to rent communities, but when you’re in the lending side, again, it goes back to the Rockefeller strategy, control everything, own nothing. I hope you enjoyed this episode. Make sure to leave us a like on your favorite platform. As always, I’ll catch on the next one.

 

Important Links

• Chris Seveney on X
• 7E Investments on Instagram
• 7E Investments on YouTube