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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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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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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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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Real Estate Retirement Investing Part 1: Sunday Morning Thoughts 02 September 2012

With the recent economic downturn many people have seen their retirement almost go up in smoke. From 401k to savings accounts to buying stocks and bonds, this recession-depression has taken its toll on all investments. Many people who have already entered into retirement have noticed the sharp decrease in the money they use to have.

Racking their brains with, how long will my funds last? Can I sustain my lifestyle?

So how do you recoup your retirement in a down turn economy?

The easy answer, make better investments.

Money market and 401k accounts depend on a fund manager to make decisions for you for a certain type of product. So if the fund is invested in for instance, green energy or emerging markets then that’s the only type of investment the fund is allowed to invest in, without regard of market performance.

So if another type of investment would prove to be more lucrative for you, the fund manager is not allowed to change the investment strategy but is bound to the specific type of fund investments.

So, you will never receive a call telling you that there is a better investment on the horizon. This is why many funds can be poorly producing funds when compared to individuals who invest in stocks on their own.
But what about investing in real estate?

Some people believe that real estate investing is a thing of the past and has seen its prime, but as long as there are people on earth, real estate will always remain a sound investment.

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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.

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Residential and Commercial Real Estate Investing: Sunday Morning Thoughts 5 August 2012

Loan (Photo credit: Philip Taylor PT)

In our previous posts we shared an overview of the A, B, C’s of commercial and residential real estate investing, and the pitfalls of alligator investments.

Our next look is residential and commercial real estate investing, not versus each other, which means a real estate holdings portfolio would be more stable in any market, buyer, seller, or flat if both types of investments are included.

Currently residential real estate, in certain markets, is seeing some improvement, but with more foreclosures on the horizon, that may change in the very near future.

Commercial real estate is also seeing fluctuations which will benefit commercial investors.  The factors are, but not limited to:

Maturing loans

Mismanagement of the asset and its negative effects on NOI

Insolvency

An underwater mortgage, owing more than 100% of property value

So how does a private lender take advantage of all these factors?

By investing in purchase loans, bridge loans, rehab loans, construction loans new and completion, and/ or become a second mortgage holder, or investing non-performing and performing notes.

Whichever strategy is your preference being the lender in today’s real estate market is a safe bet to increase the rate of return on your investment.

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Separating a Winning Deal from the Alligator: Sunday Morning Thoughts 30 July 2012

Alligator eating Money Sculpture 14th Street – New York Subway (Photo credit: Annie Mole)

With so many great deals out there and even more on the horizon, how do you pick a winner?

Analyze.

For each type of invest there are hard and fast rules of analysis to apply.

For instance you would not analyze a residential deal the same as you would analyze a multi–family deal.  Even within residential evaluations, a two bedroom one bath is not analyzed the same as a five bedroom 4 bath.

But there are similarities of analysis for all properties. The A, B, C’s of evaluating properties.

So how do you tell the difference between an alligator and a profitable investment?

An alligator is an investment which someone tries to sell you on with the promise of making a profit somewhere down the line, somewhere in the future.  The typical time period is five years.

So while you are waiting for the profit period to finally happen, the investment costs you money out-of-pocket to hold on to.  This is also negative leverage with a negative return on initial investment.

It may be better to not make that investment.

In real estate if the cash flow of the investment does not cover the maintenance costs and debt service, then it is classified as an alligator;  A losing money investment.  Which means it would no longer be an investment but a liability.

When investing in real estate you can make an investment positive by having a positive return on investment, also known as a positive cash flow property.

If your deal does not bring you a positive cash flow from you take over the property then you may want to reconsider or restructure the investment.

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The A, B, C’s of Real Estate Investing: Sunday Morning Thoughts 22July 2012

 

 

now renting? sweet! can I get the one with all the broken windows plz? (Photo credit: tray)

 

With so many great deals out there and on the horizon, how do you pick a winner?

 

 

 

Analyze.

 

 

 

For each type of invest there are hard and fast rules of analysis to apply.

 

 

 

For instance you would not analyze a residential deal the same as you would analyze a multifamily deal.  Even within residential evaluations, a two bedroom one bath is not analyzed the same as a five bedroom 4 bath.

 

 

 

But there are similarities of analysis for all properties. The A, B, C’s of evaluating properties.

 

 

 

“A” classified investments are located in high-end areas.  Generally people with higher incomes and educations reside in “A” type areas.  The area can be all residential or mixed with multifamily units.

 

 

 

Generally, these types of properties are considered prime real estate, have a low cap rate, normally around 2-4%, they also have a higher tenant turnover if it is a rental property.  Most often investors purchase “A” properties for equity and cash flow.

 

 

 

 

 

 

 

“B” and “C” class properties make great rentals and are in middle class type of areas.  Investors tend to refer to these types of properties as ‘bread and butter’ investments.

 

 

 

Rental turnover is normally low to moderate for properties which are well-managed.   These type of properties can have cap rates ranging from 5%-13%, have great cash flow, and moderate equity.  Equity gains can be increased with improvements and minimal to moderate rental increases.

 

 

 

“D” and “F” properties, well just like in school you may want to avoid these types, but why?

 

 

 

“D” and “F” property investments coupled with strategic planning on improving can be a lucrative investment.  Keep in mind people who live in “D” and “F’ areas may not have a checking account and may work lower blue-collar jobs.  They may also receive some form of government assistance.

 

 

 

 

 

 

 

This does not by any means, mean for a person of more wealth to take advantage of someone by becoming a slumlord or slum investor.  Where you are not making improvements, or taking care of maintenance issues.  People of all walks of life deserve to live a happy life regardless of circumstances.

 

 

 

So which type of investment are good, better, and great?

 

 

 

All are profitable with the right types of strategies.  Remember entry strategy, holding strategy, and exit strategy, are all phases of a great investment.

 

 

 

 

 

 

 

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