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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What’s Your Investing Strategy: Sunday Morning Thoughts 19 August 2012

strategy (Photo credit: Sean MacEntee)

What strategy do you use to put your money to work for you?

Some people may say they invest in a mutual fund, have a 401k with a fund manager they have never spoken to directly.  Or some people having a distrust of banks and the banking system may actually put their money in a mattress.

Putting money to use to make money is a strategy as old as time.  Some people believe that working for money is the best way to make more money, but near the end of the week, they always seem to be waiting for the next paycheck.  In essence living from pay check to pay check, but never seeming to save enough money.

Then there are those that invest in the stock market.  They buy stocks based on a tip someone gave them, or they invest based on someone else’s opinion of how a stock will perform.  From day trading, expiration trading, buying stock, dabbling in options, etc.  But if you are a novice then you may not know the land mines which await you when you enter the battle field of the stock market.

Isn’t that what the banks were doing with the money you placed in the bank before the system took a down turn, they even charged you fees for the privilege of leaving your money with the bank.  Well, they do keep it safe, don’t they?

Why is real estate investing a great investment option even for a novice?

Most people can look at an area and decide if the area is good or otherwise.

There are many strategies in real estate investing but one of the best strategies, is do you feel the investment is sound?

The other questions you can ask yourself:

• What can you do with the property to improve it?

• If you need to sell it how much and how fast do you want to sell it?

•  Can the investment sustain itself and give you cash flow?

With real estate investing one golden rule, never attach yourself to a property.   You will come across many good deals in real estate investing but never hold on to an alligator just because you love it.

Related articles

• Residential and Comercial Real Estate Investing: Sunday Morning Thoughts 5 August 2012 (backedbyrealestate.com)
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• Some of These Real Estate Stocks Pay More Than 12% (fool.com)
• Ryan scrutiny ‘par for the course’ – NBCNews.com (video.msnbc.msn.com)
• Investment Site Announces Investing Solution After Latest Stock Market Rise Still Shows a Down Market (prweb.com)

Profiting as a Real Estate Private Lender

Real estate investing does have its risks, but with a properly structured deal, the risks can be kept to a minimum, making the return on investment reach maximum potential.  A private lender should never allow their investment to be the down payment on a property.  Instead having a seller held second if a down payment is still needed is a better option, but it should not be lender money.  A second position is riskier than a first position but a down payment position, the money is not secured by the asset and possibly not collateralized.

There can also be a primary position coupled with being an equity partner.  As an equity partner, a private lender will contribute to the down payment in return for a percentage of equity in the property.  This strategy tends to lessen any down payment issues since it’s shared, while reducing risk of the down payment money by having an equity partnership in the property.

Syndication is also a possibility if you have a group of people wanting to invest and everyone in the group is contributing varying amounts of capital.  If an equity position is also in play, then the syndicate would be the equity partner, not just a few of the members.

The other consideration for impact on your return of investment would be fees.  Fees accompany many investments such as CD’s, Stocks, bonds, etc.  Those fees can cut into your final profit.  With private lending, secured by realty, there is a tendency to not have maintenance, origination, or any other type of fees involved.

In conclusion, as a private lender, after being presented with a deal, then checking the numbers for yourself, remember to keep in mind:

• The cost of money
• The impact the cost of money will have on your profit
• Level of risk
• Covering the downside if the loan should go bad
• The profit/ return of investment

These are just a few tips for being a private lender in real estate with minimal effort.  Keeping these tips in mind may aid in the reaping of the rewards on your investment. 

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Private Lending Tips: Sunday Morning Thoughts 15 May 2011

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So you have decided to become a private lender.  You have considered many options on the types of deals you will choose to provide lending.  You understand that private lending is not a REIT, but is more like being the bank.  There are things you should keep in mind when private lending.  This is a short list given in a series of posts.  As you become more familiar with lending you will without a doubt make a few additions to the list for yourself.

Cost of Money

Level of Risk

What to do when a loan goes bad

Profit/ Return on your investment

Cost of Money:  How much is money costing you as a borrower?

You should not use your life savings.  This should not even be considered as a viable option.  Keeping a reserve is even a strategy Warren Buffett utilizes.  Answer a basic question-how much can you afford to lend and at what cost?

Borrowing to lend is a viable strategy; many people use the leverage of other people’s money to make money.  An example, a homeowner buys a house then takes out a second mortgage to pay off credit cards, cars, and to free up currency.  They are making payments on the second mortgage but are saving money in interest and possibly receiving tax advantages.

You can use a line of credit if you own something which can be used as collateral, such as a house, property, etc.

Using your IRA is also an option.  When using your IRA the profit goes back to the IRA aiding in the building of your future savings.  With an IRA you are using the money in the IRA versus borrowing against the IRA.   For more on IRA account usage please read our past post.

What is important to remember, how much interest you are paying on the money you are borrowing, and then subtract that from the interest you will gain from the lending.

For example you are the private lender, and are looking to earn passive money.  You do not wish to own the property but would like an investment with a decent return, something better than a CD.  You find an Investor who has a deal which needs funding.  The investor offers you 8% interest on terms for the use of your money to quickly close a profitable deal.

For arguments sake, let’s say you as the private lender decide to use a line of credit from your property to fund the deal.  Always remember you will be responsible for the repayment of the line of credit.  The investor as a borrower from you is responsible to repay the loan you are extending to fund the deal. If the bank gives you a line of credit with 4% interest and you loan the money to the investor at 8% interest you will have made a 4% earning on the difference in loans.

In short borrow for less interest than you loan.

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Risk Management Covering the Downside

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When investing in real estate risk comes with the territory, but minimizing risk to a manageable tolerance is crucial.  Some investors can tolerate huge losses while others would find a small loss difficult to handle.  It is a matter of considering all your options and then proceeding from there.  You do not need to have a vast knowledge as a private lender for a possible deal but you will have to make a consideration of many aspects of the deal.

Aspects to consider is the structure of the deal, what is the percent collateral to debt, which position are you 1st or 2nd, etc., and when will you receive your profit.

With the four aforementioned considerations you may be able to limit high risk and maximize profit. Remember the four points are when you initially look at a deal, if these things are not answered the way you want, then you can let the deal go or improve upon the deal to make it profitable for you.

The structure of the deal, how will the property be obtained?  Will it be seller financing and at what percent and length of time?  Will it be bank financing along with private funding, if so then how much bank financing is needed?

With seller and bank financing are you the second lien holder or even further away from the collateral?   Are you the rehab money?  The first lien holder is the best position especially if the borrower goes into default.

These are just a few things to consider when minimizing risk.

The downside would be being the 3^rd or even lesser lien holder on a collateralized note, a property having no to low occupancy (occupancy under 55%), a property with major rehab needed, and a property with poor management.  This is not the end of the list but only a few of the normal problems which can be encountered on a real estate deal.

Of course each one can be covered to help benefit in profitability.

Lien holder position, find out what it will take to make you number one or number two.  Funds necessary may only be the difference in $5000 or possibly less.

Having no to low occupancy; many profitable deals have started that way.  The upside is having new one year leases in a multi family property, or a buyer or a lease option for a single family residence.  In a no occupancy situation, finding the best management company for the area is a great start to a profitable finish.

Major rehab projects may be a time factor downside.  Time of year for weather concerns for certain areas, and or time of investment return.

A property with poor management, the remedy is to find the best management company in the area or build a team for the property.  Hiring people with people skills is the biggest key.  Many companies with less than stellar products may have high sales due to the people skills of the sales staff.  People have a tendency to stay when they have been treated fairly and respectfully.

So remember, covering the downside by taking proactive steps to maximize profitability can result in less risk of investment.

What Risk Would You Take? : Sunday Morning Thoughts 24 April 2011

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Risk—[risk] – n. 

To venture upon, the degree of probability of loss, take or run the chance of injury or loss.  To be under financial or legal obligation; held responsible.

 

In any investment one must be willing to take a risk.  The types of risks low, medium, and high, which are proportional to profit from taking the risk; normally the greater the risk the greater the profit.

A low risk investment yields a profit without much consideration for a loss.  Something comparable to a FDIC insured savings account at a banking institution.  This type of investment normally has lower profit and very minimal loss, even if the banking institution were to go into receivership.

A medium risk investment normally has a better profit than a low risk investment, but the risk is greater although the investment may still be a safe bet with a nice return on profit.  A medium risk can be something similar to investing in a slow growth fund or even a real estate investment such as a lease with the option to purchase or a class B multi-unit rental property.

The higher the risk the more likely you will have a greater return.

With that said, a high risk investment normally has a larger profit margin but if a loss is incurred it could be of a large amount, and in some cases more than what you invested.

So a good question to ask, how can I minimize the risk of loss?

Always be aware of the downside.  In any investment there is a downside.  The downside can range from a very long-term wait (5 years or more) to realize a profit, to a negative profit at the end of maturity for the investment.

How to gauge how much risk you can take, answer–what do you feel you can tolerate?

Increase in interest for Commercial Real Estate: Sunday Morning Thoughts 30 January 2011

If you input ‘commercial backed securities’ in a search engine you will see approximately 12.3 million results, give or take a few, and depending on which search engine you prefer to use.  Among the plethora of results- ‘Cantor prepares to debut commercial mortgage backed bonds.’

Many other institutions already have commercial backed bonds.

The commercial real estate market and SFR (single family residence) market are at most times opposing one another.  When the interest for one is up the interest for the other is down.  As everyone is running to the nearest, next and best SFR foreclosure, there also exists over valued over bloated commercial foreclosures in abundance just like houses.

Also like houses, commercial real estate is many and varied- From 5 unit multi-family, mixed use, retail commercial, business commercial, and apartments.  When home foreclosures increase, so does the demand for apartments; displaced home owners need some place to live.  The choice is either family or find a rental.

During the housing boom vacancy rates for rentals increased.  Now that so many people are becoming non homeowners, there is a shift from ownership back to renter.  This shift contributes to an increase in value for apartments.  Increasing the net operating income by $1 increases the value of the property by $100.

At this time with more foreclosures on the horizon apartments and other types of rentals will be in an increasing demand for at least another 8-10 years.  As a private lender having a note on these types of properties which normally have a maturity of 5 years is a low risk investment with a very nice yield.

The Robo-Foreclosure mess and the effects on Private Lending: Sunday Morning Thoughts 16 January 2011

If you read last Sunday’s post then you will understand that the robo signing scandal has become the bane of most Banks.  Judicial foreclosures have been thrown out by Judges.  The reason, there was not enough proof on the lender’s part of owning the note; seems as though the process of foreclosure is going to take even longer.

With all the shoddy paperwork, what type of impact will this have on the real estate market?

A slowing effect on foreclosures, so basically property values should see an increase in markets that are considered desirable and a leveling in values for harder hit areas where every other house is a lender owned vacancy.  The future, the harder hit areas will become popular again as home values begin improving in the desirable areas, against the lower priced harder hit areas.  New inventory will also begin to pick up but not just yet that’s on the horizon.

How will this effect private lending?

Well not the same as it is affecting large banks.  Aside [If you buy paper from any institution then you better scrutinize the paperwork to make sure they are the current note holders among a myriad of other important things.]

The upside to the robo-signing  scandal, banks maybe a little easier to work with for short sales and loan modifications.

Private lenders will find themselves in a better investment in a shorter period of time, due to the slowing of foreclosures and the appreciation of various types of property. Even the DOW is showing appreciation in the REIT’s being offered.  In the coming months and years private lending will prove it self to be a very lucrative investment strategy in this weak yet improving real estate market.

Take advantage of the wave of our near future.

Retrospectively Looking Forward: Sunday Morning Thoughts 26 December 2010

The end of the year makes you think of what happened to time?  Didn’t we just do a New Year?  Almost 365 days have gone by and a lot has happened in this year which affects many of us.

We have witnessed healthcare, banking and Wall St Reform to lenders re-assessing foreclosure paperwork.  We have seen the real estate market go from a dive bomber decline to a flat line.

As far as investing goes, well the stock market has been surprising for some, investors have been realizing returns, and consumers are returning to consumerism.  All things look like we are returning to normal, but things are a little different.  Investors are not using all the traditional models of investing and consumers are not using the plastic money as much as they use to, paper takes precedence.

Interest rates are at an all time low.  Making it affordable to pick up housing deals but lenders have been so tight with credit that even a 750 credit score may not get a mortgage with favorable rates.

This has been the year of restructuring, rethinking, and basically a redo. Wow in school they always warned, that in life there aren’t any do-over’s, well, in some cases, yes.

We are living through a recession depression, not equal to the Great Depression, but still we are affected.  Unemployment, but a new job outlook is on the horizon; Employers are starting to hire again and set to do so even more in the coming New Year.

All in all, the New Year of 2011 shows promise, an increase in prosperity, and challenge.

Neutral Arbitrage and the Effect on ROR: Sunday Morning Thoughts 19 December 2010

Quick recap, positive arbitrage is when your investment return increases with financing.  Negative arbitrage, your investment return decreases with financing.  Neutral arbitrage, your return on investment does not change with financing.

So how can an investor have positive or neutral arbitrage, picking the right loan is key to having a better rate of return.  When considering commercial property, such as multi-unit apartments, a low to no interest loan is best.

Interest only loans were only meant to have a life of no more than five years, after five years the loan could become upside down.  In today’s credit climate having a no interest loan would be difficult.  Lenders were admonished by the government for offering what is known as an investor’s loan to the average American.  This offering to the average person caused many to be in over their head at the time of the loan reset, contributing to our current foreclosure crisis.

All three arbitrage can be present when private lending, of course not at the same time; it just depends on the deal.

Related Articles:

http://backedbyrealestate.com/2010/11/14/arbitrage-and-real-estate-sunday-morning-thoughts-14-november-2010/

Negative Arbitrage and the Effect on ROR:  Sunday Morning Thoughts 12 December 2010