Private lending executive explains the shift in the RTL space
The fix-and-flip market that dominated real estate investing through much of the 2010s looks different today. The HGTV-fueled wave of casual flippers has largely subsided, and the investors who stayed are starting to hold onto properties rather than selling them.
For commercial mortgage brokers in the CRE lending space, that means clients are asking about different products than they were five years ago.
Ketan Parekh (pictured top), managing director and head of US lender relations and capital markets at Toorak Capital Partners, has over 25 years of experience in the mortgage industry. He said the borrower base commercial brokers and private lenders serve today is not the same crowd that showed up during the HGTV era.
"The borrowers that are in the space now are in it for the long haul because the people we lend to, for the most part today, are experienced," Parekh told Mortgage Professional America. "This is what a lot of them either do for a living, or it's their big second job. It's not the customer base that was watching the HGTV show and figuring out how they're going to make a quick buck."
Why investors are choosing to hold
The shift from fix-and-flip to fix-and-rent was driven by capital. Two things had to happen before investors could realistically hold: the DSCR market had to mature, and home prices had to slow enough that the long-term play made more sense than the quick exit.
"Back in 2017, 2018, you couldn't really finance these loans very efficiently," he said. "The DSCR market was just evolving."
As the market matured, the exit options available to investors changed with it.
"As that market opened up, it afforded opportunities for investors to have an option to retain the house," Parekh said. "Post the fix-and-flip loan and the project being completed, going into a DSCR loan that they can then rent the property and hold with long-term financing. The advent of more accessible capital accelerated that path of giving investors that option."
For brokers, that means clients who once needed a short-term bridge loan are now coming back asking about permanent DSCR financing. It is a second transaction that did not exist when the fix-and-flip market was purely about the exit sale.
The bank failures of 2023 brought another wave into the private lending market. When Silicon Valley Bank, First Republic, and Signature Bank collapsed, and institutional books were wound down, investors who had relied on those relationships were now free agents on the market. As they moved into private lending, these customers had to adapt their thinking about financing.
"Those borrowers didn't have a place to go," Parekh said. "So they started coming into the private lending world with the idea that they had to get comfortable paying higher rates. But then they got the benefit of faster speed, better customer service, and getting their draws out quicker. Everybody focuses on rate, but rate is a cost of funds, a line item in a budget, and a project's feasibility.
“If there's enough margin in the deal and you're paying another point and a half of interest for 12 months, it's not going to kill a deal."
What this means for brokers
DSCR lending is showing up across more platforms than it used to. Parekh said the growth has been significant, but brokers should understand who is actually being served by each type of originator.
Retail platforms and consumer-facing lenders have started offering DSCR products, but Parekh said their borrower base is different from the experienced investor profile that dominates the private lending space. The consumer side tends toward individual landlords with one or two properties, many of whom end up in agency-eligible loans.
The institutional private lending world is serving LLCs, experienced operators, and investors running actual businesses.
"When you're talking about CrossCountry or Rocket Mortgage or UWM doing DSCR, they may see some small sliver of the investors that would work with us," Parekh said. "But they're working more with that consumer who owns two rentals or something similar. We are treating these truly as commercial loans from all aspects."
In the institutional space, experienced borrowers think about rate differently than consumers do, Parekh said.
"You intend to be there for the long haul," he said. "Somebody may have cheaper terms, they don't have the best experience, and then they're like, I'm going to come back to you. I realize it's going to cost me more, but borrowers generally get it. At the end of the day, they need less friction to do what they need to do."
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This article is part of our Monthly Spotlight series, which in June focuses on residential and commercial construction. Full coverage can be found here.
