Five essential tips for evaluating real estate project financing

1. Understand the project

Before investing in a real estate project, it’s important to understand what the project involves. What type of project is it: is it an existing rental property with income, a new construction, a renovation, or a conversion? What will be done in the project, and what goals are to be achieved? Where is the project located, and what conditions exist for its success? By understanding the purpose and scope of the project, you can assess whether it fits within your risk profile. Consider the risks involved, both financial and operational. How realistic are the timeline and budget? Are there external factors, such as market changes or regulatory adjustments, that could affect the project? What is the current macroeconomic situation in the real estate industry? Taking the time to understand the project will help you determine if it’s something that aligns with your investment goals and if the risks are acceptable.

2. Interest rate, amortization, and loan term

It’s good to understand how the interest rate, loan term, and amortization work. Review the payment structure. Interest payments may be made regularly, such as monthly or quarterly, or at a different point during the loan term. Also, keep in mind that amortization and interest payments may be separate, meaning that amortization doesn’t always equal the interest payments. For example, bullet loans are common in bridge financing, where the entire loan amount is paid back at the end of the term. It's also important to ensure the loan term aligns with your investment horizon. If the loan is paid off early, this could affect your returns as the interest might be adjusted to reflect the shorter term.

3. Risk assessment

A well-developed risk classifi model is a valuable tool for investors as it helps simplify and structure the evaluation of credit risks. Such models take into account several factors, including counterparty risk, collateral, project risks, and market risks, to reasonably assess and price the risk. The result is typically presented on a scale, often from A to F, with each grade corresponding to a specific risk level. Here you can read more about SaveLend's risk rating model.

However, it’s important to remember that the risk assessment should not be seen as an absolute truth but rather as a support in the decision-making process. Even with a clear risk classification, each investor must make their own judgment about the project’s conditions. For instance, if the investment repayment is based on selling housing units, the investor should consider whether the properties being sold are realistic in today’s market, even with some market fluctuations. It’s important to form your own opinion on the project’s feasibility and potential, rather than relying solely on the given risk classification.

4. Securities

When evaluating a real estate project, understanding the securities offered and the structure of the loan is important. Real securities, such as property liens, share pledges, and personal guarantees, act as guarantees for the lender, ensuring repayment even if the borrower cannot fulfill their payments. Real securities are particularly important in real estate financing because they give the lender the right to take over and sell the assets to cover the loan if the project doesn't go as planned.

Another important factor to consider is LTV (Loan-to-Value), which measures the degree of leverage, i.e., how much of the property’s value is mortgaged. A higher LTV means a larger portion of the property is financed, increasing the risk for the lender. If the market value of the property decreases and the borrower cannot repay the loan, it may become difficult to cover the entire debt by selling the securities. Therefore, it's good to carefully assess both the securities and LTV when evaluating a real estate project.

5. Diversify your investments

A key strategy to reduce risks in real estate investments is to diversify your investments across multiple loans and projects, both within real estate financing and other investments. By investing in different loans, project owners, and real estate projects, you can reduce your vulnerability if a specific project encounters problems. If a particular project faces delays, financial difficulties, or other obstacles, the impact on your overall return will be less significant if you have a broader investment portfolio. The more loans you spread across different projects, the more diversified your portfolio becomes, leading to a more stable and balanced long-term return.

Most of you have probably already seen our real estate financing opportunities under the "Invest -> Projects" section when you log in to SaveLend. It’s easy to get started and participate, but remember that it’s important to truly understand what you're investing in. By reviewing the factors above, you’ll gain a clearer picture of the project’s potential and risks. If you have questions or want to discuss a specific project, don’t hesitate to contact us. We’re here to help!