Scrutinize the market’s big themes and dependencies to develop your game plan for the second half of 2025.

So much can be said about the investment world and capital market volatility during the last 24 months. As we move further into 2025, some harsh realities about the investment world and capital market volatility are becoming even clearer.

Here’s what to keep an eye on.

Higher Cost of Capital

The days of fix-and-flip loans at 4.25% for a 600 FICO client with little experience are over. Private lenders are back to pricing their loans based on risk, exit, and market conditions for a property’s location. With interest rates still fluctuating and inflation pressures persisting, many lenders are keeping rates high. Even borrowers who used to get 8-10% interest rates just six to nine months ago are now seeing 11.5-12.75% or more on properties in “riskier” locations with unique asset classes and lukewarm exit plans. This is now squeezing profit margins.

Stricter Underwriting & Lower LTVs

Lenders are tightening their guidelines, reducing Loan-to-Value (LTV) ratios, and demanding more skin in the game. That’s not a surprise. This has been common over the years in changing markets and election years. But many investors who relied on 80-90% LTV funding are now seeing max LTVs closer to 65-75%, forcing them to bring more cash to deals. It appears as if liquidity, exit, and experience (not necessarily in that order) are back—and back for the long term.

Tighter Liquidity

Many investors who took on high-interest loans between 2022 and 2024 and have had a tough time completing projects are now struggling to refinance or exit profitably. This is leading to increased defaults due to maturity dates not being met and projects not at the point for one lender to take on the project (short of the minimum percentage completion to qualify for a new loan). This is making private lenders more cautious, restricting the availability of capital for new deals in the ground-up construction and major rehab space.

Falling Property Values

Some markets are experiencing declining property values. Yes, as has always been true in investment real estate, location is everything; however, certain locations are feeling the hammer more than others. As the markets in these metros flatten, it is harder for investors to exit at a profit. Rental rates are cooling off as many people relocate to better job creation corridors.

Lenders are more hesitant to fund deals in risky markets, making capital harder to secure. A good idea is to ask your lender upfront, “Is this a flagged market for you, and what is the reduction for the flag?” This one question will save you days, maybe even weeks, of wasted time if the “math isn’t mathing.”

Increased Competition

Lenders are cherry-picking only the best deals (nothing new here), leaving less-experienced investors struggling to secure funding. Some underwriting guidelines have become so tight it would be easier to ask a conventional bank for a full doc loan with a seven-day close.

Uptick in Regulatory/Compliance

More states are increasing regulations around private lending, requiring specific licensing and lending practices as well as more detailed disclosures. Some lenders are skirting the rules, but borrowers who don’t verify their lender’s legitimacy may end up in legally risky situations. An unsophisticated borrower can get left at the altar by engaging with a bad actor who is playing outside of the lines and is only concerned with a 2-point commission check. Re-trades at the closing table, and last-minute deal fall out is so much more common now with fly-by-night “ brokers” and wanna be “lenders.”

Harder Exits for BRRRR Investors

The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy is becoming more challenging as exit  banks and DSCR lenders tighten cash-out refinancing and leverage requirements. Investors looking to refinance private loans are facing higher interest rates, reduced cash-out percentages, and fewer exit strategies, delaying their ability to access profits before a sale or refinance.

A Rise in Fraud

Fraud is on the uptick. The fraud of today is so much more advanced than it was even a few years ago. Advances in technology make digitally falsifying documents, bank statements, appraisals, deposits, and other items easier. Although underwriters are diligent about sussing out these frauds, the additional scrutiny takes more time, creates more questions, and adds extra hoops to jump through. This is the new normal—one in which clients and brokers must be ready to answer the hard questions and have documents ready for clarification.

Predatory “Lenders” and Loan-to-Own Ploys

They’re back! Some bad actors are once again structuring deals/loans with hidden clauses, unrealistic balloon payments, or accelerated default interest rates. They hope the borrower defaults, so they can take over the property and then finish it themselves for a larger profit. Borrowers who don’t fully understand the terms are at risk of losing their deals to these predators.

Fewer Lenders

Some private lenders (more than not) rely on capital from hedge funds or institutional investors. Many of those funds are pulling back due to rising defaults and risk concerns. A solid number of these hedge funds and institutional lenders are also rescoping their concentration limits to certain loan types and locations. This means fewer lenders are offering loans (or not as many in a certain investment focus), making it harder for investors to get capital when they need it. One month a lender may be searching aggressively for a multifamily 1-4 and the next month may not be taking any. This is the new normal, so if it happens, don’t be overly surprised.

As we all know, our industry is a teeter-totter at times. One month there are deals everywhere but limited capital; the next month, lending houses are begging for “good deals” and no one is answering the phone.

This list offers a realistic view of 2025, emphasizing the importance of writing solid paper,  managing risk in unproven markets with unproven borrowers, and prioritizing client experience alongside a solid exit strategy. Private lending is shifting back to fundamental business principles and disciplined operations. Lenders, funds, and borrowers who specialize in localized markets will be best positioned to thrive in the cycles ahead.