May 25, 2023
In the past year, Landa experienced tremendous learning. We are continuing to grow our user base and offerings. Our active investor base has increased from 600 to over 50,000, we launched more than 250 single-family and multi-family properties in 7 markets, designed a whole new look for Landa, and built the Landa app experience for desktop. However, the most significant learning from this past year relates to the state of debt markets, and the disproportionate impact debt markets have on real estate businesses and real estate investors.
The increase in interest rates, from 1% to 5.25% in a year, has begun to usher equilibrium back to the market.
High rates and diminishing real estate returns.
The increase in the cost of capital has reduced real estate asset values across the US since June 2022. The fear of missing out on real estate ownership seems to have dissipated, and investors are turning to cash deposits for attractive returns. Those who remained liquid in the face of uncertainty are now presented with significant opportunities. This new direction is not surprising, given the dramatic increase in bankruptcies and foreclosures. Looking ahead, we expect this trend to continue, with even more buying opportunities emerging in the next 1-2 years. This presents a unique opportunity for investors to take advantage of the changing real estate landscape.
We are and have always been a full-stack real estate product, and as such, we believe that working towards changing the broken debt market is essential for real estate investors.
Over the past year, the debt market has consistently proven to be a major obstacle to long-term investor returns. Which is why, Landa is taking on the debt market industry.
A significant part of our value proposition at Landa is the cost of debt for properties on our platform.
Affordable debt represents a staggering quarter of Landa's value proposition. And since the cost of debt has such a significant impact on investors' returns, I'm going to breakdown why exactly debt is so expensive and how Landa plans to make it more affordable:
When the Fed increases the Fed rate banks must pay, banks increase their rates for all other lending activity.
In the commercial real estate mortgage industry, there are typically 3-5 parties involved in providing a commercial loan, and each of these parties charges chunky fees:
Mortgage broker - will typically charge a 1% fee upfront.
Lender origination fee - represents 1-2% of the total loan amount.
Lender closing costs (commonly called "processing fees", "document generation fees", or "printing fees") - collectively amounts to an additional $1,500-$2,500 per property.
Once the loan is originated and closed, the originator sells the loan to an aggregator or investment bank, who then packages and resells the loans as larger packages to investors like banks, insurance companies, or Mortgage REITS.
Each party in this process cuts a fee from the mortgage, ultimately resulting in higher rates and fees for the end-user: the property owner.
Furthermore, real estate investors, for the most part, don't interact directly with lenders. Instead, they make monthly payments to loan servicers, who (you guessed it) charge fees for handling the payments and payment risks. In the current model, loan costs are compounded for borrowers (real estate investors) on all sides and at every stage of the process lowering investor returns significantly.
What if we could streamline the real estate debt market by removing unnecessary intermediaries like mortgage brokers, loan originators, investment banks, and loan servicers?
Not only would this improve returns for equity investors and lenders, but it could also significantly reduce legal costs associated with late fees, liens, and foreclosures.
Our answer to the broken debt market follows our values and product principles:
Provide access to debt investing. Enable individual investors to become direct lenders for real estate properties without intermediaries. The climbing interest rates of 2023 have brought a surge of revenue to the banks. These profits which were once reserved for banks are now accessible to the public. Our variable interest rate, SOFR +2%, will provide investors with dividends that effectively capitalize on the high interest rate environment.
Create transparency. Enable individual investors to track their portfolio, analyze risk, and understand their investment.
Leverage technology to reduce costs. Goodbye mortgage brokers, loan services, and lawyers ... hello automated payment systems.
When you buy shares in Lend, you invest in the fund, Landa Financing LLC. The funds raised are used to provide mortgages to rental properties. Lend collects monthly interest from its mortgage portfolio and distributes the interest payments as monthly dividends to shareholders. Lend is structured as a mortgage REIT to optimize investor taxation, in other words, as long as the fund continues to qualify as a REIT, there is no taxation on the fund level.
Here, at Landa, we are excited about this new product offering which we believe to be central to our steadfast goal to unlock value for real estate investors, now with equity and debt.
We are here to continue to change the real estate industry, one step at a time. Check out Lend here.
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