Commercial Real Estate Lapse, Rebound, Relapse Part II: Sunday Morning Thought 09 June 2013

After a lapse, there is almost always a rebound, which is the current state of the commercial real estate market.  The rebound even includes areas of cities which were once abandoned many years ago, and are now going through a city revitalization project.

During the lapse many investors created a buying market for many new investors of commercial real estate.  The lapse being caused by lenders either not refinancing properties, which became deals with lending already in place for an investor who has access to cash to pay off a note which balloon has come due.  Or from an investor who entered the commercial real estate market trying to wear multiple hats, like managing the property, doing the maintenance and up keep for the property, and acting as the handyman as well; the proverbial jack of all trades, but master of none.

A formula for an unsuccessful leap into the commercial real estate market, driving an investor into a frenzy of disappointments, ending in a loss of the investment and resentment of land lording.

Real estate investing is mostly the K-I-S-S method, simplicity in all things.

So with the current rebound, history will repeat itself with the new commercial investors, as the commercial real estate market is now poising itself for another relapse.

The rebound is being driven by higher purchase prices which are substantially impacting the capitalization rate of properties which are the “bread and butter” types of commercial real estate. So what may have been a multifamily property which sold with a cap rate of 8.5%, goes up for sale in this rebound market, and after a bidding war, sells with a current cap rate of 4.5%, a recipe for higher rents to try and bring the cap rate back towards 8.5%.

But, the shadow market of house rentals may prove to cause another relapse in the commercial multifamily sector.  With renters having a choice of either renting a house for the same price as renting an apartment in a 100 plus unit complex, the house with a front yard and backyard may become a better option for many.

Watch the Private Lending 102 Webinar on our FaceBook page.  At the end of the Webinar download the information loaded PDF Private Lending FAQ’s.

 

 

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Arbitrage, Profiting from the Spread: Sunday Morning Thoughts 19 May 2013

Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.  http://www.investopedia.com/video/play/arbitrage/

 

Understand when you look up the word arbitrage, you will find many varied references to the stock market, for this post the term will be applied to real estate investing.

In real estate as a private lender arbitrage will be the spread between the costs of monies.  If you borrow $100,000 at 3% interest then loan the same money at 6% interest then you would have 3% interest as a gain.  Many private lenders and real estate investors have taken advantage of arbitrage.

Flipping houses is also a form of arbitrage.  The method is slightly different today but it is still the buy low/ borrow low and loan/sell at a high rate and the difference will be the profit.

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The Golden Goose Must Never Die: Sunday Morning Thoughts 24 March 2013

1 in 3 Americans cannot retire comfortably.  With that in consideration, when you retire you no longer have the same income as when you worked, so saving for your retirement is crucial while you are still working.  But, once you retire, you no longer have an earned income.  You will be living off of your investments, and if you are not adding to your investments while living on the investments then you are hoping to not out live your money.

Most people out live their money, and if you do a reverse mortgage you may out live that as well.

So what can you do to protect your retirement future?

The simple answer, the goose must never die.

So how do you live off of what you set aside for the future and still increase or at the least replenish your investment.

One way is to become a private lender and live off of the interest payments you receive.  This way you still have a retirement investment which will still grow, and wantfully you will not outlive.

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Strategies of a Private Lender a Case Study: Sunday Morning Thoughts 27 January 2013

For many new private lenders it is overwhelming to think about the many ways to create streams of income.  The most effort is in analyzing deals, and then thinking of conventional and unconventional ways to create at least three different streams of income on one single deal.

There are many ways to make income on one deal.

First the sale of the deal, which will be the end result for most deals, eventually.

Second the open of the deal, how much equity will the property come with, how far below market can the deal be purchased, and how much interest to be paid, the cost of money, for funding.

The third is how long will the investing money be tied up in the deal?  The longer the time the money is tied up in one deal may limit the ability of funding other deals.  But that really depends on how much capital you are working with, if the interest on one deal is enough for you, then the one deal is enough.  Of course the more deals you fund the more income.

Let’s take a closer look at the art of being a private lender.  You have a deal brought to by an investor.  The investor tells you that they need $100,000 to purchase a single family residence (SFR) in a middle class area which is showing signs of growth.  The average time on the market for comparable houses has been two months, without aggressive advertising.  The comparable homes in the area are going for $190,000 plus.  The investor also states that they will need $40,000  for repairs, so all total the amount of requested funding is $150,000 which will also cover the holding and the closing costs.  The investor stands to make close to $40,000 once you, the lender, are completely paid.

For arguments sake, let’s say you have done business with this investor before and you will take a one lump sum payment, with interest, at the completion of the deal, which will garner you a higher interest rate on the loan.  The investor also tells you they will pay you interest for a minimum of three months if the deal should close in less than three months.  So the initial loan will be $150,000 at 5% interest for a period of 1 year.  The interest on your money will be $4093.47 if the loan is held for the entire year and compounded monthly.  If the investor keeps a tight schedule and sells the deal in 4 months then your interest paid will be $1565.75 if compounded monthly.

Now let’s say that the investor has found many qualified buyers/borrowers but the borrowers are having problems attaining conventional financing.

As a private lender this down fall could be yet another opportunity to make money.  Not a foreclosure on the investor, but something much easier, nicer, and much more business savvy.

The investor has sold the property for $210,000, which is within the average for the area, and the borrower is able to secure a conventional loan for 65% of the purchase price which is $136,500, and has a down payment of 20% of the purchase price which is $42,000 for a grand total of $178,500.   You, the private lender, and/or the investor can hold a second on the property for the remaining $31,500 at a reasonable interest rate for a 3-5 year period.  Either way, your initial investment of $150,000 has been returned with at least $1565.75 compounded interest within a 4 month time span.  I wonder if a CD can do that.

Remember this is a scenario of how deals can be made and worked to have more value than just face value, there is not a guarantee of return on investment.  The working example of 5% compounded monthly interest is for our top level investors.

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Backing the American Dream: Sunday Morning Thoughts 23 December 2012

As a private lender of mortgage notes, one can find a way to make the American Dream of Home Ownership a reality once again. 

The banks are still having tight credit restrictions, and good people with good credit are finding it hard to get a purchase loan whether first time buyer or second purchase.  Although on the flip side of the coin, at present, refinance and reverse mortgages are a booming industry for the banks; which makes this a lucrative time for small lenders and lender groups to capitalize on a much-needed product, single family purchase loans.  There are considerations to make such as usury laws, which are the interest rates a lender can charge.  The average institutional bank interest rate for a 30 year mortgage is 3.125% and for 15 year loan the rate is 2.75%.

When considering lending to consumers and investors, usury laws prohibit going above a set limit for some states.  In general, the set limit for most states is 10% for other states the limit is a little less at 8%.

Many hard money lenders are within the guidelines of lending but they are navigating in tricky waters.

With real estate showing signs of a slow recovery in many areas, and institutional lenders implementing tougher credit restrictions, the time for private lending is now.

So, where do you find qualified borrowers?

Believe it or not, people who had the interest only loan and lost their homes after the loan reset.  Many of the families with the interest only loan were banking on being able to refinance the loan into more reasonable payments than the reset payments.  But the problem, a story we all familiar with by now, the value of homes had dropped drastically in most areas, and most home owners were faced with one added dilemma, being upside down on their mortgages.

Under water mortgages, loan resets, and the added frustration of denied loan modifications only has made private lending necessary and lucrative for a real estate recovery.  Getting involved is easy, fill out the form at the bottom of this article for more information on becoming a private lender.

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Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012

What subprime crisis? Affordable houses are everywhere. (Photo credit: woodleywonderworks)

It should not matter if the glass is half empty or half full, it has something in it.

So in a flat real estate market, how can you make money?

Having control over a property and not owning the property can prove to be a fast way to improving your bottom line, but what about another option?

Becoming the bank, becoming a private lender; some of the benefits:

• You don’t own the property

• You don’t have to pay the property tax

•  You don’t do maintenance and repairs

•  No dealing with tenants

Private lending is a way to be involved with the real estate recovery, but without the risk that a property owner would have.

As a private lender you can invest a sum of money for a specified period of time, at a nice rate of interest.  You do not spend time mowing the lawn, or fixing the minor or major problems, you lend money secured by real estate and collect either a monthly payment or a lump sum after a specified holding period.

Being a private lender is a viable option in a buyer or seller’s market.  A private lender can lend money to buyers and refinance sellers, so it would not matter the type of market, your investment could appreciate.

In our current financial economy, the buyers are looking for money sources since many lending institutions are having trouble with lending.  Sellers are looking for private lending sources to refinance or sell their property.

No matter what type of real estate market, your investment can still earn.

For more thoughts on lending read our other articles.

Private Lending Retirement Investing Part I

Private Lending Retirement Investing Part II

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Are You Gambling with Your Retirement?: Sunday Morning Thoughts 04 November 2012

Gambling while in retirement is not the same as gambling with your retirement.  

When you enter the field of stock market investing, i.e. with a 401k, Keough, IRA, etc. the first person placed in front of you is an adviser.  They help you create a retirement model that may or may not work.  Most models look at the upside of saving and not the down side of the economy.

If you only know that your retirement will be a certain amount of money by the time you retire, and the estimated probability of having a comfortable retirement is at least 95% then you may want to ask more questions.

Occasionally the retirement models only tell of the shiny side of the coin.

But taking charge of your retirement and investing it ‘willy- nilly’, is not any better.  A balanced portfolio may prove to be better than having one in all aggressive investments, or on the flip side, in too conservative of investments.

Too aggressive opens your investment to high risk, and too conservative may not yield decent returns.

Finding the right balance for you tolerance level and growth strategy may prove to be what will get you to your retirement safely and comfortably, without the thought of outliving your money.

A few things to consider:

• How much do you want to live off of yearly? $70,000+-
• How long do you think you will live?   Many people are making it over the 100 mark these days, just ask Willard Scott.
• What type of savings do you currently have?
• Do you have an IRA, 401k Keogh, if not will you begin to save and open one and when will you open it?
• How much will/are you putting away currently?

Here’s a retirement calculator to get you started.

http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp

Keeping these tips in mind may aid in the reaping of the rewards on your investment. 

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An Introduction to Retirement Investing: Sunday Morning Thoughts 28 October 2012

Investing in a 401k is the way many people invest for retirement.  You make a set amount of contributions from your pay check.  A 401k, as we have seen in recent years, is not an economy proof method of investing.  A 401k has a tendency to follow the stock market.

So when the market is up, your 401k is up, but when the market has turmoil so will your 401k.

No one is telling you to not have a 401k, what we are telling you, be more proactive in your investing.

A self-directed IRA is a proactive vehicle for investing.  Although there are fees associated with execution of an investment, but fees are a reality when investing.

With a self-directed IRA you can invest in real estate by being a private lender.   The untaxed interest you earn on the investment goes back to your self-directed IRA.

The Warren Buffett way,  is compounded interest which is what an investment from a self-directed IRA will gain.

2012	$0.00	$0.00	$10,000.00
2013	$0.00	$511.64	$10,511.64
2014	$0.00	$537.79	$11,049.43
2015	$0.00	$565.30	$11,614.73
2016	$0.00	$594.23	$12,208.96
2017	$0.00	$624.63	$12,833.59

In the above chart, if you invest $10,000 and had a five-year contract at 5% interest, at the end of the  5 years your investment would grow by $2,833.59.

Ask yourself this question, has your 401k in the last five years earned $2,833.59 or more?

This is just an example, and an investment in real estate does have some risk involved.  In the investor packet we will provide information on the property to help you make a decision.

Property Flipping in a Down Economy

Property market (Photo credit: Alan Cleaver)

 

Has flipping houses in our down economy become a thing of the past?

 

 

 

Not hardly.

 

 

 

Flipping houses is still in use by many real estate investors.  Some are using their standby buyers list.  The list of people who could not afford to enter the housing market feeling it was too high to enter.  There were many people standing on the sidelines waiting for the housing bust.  But little did they know that banks extending credit would also bust.  But the now market of flipping properties with hungry buyers which had to go through rigorous credit scrutiny, and the technical loss of simultaneous close made flipping houses have a little longer than a 30 day close, unless you tried it a different way.

 

 

 

Private lenders and seller financing can make what seems to be a deal in the far off future, become the house flip of today.

 

 

 

Often times an investor will come across a person who is creditworthy but the bank cannot lend to them for the purchase of a home.  Maybe the lender could if the seller added to the deal, such as boosting the down payment.  If the bank will only lend to 60% of the value of the home and the investor wants their full asking price, then with the buyers 20% down the investor could hold paper for the other 20% in the form of a second mortgage on the property.  Many investors were losing their buyers or taking less than their asking price on the property due to not thinking outside of the box.

 

 

 

So in short, house flipping is still alive and well, but it is not being “done” the same way.  Investors will have to adapt to the new ways of flipping properties to stay in the real estate market.

 

Real Estate Retirement Investing Part 2: Sunday Morning Thoughts 09 September 2012

Retirement (Photo credit: Wikipedia)

Instead of wracking your brain over how long your retirement will last, why not give a lot of thought to understanding how you can use other non-conventional investments to make your money for retirement work for you.

Everyone either understands or pretends to understand how their 401k works. 401ks have been an investment vehicle for a long time, but there are many options for your 401k investment.

You can invest aggressively, moderately, or very cautiously, but will you still be able to have returns that will be viable when you retire?

Not necessarily.

You have to consider all of your fund options, and a diverse account is normally the best route.

What about if you are already in retirement, and your account is not going to last you for much longer and your greatest fear is out living your money?

No one should be afraid to live.

Precautions before your money runs out is best, whether you are safe guarding what you have, or you are trying to make what you have grow larger; sound investments are your key to living in a happier state of being, without the worry of your money running to low or out altogether.

Diversifying your portfolio to include real estate investments may prove to be a great option for growing and/or maintaining your retirement nest egg.

Being a private lender, also known as being the bank, is a way of earning interest without the risk of owning a property.

As a private lender you are investing in the vision of someone else, but only the vision is backed by real property, something tangible, sellable, and if calculations are done properly can also be profitable.

So even if a borrower defaults on the loan you have given them, you will still have an asset that you can resale or keep for yourself as an investment.  Of course, you will already know from the documentation given to you in the initial evaluation of the loan, if the property is worth equal or more than your initial investment.

Retirement does not have to be bleak future/present if prepared for and maintained properly.

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