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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Commercial Real Estate Lapse, Rebound, Relapse: Sunday Morning Thoughts 02 June 2013

What caused the lapse in the commercial real estate market?   

Many would think sub-prime lending, but that is not the cause.  Commercial lending is based on the income of the property.  The lapse has been caused by easy lending.  Similar to sub-prime lending in that it was easier to get a loan and purchase a commercial property, without regard for knowing how to manage a commercial property.

Many people had never learned about managing commercial real estate but entered into the arena believing they could handle the demands of commercial property.  Many of the properties were multifamily apartments.  Although many of the investors sold off items from the apartments, such as , microwaves, refrigerators, washing machines, dyers, etc. and then skipped out on their loans, and leaving in their wake the rubble of what was once a viable housing community.

Many of these properties were left in a horrible state, but was it really that horrible?

Not necessarily so.

It had been noticed that many once viable properties, in thriving rental areas, had fallen into low occupancy, disrepair, and higher than normal expenses due to mismanagement; with many units in a community becoming uninhabitable from some type of damage such as fire, or property destruction such as knocking holes in the walls.

The lapse was a time of finding a plethora of value-add properties, which are still present at this time and many more like type properties entering the commercial market weekly, if not daily for lucrative rental areas.

Next Sunday’s post the Rebound part II.

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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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How to Keep the Goose Alive, FOREVER: Sunday Morning Thoughts 31 March 2013

Let’s recap last week’s post about a steady income flow during retirement.  To keep the goose alive and producing golden eggs, you must have at least one stream of steady income into the goose, also known as your retirement account, or life savings.  Please understand retirement does not mean you quit your lifestyle, but that you no longer go to a job/work/run your business.

But all play and less business/work can lead to poverty.

We all live on a fixed income, regardless of retirement status.  We make a budget of fudget, encounter surprise expenditures, and maximize the money we have.  So working on your retirement before you retire is the ideal, but everyone always puts it off until later.  Set up your retirement account, also known as your golden goose, to continue to have an income when you have gone into retirement.

How do you keep an income, when you are no longer working?

Have your non-earned streams of income continue to work for you, such as private lending.  With a private lending contract the work is minimal.  The deals literally come to you.

You examine each deal to ensure it will give you the return you are looking for, and for the period of time you wish to be involved.  Remember; never place all of your eggs (investment money) into one basket.  Diversify your types of lending investments.  You can invest in a few SFR’s, a few small and/or large multifamily units, offices, and businesses either start-ups or businesses which are already generating a steady income.

The only way the goose will remain alive is to feed it a steady income.  If you live off of the money you put away without adding to it, it will eventually run out, become depleted, and the end result is  a dead goose, and no more golden eggs.

But, the goose can live forever, if you plan for it.

So how do you make your goose live forever?

Private lending is one way.  But, before you dive in, get an education on private lending first.  We have an on demand webinar and will be adding two more educational webinars soon.

Ask questions, we will answer your questions.  So take a moment, bookmark our Facebook webinar page and watch Private Lending 101 at your leisure.  Private Lending 102 and 103 coming soon.  May your goose live long and give you prosperity.

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Note as Collateral: Sunday Morning Thoughts 10 February 2013

It’s no surprise that a note is collateral for its face value.  When considering becoming a private lender one would wonder do they have to wait for the maturity date of the loan agreement to receive a return on investment?  The short answer, no.

For arguments sake, let’s say you are a private lender who has a note with a face value of $100,000.  Granted you cannot use the note as if it was an ATM, but you can put it to more use than just sitting and waiting for the maturity date of the loan agreement to realize a return on investment.  A note can be used as collateral to purchase something else or you can sell the loan at face value or at a discount, or even option a portion of the note to someone else.

If you think that you do not have the right to sell the note, take a look at lending papers from large institutions, in the fine print, they have a clause with the equivalent of ‘and or assigns’, which gives them the right to resell your contract to another entity.

With the $100,000 note in hand you can borrow against the note to lend again, for a lessor amount but the note is an instrument of collateral.  Collateral is defined as:

a : of, relating to, or being collateral used as security (as for payment of a debt or performance of a contract)

b : secured by collateral.

Many private lenders resell their notes at a discount once the loan has matured.  A note is considered matured when it is at least 3 to 6 months old.  Often times, the investor, the lender has created a note for, will refinance the project with conventional lending after the maturity of the loan to pay off the private lender.

But what if the investor defaults on the loan payment?  Then the private lender can sell the note as a non-performing asset or do a foreclosure, whichever suits the lenders preference for a return on investment.

A private lender may also hold a first and a second on a property, but may only wish to sell either the first or second position.  The choice is that of the lender.  Many banking institutions can lose money in the second position, mainly due to not monitoring the payments of the borrower.  A borrower, when financial trouble hits will almost always default on the second mortgage payments long before they allow the first mortgage to default.

The second position is not necessarily a losing position.  If a borrower were to default on the second loan, the second can start a foreclosure and once the foreclosure is complete begin making payments to the first.

This is only an overview of what a private lender can do with a note, other than waiting for the maturity date to realize a return on investment.  Thinking outside of a conventional box may prove to be more profitable.  Conventional thought is to wait for maturity, the unconventional is to sell part or all interest in the note, use the note as collateral, or option the note.  Just remember consult with an attorney for the legal uses of a note before making a final decision.

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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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Investor Driven Real Estate Recovery: Sunday Morning Thoughts 13 January 2013

The housing recovery is well underway in some areas, and stagnant in some of the most desirable areas.  So what is driving the housing recovery in those markets?

Cash brought in by investors and home buyers who have great credit, and the ability to acquire a quick home loan.

Markets such as Orange County actually had a slight decrease in property values overall but for the more wealthy areas the home values decreased slightly when compared with the rest of the country: Mainly because many of the property auctions were driven by investors.

In the Inland Empire areas such as Temecula, Lake Elsinore and Hemet are starting to have growth of 30% or better; Investors again bringing all cash to the closing.

So what does this mean for the housing market?  The recovery is investor driven but to have a healthier recovery, it does need to be driven by home owners.  This will come later in the real estate market as credit makes a bigger return to the economy.

As a lender to investors, this is the time to capitalize on the market showing signs of movement and the need for money to purchase homes.  Here’s a possible strategy:   If you invest in a property with a current worth of $188,000 purchased by an investor for $90,000 with a small amount of necessary rehab of $30,000 or less, then the rounded up LTV is 64%; Which gives a lot of room to resell for a profit and still leave equity in the property for the buyer.  Now what if the buyer is a solid credit risk, but cannot get a loan?

Well take a closer look.  The investor is using private money in the amount of $120,000 at 5% for 5 years.  Then decides to sell the property at $160,000 and holds a note for the buyer at 5% for 3 years.  Same interest but a $40,000 dollar profit which will be realized later.  With this formula the investor driven housing recovery will lead to a home owner driven recovery.

Keep in mind the aforementioned is an example.  It does not mean that you will find the property, or even the buyer.  But it is possible and being done by many real estate investors of SFR’s, multi-family, other commercial types of property, and even raw land.

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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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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.