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.

Name(required)

Email(required)

Phone Number(required)

How Much Are You able to Invest?(required)

What type of Funds are Using to Invest i.e. 401K, Self Directed IRA, etc(required)

Submit

Δ

Related articles

• Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012 (backedbyrealestate.com)
• Backing the American Dream: Sunday Morning Thoughts 23 December 2012 (backedbyrealestate.com)
• Investor Driven Real Estate Recovery: Sunday Morning Thoughts 13 January 2013 (backedbyrealestate.com)
• AlternativeLendingMagazine.com Announces the Successful Funding of a California Hard Money Loan;New Hard Money Lender Program Allows over 75% Loan to Value on Purchase (prweb.com)
• In Middle Market: Money, Money, Everywhere (pehub.com)

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.

Related articles

• Desert Property Investor Sees All Signs Pointing To Phoenix Housing… (prweb.com)
• Sarasota Bay Real Estate Reports Wall Street Bullish on Housing Recovery (prweb.com)
• Investing Strategies for a Struggling Real Estate Market: Sunday Mornining Thoughts 09 December 2012 (backedbyrealestate.com)

Home Sales Up Foreclosures Going Up: Sunday Morning Thoughts 22 January 2012

Image via Wikipedia

Home sales ended 2011 with an overall gain.  Mostly due to lower affordable prices, low-interest rates and a better outlook on the foreseeable job market.  It looks as though a real estate recovery is underway.

Homes sales were up but real estate prices were down and with the foreclosure crisis reigniting itself prices are due to go to new lows.  Many of the current sales for homes have been from foreclosures.   Short sales, once the dreaded enemy of many impatient investors is now the vehicle by which many real estate assets have been purchased and at hefty discounted prices for the more savvy investors.

So has flipping properties become a thing of the past?

Not at all flipping in a depressed market is still alive and well, and a well used strategy for many investors.  Only change has been the rules by which a flip can be done, but flipping nonetheless is still a viable practice.  Not all of the would-be homeowners will be able to negotiate with banks for a foreclosure let alone negotiate a short sale.

With more banks heating up the foreclosure pot, inventory is set to rise, more and more real estate deals will be sourced and made by savvy investors and home buyers alike.

But most foreclosures are sold by realtors.

Not all realtors can move foreclose properties, if the area is inundated with foreclosures a confused buyer may fall out of escrow on a few properties before finally deciding which property to close on.

So although the bleakness seems to be disappearing in some real estate markets, it is a matter of time before another cooling period will begin.

Level of Risk in Real Estate Investing: Sunday Morning Thoughts 22 May 2011

Image via Wikipedia

As with all types of investments, there exists a level of risk.  Risk can range from low to high.  The range also has an impact which can be directly proportional to your return on investment.  Often times, the more the risk the better the profit.  But does that actually apply when considering real estate investing or private funding of real estate?

In a previous post we explored the amount of risk and the impact on return of investment.

Using the previous examples from part #1, the lower risk investment was the 60% occupied apartment.  The high risk and low yield was the strip mall.  The medium risk investment was the SFR.  But even then the determination of level of risk is based on what we already know about each project.  This isn’t to say we will jump into either investment of low or medium risk without knowing more information; now it is purely a judgment at first glance, to see if the potential investment warrants any more analysis time.

First we will examine the apartments with 60% occupancy and knowing the current management/owner is tired of owning rental property.  And for good reason, the tenants always seem to have some sort of an issue; maintenance always has to be performed from general maintenance keeping the grounds neat and tidy to fixing other issues such as plumbing, electrical, etc.

Now with the current owner letting things go, his rental income property has become his nightmare.  As long as the property can support itself, and generally 60% occupancy can do that, then the investment becomes a steal of a deal for another owner, one who will make sure the property has great people oriented management.  This one would definitely garner a request for the financials and a deeper analysis in order to make a reasonable offer.  This investment would be a medium with a superior yield even in its current state.

The other medium risk investment would be the SFR.  The SFR is in a middle class area without too many homes for sale.  The area is considered desirable for families to move into.  Once the house has been rehabbed and cosmetic touches have been applied then we would have either a passive investment property as a rental or sell it for at the fair market value.  This property could also become a lease with the option to purchase.  This one would also garner a further look to make sure the numbers are in order, and that the return on investment is worth all the hassle of the rehab, if rehab is necessary.

Not all houses are worth the rehab effort.  Some houses may only have a value due to the land which they have built on, versus the amount of work needed to fix the place.

As for the high risk and low yield investment, the highly vacant strip mall or office space, would be an investment that would not receive consideration if the typical strip mall/ office space in the area are almost empty or empty.  It would be a matter of evaluating employment statistics for the area, in addition to taking a look at the local demographics.  All of which is just a mouse click away.  Most of all the information can be found quickly on the internet.

But if the area is dense with vacant strip malls/ and or office space then it might be best to move to on to a more viable investment.

As a private lender, the investor presenting you the deal for funding should have already checked the numbers and made sure the deal is profitable.  But as a private lender you still need to look for profitable characteristics in all possible deals before funding.

Minimizing Risk in Real Estate Investing

Image via Wikipedia

In real estate investing as with any investment, risk is a factor.  Minimizing risk entails covering the downside and investing in a deal which makes sense.

Real Estate investing ranges from Single Family Residence(SFR), 2-4 units, 5+units multi-family, apartment building complexes, office space, mixed use, land, and agriculture.  Each type of investment has a built-in downside, or does it?

When real estate investing, a great investor falls in love with the numbers, not the property.  So the type of real estate should not matter as much as the numbers.  Stock investing and real estate investing are alike in this respect.  You can like a business but if the businesses stock is non-producing or poor producing stock investors are less likely to invest in it.

In real estate investing if the area is mostly abandoned buildings most real estate investors are less likely to invest in the area, although these non-producers may actually be diamonds in the rough.  We will save that for a future post regarding emerging and re-emerging areas.

Food For Thought, which investment poses less risk?

•      A SFR which needs rehab and is unoccupied in a middle class area with only a few houses for sale.

•      A 60% occupied 28 unit apartment complex where the owner cannot take it any longer.  It being the tenants.  With minimal   rehab necessary.  In a middle class area with a low vacancy rate.

•       A strip mall with 10 spaces total but only two are occupied, and the surrounding area has many vacancies of this type.

The less risk is the apartment complex.  60% occupancy in an area with few vacancies indicates mismanagement of this particular complex.  The SFR, well it does make a return but not until after rehab and finding a buyer or leasee.  As for the office space, find out why the businesses are moving out of an area.  It could be that jobs are moving to another area, or the main employer has moved out-of-town.

But each possible investment has it’s own upside and downside   too numerous to mention in a short post.  There are more things to consider for each type of property, but when faced with a choice, choose the one with the best numbers and advantages to maximize profitability.

Private Lending Tips: Sunday Morning Thoughts 15 May 2011

Image via Wikipedia

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.

Name(required)

Email(required)

Website

Comment(required)

Level of Investment Desired(required)

Submit

Δ