3 Top Markets for Private Lending in 2021

By Strategic Passive investments 

In the third quarter of 2020, fix-and-flip real estate investors enjoyed some of the best returns they have seen in the past decade. According to ATTOM Data Solutions, flippers generated more than 44 percent returns on their investments during Q3 2020, which equated to profits of nearly $74,000 on each deal. That was up nearly 20 percent over a year prior.

And yet, in keeping with the weirdness of 2020, fewer fix-and-flip investors jumped into the market to enjoy those record-high profits. In fact, most homeowners would probably have said they would have loved to see a few more flippers participating in the housing market just to get more homes out there and available for purchase. In Texas, a great state for fix-and-flip deals historically, some of 2019’s hottest markets’ fix-and-flip volumes fell by more than 44 percent. The same happened in other popular markets around the country as real estate investors found themselves outgunned by homeowners armed with conventional mortgages, a drive to win bidding wars and own a single-family home in the middle of the pandemic, and record-low interest rates. And, on top of that, most homeowners simply were not interested in selling.

Todd Teta, chief product officer at ATTOM Data, summed up the situation: “Spurred by low interest rates and a desire for more space, a surge of buyers relatively unscathed by the economic damage resulting from the crisis has expanded the market, raising demand for a dwindling supply of homes.” He noted the net result was “more buyers scooping up properties, leaving less for investors.”

Fortunately, real estate investors are never a population to write off. In the face of adversity, these individuals tend to be the ones who solve insurmountable problems and come up with wildly creative strategies to keep generating returns. In the case of the 2020 housing supply squeeze, however, investors turned in large numbers to something tried-and-true: private lending. The key to success in private lending, however, often lies in picking markets in which to lend that are optimized for both private-lender success and real estate-investor success.

Here are three markets that are likely to represent this crucial balance for investors in 2021:

1. Nashville, Tennessee

Nashville has a great position heading into 2021 thanks to its location in the relatively affordable southeastern United States. Few regions ever beat the southeast in terms of offering an attractive cost-of-living metric, and the Midwest is usually the only region in the running to do so. With the COVID-19 global pandemic making outdoor living a key consideration for buyers, the subtropical climate in Nashville beats icy midwestern winters every time.

Nashville also boasts recession-resistant employers in areas like healthcare and real estate, and Amazon employs more than 5,000 full-time workers in the area. The city boasts five Fortune 500 company headquarters and a municipal government dedicated to keeping development and developers in business during the pandemic.

Nashville is best known as “The Music City,” of course, which leads many new investors to discount it since the live-music industry is suffering under ongoing lockdowns around the country. However, the music industry is just one of the region’s big employers, with Forbes describing Nashville as a “center for healthcare, banking, and transportation industries” as well as citing its “large number of colleges and universities, including Vanderbilt University.”

2. Savannah, Georgia

Also located in the highly affordable southeast, Savannah actually made ATTOM Data’s list for markets that have seen the biggest decline in fix-and-flip activity in 2020. Despite the highly competitive market, investors with established pipelines of leads for flip properties are still active in the area and raking in those 40-percent-plus returns in many cases. However, if private lending is more up your alley, then Savannah ticks all the boxes:

• The city’s investor-friendly government is offering West Coast tech employees a stipend to move to Savannah, and entire micro-communities have taken the city up on the offer. In fact, several new high-tech employers now call Savannah home, including some extremely innovative startups.
• Savannah’s cost of living is hard to beat. In a year when home-buyers were willing to pay just about anything to get their hands on that deed at closing, Savannah’s overall cost of living remained below the state of Georgia’s and well below the national average. The city’s median home price also remained lower than Georgia and national median home prices despite record heat in the market.
• A solidly recession-resistant economy. Thanks to the Port of Savannah, many parts of the city simply will not be permitted an economic shutdown even if there is a federal mandate for it. After all, transportation of goods is an essential service, and much of the country’s imports flow in through Savannah. As a result, many employment opportunities across the board are likely to be considered “essential” in Savannah, thereby offering residents a degree of economic stability in volatile times.

3. Phoenix, Arizona

Phoenix, Arizona, offers that outdoor-living attraction everyone craves right now along with relative affordability and access to tech and bioscience jobs that are considered essential and also may be amenable to remote work. Although the cost of living in Phoenix is not nearly as far below the national rate as in Nashville or Savannah (in fact, sometimes the cost of living in Phoenix is slightly higher), it still compares very favorably with the West Coast, where many homebuyers hail from.

Private Lending in Hot Markets Can Bring Pitfalls with Profits

These three markets are ideal for private lenders as well as real estate investors because the markets are likely to support the types of deals that real estate investors want to do. If you are like most private lenders, your goal is to generate profits via the payment of interest rather than by foreclosing. This means you need to lend in solid markets and on solid deals. Identifying good markets for private lending is only the first step.

Once you have identified a good market, you still must determine if a given deal according to the information you have about the borrower’s strategy is likely to generate the returns you expect. Do not permit yourself to think about how you might do the deal differently because, as the private lender, you do not have the flexibility to change the plan. Only the borrower can do this, and they may not elect to do so on the timeframe you would or, for that matter, at all. Private lending is a great way to make money in hot markets in 2021, and the hottest markets that are toughest for real estate investors may be the most attractive for private lenders.