As we approach 2025, real estate investors need to be prepared for a shifting lending environment. Whether you're into rentals, wholesaling, multifamily, or single-family homes, understanding the upcoming changes in bank lending practices is crucial for your investment strategy. Let's dive into what you can expect and how to prepare, based on insights from Deloitte's 2024 banking and capital markets outlook.

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The Current Landscape

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First, some good news: residential properties, especially multifamily, are facing fewer lending hurdles compared to commercial real estate. As of August 2023, only 8.5% of multifamily property loans maturing in 2024 were classified as "troubled" or "potentially troubled/watchlist", compared to 17.4% for office properties and 10.5% for retail property loans (Deloitte, 2024).

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However, caution is the watchword in banking circles. In Q2 2023, 68% of surveyed US banks reported tighter standards for commercial real estate loans (Deloitte, 2024). While this primarily affects commercial properties, it's likely to influence residential lending as well.

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What to Expect in 2025

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1. Higher Interest Rates: While we may see some easing from current levels, don't expect a return to the rock-bottom rates of recent years. This means your borrowing costs will likely remain elevated compared to historical lows.

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2. Stricter Lending Standards: Banks are expected to maintain cautious lending practices. They'll be looking more closely at your financials, property performance, and overall investment strategy.

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3. Regulatory Scrutiny: Smaller banks, which often work with local real estate investors, may face increased regulatory oversight. As of Q1 2023, small banks' commercial real estate loans as a percentage of risk-based capital stood at 357%, compared to 131% for the overall banking industry (Deloitte, 2024). This could potentially impact their ability to lend to residential investors as well.

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4. Property Type Preferences: Multifamily properties may continue to be viewed more favorably by lenders compared to other property types.

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How to Prepare

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1. Strengthen Your Financials: Focus on improving cash flows and maintaining strong debt service coverage ratios. Banks will be scrutinizing these metrics closely.

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2. Diversify Funding Sources: Don't rely solely on traditional banks. Explore alternatives like local credit unions, private money lenders, or partnerships with other investors.

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3. Optimize Property Management: For rental and multifamily investors, strong tenant histories and well-maintained properties will be more important than ever in securing favorable loans.

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4. Plan for Refinancing: If you have loans maturing around 2025, start planning your refinancing strategy now. Consider locking in longer-term fixed rates if they become available at attractive levels.

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5. Embrace Technology: Use property management software and other tech tools to improve your operational efficiency and provide better data to potential lenders.

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6. Stay Informed: Keep a close eye on your local housing market trends. Lenders will want to see that you understand the dynamics of where you're investing.

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7. Build Banking Relationships: Don't wait until you need a loan to approach lenders. Build relationships with multiple banks now to improve your chances of securing financing when you need it.

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8. Prepare for Increased Scrutiny: If you're into wholesaling or flipping, be ready to provide a strong track record of successful deals. Lenders may require more detailed information about your investment strategy and past performance.

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9. Consider Your Property Mix: Given the favorable outlook for multifamily properties, you might want to consider increasing your exposure to this sector if it aligns with your investment strategy.

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10. Stay Liquid: Maintain a healthy cash reserve. This not only provides a buffer against potential market downturns but also demonstrates financial stability to lenders.

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The Road Ahead

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While the lending environment in 2025 may present challenges, it also offers opportunities for well-prepared investors. By focusing on financial strength, diversification, and savvy property management, you can position yourself to weather potential storms and capitalize on emerging opportunities.

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Remember, the key to success in real estate investing is adaptability. Stay informed, be proactive, and don't hesitate to seek advice from financial professionals as you navigate this evolving landscape.

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By following these guidelines and staying abreast of market trends, residential real estate investors can approach 2025 with confidence, ready to tackle whatever challenges the lending environment may bring.

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Source: Deloitte. (2024). 2024 banking and capital markets outlook: Navigating the changing contours of the global economy. 

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