Brandon

Hard Money Lenders: Loan Sharks of the Real Estate Industry

by Brandon · 12 comments

Imagine a world where you have all the money you need, all the credit you could get, and banks pounding down your door to give you large sums of money for low interest. Nice isn’t it? However, the real world is a much darker place. In reality, trying to get financing from a bank is often like trying to shave Chuck Norris’ beard while he sleeps. It’s just not possible.  As they say, necessity is the mother of invention and Hard Money is the invention birthed by the need for financing.

What is Hard Money?

Hard Money is money that is obtained from private individuals or businesses for the purpose of real estate investments. While terms and styles change often, Hard Money has several defining characteristics :

  • Based on the value of the property
  • Short Term (6 – 36 months)
  • High Interest (8-15%)
  • High loan “points” (cost to get the loan)
  • Often do not require income verification
  • Often do not require credit references
  • Quick ability to fund
  • O.K. with property in poor condition

How Hard Money Is Used:

Compared to typical bank financing, Hard Money is ridiculously expensive!  Why would anyone use Hard Money? As I mentioned early: necessity. It may be an expensive way to do business, but if those costs are factored into the equation, it just might work for some people.  When investors cannot obtain normal bank financing, we will often use hard money as a “bridge” between purchasing and the resale or refinance.

Often times, house “flippers” will use hard money (as I have) to buy a property, fix it up, and sell it again. When it works, it works well. The lender may charge 4 points (4% of the loan) and a 12% interest rate, but if those costs are figured into the cost of the project this number is inconsequential.

How Do I Find Hard Money Lenders?

Hard Money Lenders can be difficult to track down, but there are several easy ways to find them.

  1. Look online. Many hard money lenders (both national and local) have websites and they need you as much as you need them. Search Google for Hard Money Lenders in your state to find some.
  2. Ask a Mortgage Broker – Some, not all, mortgage brokers can connect you with hard money lenders – for a fee.
  3. Ask House Flippers – Find some house flips that are on the market and find the owners or attend your local real estate investment club and ask around. Referrals are often the best way to find anybody good in business.
  4. Ask a Real Estate Agent. An agent that works with lots of investors should know several hard money lenders  – or at least be able to get you in contact with someone who knows them.

Should I Use Hard Money?

I have used Hard Money on a number of occasions, but I try to steer clear whenever possible. I am a strong believer in security and in the “buy and hold” method of investing. Hard Money – with its short term lengths – do not fit well with my investing strategies. I like to think in terms of “worst case scenarios”. If I try to “flip” a house using Hard Money, and am unable to sell that house before my term is up, I am in danger of losing the house to the lender.  I only use hard money when I have a clear exit strategy on a flip and secondary funding available as a backup.

Hard Money can be a great way to get into the “flipping” business, if that is the business model you are looking to get into.  However, you must weigh the risks with the reward to decide if this is a path you want to go down.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

How I See My House…

by Brandon · 3 comments

I received this email yesterday from my good friend, designer, and creative genius Krister from Plank Island Studios (www.PlankIsland.com) and found it hilarious and very true. If you are a homeowner you will especially appreciate this.

 

 

 

 

How I View My House:

How I View My House

 

 

 

 

 

 

 

 

How My Buyer Views My House:

How Buyers View My House

 

 

 

 

 

 

 

 

How My Lender Views My House:

How my Lender Views My House

 

 

 

 

 

 

How My Appraiser Views My House:

How My Appraiser Views My House

 

How My County Tax Assessor Views My House:

How My County Tax Assessor Views My House

 

 

 

 

 

 

 

 

 

 

 

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Screening For Ghost Tenants

by Brandon · 1 comment

I don’t believe in ghosts.

I especially don’t believe in ghosts who apply to live in one of my two-bedroom apartments (I hear they are more attracted to creepy mansions). This is why when poor Miss Abileen’s name came forth on the background check I ran this week, despite her death in 1987, I didn’t immediately call the Ghostbusters. While there are a number of “protected classes” that are illegal to discriminate against, I’m fairly sure being dead is not one of them. Clearly something was wrong with the social security number provided. It was fake, probably purchased by the applicant who was lacking a social security number.

This event has made me revisit just how important screening a prospective tenant truly is. As a young investor, it is easy to want to just let a tenant move in based solely on impressions. After all, throughout high school and college we are accustomed to gauging the integrity of a person based entirely on conversations. However, properly screening tenants is the most important step in decreasing the headaches you will get while investing in Real Estate. I would even be as bold as to say 90% of all management headaches could be avoided by adequately screening.  Nearly every problem I’ve ever had with difficult tenants has been from letting my standards slide when screening for them.  I have learned from my mistakes and hope to teach you to avoid them as well.  The following is a list of the top six things to research before allowing a tenant to move into your property.

  1. Valid Social Security Number: I’ll start with this, as it relates to the story above. There a number of reasons a tenant might have a fake social security number, such as immigration issues or trying to hide their shady history. While you might be tempted to allow a fake or non-existent social security number to slide – this is a terrible idea. Instead, just take all the money from your bank account and just mail it to me. Why? You are almost guaranteeing future financial problems. If they refuse to pay, trash the place, and skip town – you can’t garnish wages. If they hurt someone on your property, you can’t find them. Finally, without a social security number, you have no way of knowing who they really are and what they have done in the past. Do they have several evictions? Do they have seventeen felonies in the past year? Simply put, the risk taken when renting to tenants without valid social security numbers far outweighs the reward.
  2. Job Verification: Tenants may tell you they have an excellent job, but without verifying it from their employer, you have no way of ensuring that they are telling the truth. Even if they bring current pay stubs to you, it is still a good idea to call their place of employment because the job could be just a temporary position ending soon. Renting to tenants without a proper job is just asking for future evictions.
  3. Income Verification: I recommend setting a minimum income level for your property at 30% of the tenant’s gross income – and make this number visible from the start to avoid wasting time. I cannot tell you the number of times I have driven to a property to show a unit, only to find out that the tenant only makes $500 per month in social security and is looking to rent a $495 apartment. It is ludicrous, but it happens all too often. Tenants do not know how much they can afford, which is why you must. I now tell prospective tenants over the phone exactly our qualifications to minimize unnecessary trips to show units.
  4. Previous Landlord References: You do not want another landlord’s trash. Calling a previous landlord is vital to knowing the kind of tenant you might be soon renting your property to. However, do not simply just call the most recent landlord, because more likely than not, this landlord will give a positive review even if the tenant was terrible – simply because they want them gone! Instead, go back to other previous landlords and find out the quality through them. Additionally, a proper background check will include previous addresses for the prospective tenant. Make sure these addresses line up with the addresses they give you. Often times tenants will conveniently “forget” to include landlord information for the property they were evicted from.
  5. Credit – While understanding a prospective tenant’s credit is important, this is the only item on this list that is only necessary depending on the type of tenant you are looking for. Credit checks often just tell you one thing – they have bad credit. However, if you are renting higher income properties – by all means check credit. They way a person has paid their debts in the past is a huge indication of how they will pay you.
  6. Living Style: This includes a number of specific items of note about your perspective tenants that are pertinent to know before renting to the tenant. This includes items such as number of pets, other people who will be living with them, smoking status, and “how much cash do you have”. These questions will help you better determine the type of renter this prospect will be and how they will affect the condition of your home.

Screening tenants does not have to be a scary task, and can easily be subcontracted out to either a screening company or simply a trustworthy college student looking to make a little bit of money. I also strongly believe in charging a tenant for the cost of the background check. It is generally common practice and it will help weed out the tire-kickers and only get serious renters.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Cap Rates: The Magic Fairy Dust of The Investing World

by Brandon · 8 comments

How do you add $200,000 or more in value overnight on your investment property? Easy! Just sprinkle on some magic fairy dust! But if you are like me and used up the last of your fairy dust on your last flight to never-never land with Peter, you are in luck. You can still add incredible amounts of equity on your property, without magic, by using cap rates.

What Is A Cap Rate?

A cap rate is a tool used to discover the value of an income producing investment property. They are needed because, unlike single-family homes, most multifamily and commercial buildings vary significantly from one another – making it difficult to compare apples-to-apples. For example, it is fairly easy to determine the value of a remodeled 1200 square foot three bedroom, two bathroom home by simply looking at what other similar homes have sold for recently. However, trying to find similar sales of a 24-unit apartment building with a jumbled mix of one-bedroom and two-bedroom units in a low-income area proves to be too difficult. There are simply too many variables to use comparable sales as a means to determining value. Enter the cap rate.

The Cap Rate is a formula which lets us know the relationship between value and the amount of income a property delivers. I know this sounds confusing, and I’ll try not to throw too much math at you – but if you bear with me for two more minutes you will see why this is such an important piece of knowledge. Lets look at the formula (written three different ways) for determining a cap rate:

 

A.) Cap Rate = NOI / Market Value.

Or

B.) Market Value = NOI / Cap Rate

Or

C.) NOI = Cap Rate x Market Value

 

Let me explain. The NOI is the Net Operating Income. This is a term you will hear often which simply means the annual income left over after all the bills – except the mortgage – are paid. So, if a property makes $120,000 per year in rental income, and has $50,000 per year in non-mortgage bills (utilities, taxes, insurance, vacancy rate, etc), the “NOI” for the property would be $70,000.

Remember how earlier I mentioned that houses are compared with each other to determine value? With multifamily and commercial investments, it is the cap rate that is compared. If a nice apartment complex in Seattle recently sold at a 6.5% cap rate, it is safe to assume that other nice apartment complexes in Seattle will sell around a 6.5% cap rate. Generally ranging between 5% and 12%, the cap rate changes significantly from one location to another.  In general, the higher the cap rate, the higher the cashflow.

If you want to determine the average cap rate for your area, ask a seasoned real estate sales agent that specializes in commercial or multifamily properties in your town or use the above equations to determine the number for yourself. It is best to analyze a number of properties and determine their cap rates and average your results.  To help make this concept clearer, lets look at a possible scenario as an example.

The Example of Farmer Fred

Farmer Fred is trying to determine the value of his 24 unit apartment building. Last year, he collected $154,500 in rents and spent $75,000 in bills (not counting his mortgage payments). Therefore, he knows that his net operating income (NOI) was $74,500 last year. To find the value of his property, Farmer Fred must first find the cap rate. To do this, he looks at another property that has recently sold:

Property X recently sold for $1,500,000. It’s NOI is $100,000. Therefore, using Equation A above, (Cap Rate = NOI / Market Value) we find that $100,000/1,500,000 =.0667. Farmer Fred has now discovered that Property X sold at a 6.67% Cap Rate.

Fred analyzes four other properties and knows that this cap rate is the average for his area and his style of property, so he uses this number to determine his value. Using equation B above, Farmer Fred knows that the market value of a property = NOI/ Cap Rate. Therefore, Farmer Fred computes  $74,500  / .0667  to find that his apartment complex is currently worth $1,116, 941.53.

So How Does This Help Me?

Earlier I described cap rates as the magic fairy dust of a real estate investment – sprinkle them on and whatch your investment fly! Okay, they may not physically lift off the ground but they will take you to new heights nevertheless. Here’s how:

You do not have a lot of control over a cap rate, but you do have a lot of control over your NOI (net operating income). Remember, your NOI is the amount of income that comes in during a year minus your operating expenses (but not counting your mortgage payment). Changing your NOI can dramatically change the equation, resulting in a much different market value. How do you change your NOI? There are two ways:

      1. Decrease Expenses

There are many ways to decrease expenses. Effective management, better marketing, fewer vacancies, lower utility costs, use a resident manager instead of high-cost property management, etc. Most properties are not run at their highest efficiencies, and many times there is dramatic room for improvement.

      1. Increase Income.

Often times, rents can be increased without negatively affecting your vacancy. If so, do it. If not, there are other ways to increase income. Enforce fees more effectively, rent out storage rooms for extra income, or increase prices on (or add) laundry services.

Simply put, when your expenses decrease or your income increases, you end up with more money in your pocket. More extra money means a higher NOI, which means the value of your property is increased. 

Adding $200,000 in equity overnight:

 Let’s look back at our example of Farmer Fred. Fred looks at the property he just bought and notices several things. He is currently paying $15,000 per year for property management. He knows that an on-sight resident manager can do the job in exchange for free rent, saving him $8,000 per year. He also decides that his rents are a little below average for the area, so he increases his rent by just $25 per month per unit, bringing in an extra $300 per unit, per year or $7,200 in extra income per year total.

Doing just those two small acts, Farmer Fred immediately begins keeping an extra $15,200 per year. To Farmer Fred’s wallet, this is awesome; but even better, in investment lingo, his net operating income just increased by $15,200. His old NOI was $74,500, but now is $89,700. Now, keeping the same cap rate from before and using the new NOI value, Equation B (NOI/Cap Rate = Market Value) now shows:

$89,700/.0667 = 1,344,827.59. Farmer Fred has increased the value of his property from $1,116,941.53 to $1,344,827.59, a total change of over $200,000.

Even if you do not yet own a piece of real estate, imagine how powerful cap rates can be on a property that is under-performing because of poor management.   You are in a terrific position to purchase the property at a discount, improve the property, and resell it some day for the new value that you have created.  While harnessing the power of cap rates may not be magic, the results can nevertheless do wonders for both your future and your bank account.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

The Nine Niches of Real Estate Investments

by Brandon · 2 comments

I do not like nuts. Pecans, almonds, peanuts, walnuts, cashews, and all other nuts make me cringe. So when I open up a gift box of assorted chocolates, I tend to panic a bit, desperately desiring the milk chocolate goodness with the soft caramel inside but fearing the dreaded trojan horse filled with nuts and evil. When I choose wrong, I spend the next hour spitting tiny shards of nuts out of my teeth and vowing never to eat another chocolate from the mystery box again. For those who know me, though, that is a short-lived promise.

Real Estate Investments are like a box of chocolates. No, not in the Forest-Gump-Never-Know-Whatcha-Gonna-Get kind of way. Rather, there are many different types of investments all within the same “investment box”. Some might appeal to one type of person, some might appeal to another type of person. However, each investment uses most of the same basic principles and fundamentals.

Just as I tend to focus in on the caramel-filled chocolates in the box, I also have focused in on my niche in the field of real estate investments – small multifamily properties. However, you might be different. Your background, relationship to risk, family life, and your location may all affect which area of real estate you will begin investing in. The following is a brief summary of the nine major types of real estate investments.

Types of Real Estate Investments:

  • Raw Land –This is as “raw” as it gets (see what I just did there!). Purchasing land usually does not produce cashflow, but can be improved to add value. Land can also be subdivided and sold as well for profit.
  • Water/Mineral/Oil/Gas Rights – The cousin of investing in raw land, this is the process of buying and selling a person’s (or company’s) right to use the minerals (or water, oil, gas, etc) on a property.
  • Single-Family Homes – This is the most common investment for most first time investors. Single-family homes are easy to rent, easy to sell, and easy to finance. Single-family homes may be more difficult to cashflow, and can take a significant amount of time and effort to purchase just one unit.
  • Duplex/Triplex/Quads– Small multifamily properties (2-4 units) such as these are one of my favorite investment routes. These property types combine the financing and easy purchasing benefits of a single-family home with the cashflow benefits and less competition found in larger investments. Best of all, these properties can serve as both a solid investment as well as a personal residence for the smart investor. See “Getting Started Investing in Real Estate – Part 3: Creating Criteria” for more information.
  • Small Apartments – Another favorite of mine, small apartment buildings are made up of between 5-50 units. These properties can be more difficult to finance, as they rely on commercial lending standards instead of residential lending standards. However, these properties are excellent in terms of cashflow. They are too small for large, professional REIT’s to invest in (see below) but too large for most novice real estate investors. Additionally, the value of these properties are based on the income they bring in. This creates a huge opportunity for adding value by increasing rent, decreasing expenses, and managing effectively. These properties are a great place to utilize on-sight managers who manage and perform maintenance in exchange for free or decreased rent. At this level, real estate can truly become 90% passive.
  • Large Apartments – These buildings are the larger, nicer complexes you see all around the country, often times in upper-middle class neighborhoods in the suburbs. They often include pools, work-out rooms, full time staff, and high advertising budgets. These properties cost tens of millions of dollars to buy but can produce solid returns with minimal hassle.
  • REITs– REIT stand for a Real Estate Investment Trust. At the risk of oversimplifying, a REIT is to a real estate property as a mutual fund is to a stock. Many investors pool their funds together, forming a REIT, and allow the REIT to purchase large investments such as shopping malls, large apartment complexes, and skyscrapers. The REIT then distributes profits to investors. This is one of the most hands-off approach to investing in Real Estate, but do not expect the returns found in hands-on investing.
  • Commercial– Commercial investments can vary significantly in both size and style, but ultimately involve leasing property to businesses. Many commercial investors lease buildings to small local businesses, while others rent large spaces to supermarkets or big box superstores. While commercial properties often provide good cashflow and consistent payments, they also have much longer holding periods during times of vacancies. While most residential properties can be rented within weeks, commercial property can sit empty for months or even years. New investors should avoid these types of investments until they have significant cash reserves to weather the vacancy storms.
  • Notes – Investing in “notes” involves the buying and selling of paper mortgages. Often times an owner of a property may choose to offer financing and “carry the mortgage”. In this case, a “note” would be created which spells out the terms of the contract. For example, an apartment owner decides to sell his property for one million dollars. He offers to carry the full note and the new buyer will make payments of 8% per year for thirty years, until the full one-million dollars is paid off. If that owner suddenly needed to get the full balance of the loan, he might choose to sell that mortgage to a “note buyer” for a discount. That note buyer will then begin collecting the monthly payments and decide if they will keep the note or try to sell it for profit.

As you can see, there are a lot of different types of investments and within each type there are sub-types as well and different roles within those sub-types. This may seem daunting, but the wide variety of different types of investments is actually a great thing, as there is a type of real estate that appeals to almost everyone.  For me, I love finding under-developed small multifamily properties and adding value to increase cashflow and equity. That is my chocolate with caramel.  What is yours?

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Getting Started Investing In Real Estate – Part 4: Nuts and Bolts

by Brandon · 1 comment

Today is the final post in my four part series discussing the steps necessary to begin a venture into the real estate investing game. In step one I discussed the necessity of gaining a solid educational foundation before doing any investing. In step two I explained the process for formulating an investment plan that will free you from the evils of the 9-5 rat race. In step three I discussed why choosing to invest with a small multifamily property makes the best first investment. Finally, today we are going to look at the nuts and bolts in actually purchasing your first property.

Meet With a Mortgage Professional:

Before searching for the exact property you want, you need to know what you will be able to afford. A mortgage lender will help you determine exactly what you can expect in terms of financing. However, while most financial institutions abide by the same lending standards and rules, all lenders are not created equal.  You need to find a lender who is punctual, professional, and resourceful. The best way to do this? Call up several local real estate agents and ask them for their recommendations for who can close a loan the best in your town/county.  Real Estate agents rely on good lenders to get loans through to closing, so you can usually trust that the best lenders consistently get the best referrals from agents.

Once you are confident in a lender, have a sit down meeting with them. The meeting is free and painless, and you will leave with a much greater understanding of where to go next and what you can afford. Remember that the best lenders are also usually the busiest, so be punctual and prepared. Find out what they need you to bring to the meeting and be as organized as possible.

Meet with a Real Estate Agent:

A Real Estate Agent should be your best friend when deciding what property to buy, and the best part – they are generally paid by the house seller – which means, for you, they are free!  They will help you sort through the thousands of listing and (hopefully) find you a property that fits perfectly with your needs.   To find a good agent, ask around for referrals and then actually interview the agents. Find out if you click well with their personality, learn how many properties they have helped buyers purchase in the past, what kind of investing they do, what kind of schedule they work during, etc.  Meet with at least three agents and choose one that you think will best suit your needs.

The agent will guide you through to the end of the process. A good agent will:

  • Take you on a personal tour of any home that is for sale.
  • Prepare detailed analysis’ of homes that have been listed, sold, or pending.
  • Not be pushy or try to sell you something you don’t want/need.
  • Draft and submit offers for you when you find the perfect property.
  • Be willing to submit many offers, knowing most will be rejected for being too low.
  • Help you negotiate with the seller to get you the best price.
  • Walk you through to closing and handle any hiccups that might occur.
  • Get you connected with the Title and Escrow Closing Company or Lawyer (depending on your state’s process).

While your agent is your best friend in finding a house, there is one more buddy that is just as important – the internet. Once you have your criteria in place and know how much you can afford, you can spend all the time you’d like searching for your new home online. Sites like Realtor.com and Redfin.com are excellent sites that will help sort through the glut of homes and find ones that might be good possibilities. Then, call your agent with the list of homes you have compiled and have them arrange tours. It really is as simple as that.

Close the Deal

After your offer has been accepted by the seller, you will have usually 4-6 weeks until “closing”. During this time you will perform your “due diligence” (inspections, solidifying financing, checking out the properties financial records, etc) and the closing agent will prepare the legal documents necessary to close. Depending on what state you live in, a lawyer may perform these tasks or a Title and Escrow company may perform them. Either way, the process is similar.  Once the wait is over, financing in place, signatures signed, and the title recorded at the county – you will collect the keys, collect the security deposits (if tenants currently rent) and begin collecting the rent. Congratulations! You have now begun your new career as a real estate investor.  You are now one step closer to financial freedom and living the life you want to live.

 

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

2425262728293031323334First←→