Headlines have been buzzing with speculations about an impending single-family home foreclosure boom. While it’s true that foreclosure rates have experienced fluctuations throughout the year, comparing the current situation to the infamous 2008 crisis is an overstatement. In this blog post, we will delve into the current state of the real estate market, debunking myths and offering practical advice for those navigating the industry.
Contrary to alarming headlines, there is no substantial evidence of a foreclosure boom resembling the crisis that rocked America in 2008. Although foreclosure rates have seen periodic increases, they are far from reaching historic highs. Investors anticipating a surge in foreclosures may find themselves waiting on the sidelines. Clickbait-worthy as the headlines may be, the market reality does not align with the fears propagated by some media outlets. The uptick in foreclosures is a correction from the Covid-era foreclosure policies. In the years following Covid lockdowns, foreclosures have indeed increased but still remain beneath pre-pandemic levels.
Understanding Local Real Estate Dynamics
Real estate is inherently local, and the trends and challenges observed are often specific to a particular area. For instance, the Houston real estate market is witnessing a rise in property inventory. However, this increase hasn’t shifted the balance towards a buyer’s market, as the inventory remains at 3.6 months – still indicative of a seller’s market. This underscores the importance of considering local nuances when interpreting market trends. Some markets may be seeing a higher level of foreclosure than others. Investors should prioritize understanding the challenges and opportunities in their market.
Navigating the Flipping Landscape
For those engaged in property flipping, it’s crucial to adopt a strategic approach given the current market conditions. Here are some practical tips:
Invest in Top-Notch Rehabs: In a market where uncertainties linger, prioritizing high-quality renovations is paramount. Investing a little extra in top-notch rehabs not only enhances the property’s appeal but also adds a layer of security in an unpredictable market.
Choose Strong Markets: Opting for strong and resilient real estate markets is a prudent move. While some areas may experience temporary fluctuations, choosing markets with robust fundamentals and growth potential can mitigate risks associated with market downturns.
Flip Where People Want to Buy: Understanding the preferences and demands of potential buyers is essential. Investing in properties located in areas with high demand and desirable amenities increases the likelihood of a successful flip. Researching market trends and buyer behavior can guide these decisions.
Watch the Market: Staying vigilant and continuously monitoring market trends is indispensable. Regularly assessing factors such as inventory levels, interest rates, and economic indicators allows investors to make informed decisions and adjust strategies accordingly.
Conclusion
In conclusion, while the headlines may suggest a looming foreclosure crisis, a closer examination of the real estate market reveals a more nuanced and localized scenario. Understanding the intricacies of the market and adopting a strategic approach to property flipping can position investors for success even in uncertain times. As we navigate the dynamic landscape of real estate, staying informed, and adapting to changing conditions will be key to thriving in the industry.
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Are you considering real estate investing and thinking of working with a hard money lender? If so, it’s important to be choosy when making your decision. While there are many hard money lenders available, they vary in terms of experience and customer service. It pays to shop around and get to know who you’re getting into business with. Taking the time to research potential hard money lenders will pay off in the long run, as you’ll be able to choose one that brings the expertise of their network to your team. Be sure to look for lenders who have a history of providing reliable customer service and have established positive relationships with real estate investors. Doing your due diligence now will save you from future headaches, so it is worth the effort!
Look at the Lender’s Experience and Background
When it comes to choosing a hard money lender for your real estate investments, one crucial factor to consider is the team’s experience. Work with professionals who have a deep understanding of lending in the real estate investing industry in the community you are investing in. With experience, a hard money lender will be able to quickly offer advice about trends they are seeing in the market that may be beneficial to your deal. The more transactions a hard money lending company has closed and the more deals they have seen, the more knowledge they will have to offer when it comes to your own projects.
What is Their Investment Strategy?
When evaluating potential hard money lenders for your real estate investments, it’s crucial to understand their investment strategy. This will give you insight into how they approach lending and whether it aligns with your financial goals. Are they conservative in their lending practices or more willing to take risks? Do they focus on specific types of properties or locations? By understanding their investment strategy, you can determine if they are a good fit for your investment needs and if their knowledge base will support your success in the real estate market.
Hear From Past Clients
Hearing from past clients is an important step in choosing a hard money lender for your real estate investments. Their experiences can provide valuable insights into the lender’s reliability, communication, and overall satisfaction with the lending process. Take the time to read reviews and testimonials from previous borrowers to get a sense of how the lender operates and treats their clients. Look for patterns and themes in the feedback to gauge whether the lender is trustworthy, responsive, and delivers on their promises. This firsthand information will help you make an informed decision and select a lender that will best meet your needs.
Real estate agent shakes hands with customer after finished contract after about home insurance and investment loan
What are Their Investment Fees?
Understanding the investment fees of a hard money lender is crucial when choosing the right one for your real estate investments. While fees may vary, it’s important to have a clear understanding of what you’ll be charged. Ask the lender about any upfront fees, origination fees, and interest rates. Also, inquire about any penalties for late payments or early loan payoffs. By understanding the investment fees, you can accurately assess the overall cost of the loan and determine if it aligns with your financial goals. Don’t be afraid to ask questions and clarify any fees that may be unclear to ensure there are no surprises down the road.
Legal Documents and Clear Communication
When it comes to choosing a hard money lender for your real estate investments, it’s essential to pay close attention to the legal documents that are part of the loan process. Before signing any loan agreements, make sure you thoroughly review and understand all the terms and conditions. It’s crucial to work with a lender who provides clear and transparent communication throughout the lending process. This includes regular updates on the status of your loan, timely responses to your inquiries, and clear explanations of any changes or adjustments. Open and honest communication is key to ensuring a smooth and successful lending experience.
Summary
In today’s competitive real estate market, choosing the right hard money lender can make all the difference in the success of your investments. By taking the time to research and evaluate potential lenders, you can ensure that you are working with a trusted partner who helps you reach your real estate investing goals.
At Investor Loan Source, we understand the importance of choosing the right hard money lender for your real estate investments. With our experienced team, transparent investment strategy, and proven track record of success, we are committed to providing reliable customer service and supporting your financial goals.
Don’t settle for just any hard money lender. Choose a partner who will protect your interests and help you achieve success in the real estate market. Contact Investor Loan Source today to learn more about our services and how we can help fund your next project.
As a real estate investor, it is important to stay informed on where the best opportunities for investment lie. Recently, six of the fastest-growing states in the U.S. have emerged as new economic powerhouses. This population and business shift can make or break investing strategies for real estate investors, and understanding the nuances of the market is key to success. This blog post will explore the economic powerhouses of the fastest-growing states and discuss what opportunities they can offer investors.
Understanding the Economic Shift to the South
Currently, six southern states are leading this shift: Florida, Texas, Georgia, the Carolinas, and Tennessee. Several states in the country are attracting businesses and residents from all over, leading to the relocation of families and businesses and the transfer of their wealth. An estimated $100 billion has been transplanted to the Southeast, while the Northeast saw $60 billion flow out. According to Forbes, Texas now hosts more Fortune 500 companies than any other state and the migration of companies continues. Nine of the nation’s 15 fastest-growing cities are in the South, according to estimates released by the U.S. Census Bureau (of the nine fastest-growing cities in the South, six were in Texas). As businesses are drawn by better labor markets and business-friendly communities, so also are families relocating for lower costs of living and increased opportunity.
Population growth and economic growth are key components to examining a market’s potential, so investors need to take notice. With or without concerns of recession these states continue to grow as desirable locations for companies and families alike, opening many opportunities for investors to fill a need for housing and commercial space.
Why is this happening? For one, the cost of living is generally lower in the South, which means more people are moving to the area, creating a greater demand for housing, jobs, and services. This creates an environment ripe for building wealth, as the growing population requires more resources to meet their needs.
Of course, it’s not just the states themselves that are growing, but specific cities within those states. Miami, Dallas, Atlanta, Charlotte, and Nashville are all experiencing rapid population growth and economic expansion, making them prime locations for investment.
So, if you’re looking to capitalize on the economic shift to the south, keep an eye on these top-growing states and their major cities. With a little research and due diligence, you can position yourself for success and start building your wealth.
Cities to Watch
As investors seek to build wealth in the fast-growing southern states, it’s worth paying attention to the cities that are experiencing the most growth. Georgetown, Texas had the highest population increase in 2022, with a growth rate of 14.4%. Santa Cruz, California wasn’t far behind, with a 12.5% increase that added roughly 7,000 people to the city.
The next three fastest-growing cities were all in Texas: Kyle, Leander, and Little Elm. In fact, Texas was the only state with more than three cities on both the 15 fastest-growing large cities and towns by numeric change and by percent change lists.
Fort Worth, Texas had the largest numeric population gain in 2022, with an increase of 19,170 people. Other top cities by numeric growth included Phoenix, Arizona (19,053), San Antonio, Texas (18,889), Seattle, Washington (17,749), and Charlotte, North Carolina (15,217). It’s worth noting that Charlotte returned to the list of the top 15 largest cities in 2022, ranking 15th after dropping to 16th in 2021.
Investors looking to capitalize on the economic shift to the South should keep an eye on these growing cities. As populations and economies continue to boom, these areas may have significant opportunities for building wealth.
Industries Driving Growth
The economic shift to the South is driven by several industries that are booming in the region. One of the biggest catalysts for growth is the influx of tech giants and multinational companies that are relocating to the South. Companies like Apple, Tesla, and Hewlett Packard Enterprise are setting up shop in states like Texas, South Carolina, and North Carolina, attracted by the region’s low cost of living, favorable tax policies, and talented workforce.
According to the U.S. Census Bureau, the relocation of companies to the South is helping Texas, South Carolina, and North Carolina become three of the fastest-growing states in the U.S. Samsung, for example, is moving part of its operations to Texas, creating more than 2,000 jobs in the Austin area. Real estate developers are attracted to Austin due to the high demand for housing as people relocate to the area for job opportunities.
As the old saying goes, “Where the jobs go, so does the people.” This sentiment is echoed in a recent survey, where 51% of participants cited a new job or job transfer as the reason for families’ out-of-state move. With industries like tech, healthcare, and energy booming in the South, it’s no surprise that more and more people are flocking to the region for job opportunities and a better quality of life.
When it comes to real estate investing, choosing the right markets is essential. It’s not enough to simply buy a property and hope for the best; you need to ensure that you’re investing in an area that has a high demand for real estate and is likely to provide a good return on investment. In this blog post, we’ll explore the factors you should consider when choosing an investment market in real estate. Whether you’re a seasoned investor or a beginner, this guide will help you make informed decisions and maximize your profits.
Identify your investment goals As an investor, it is essential to first determine your investment goals before choosing a real estate market. Ask yourself questions such as, “What am I looking to achieve through my real estate investments?” or “What are my short-term and long-term financial objectives?” Identifying your investment goals will help you narrow down your options and find the market that aligns with your investment strategy. For instance, if you are looking for high returns in a short period, then you may consider investing in a market that has a high appreciation rate or a significant demand for rental properties.
On the other hand, if your objective is long-term stability and steady income, then you may opt for a market with a stable economic base and a strong rental market. Knowing your investment goals is the first step toward making informed decisions as a real estate investor. It will enable you to choose the right investment market that matches your objectives, risk tolerance, and investment style.
Consider market trends and indicators One of the most important factors to consider when choosing an investment market in real estate is the current and future market trends and indicators. Understanding the state of the market can help you determine if it is a good time to invest or if you should hold off. Some key market indicators to consider include the overall economic conditions of the area, job growth, population growth, and any major infrastructure projects or developments in the works. For example, if a city is experiencing high job growth and population growth, it could signal strong demand for housing and therefore be a good market to invest in.
It is also important to consider the local real estate market trends such as property prices, rental rates, and vacancy rates. A market with high property prices may not be ideal for investors looking to make a quick return on their investment but could be a good long-term investment opportunity.
Additionally, keep an eye on any regulatory changes or developments in the market, such as new zoning laws or building codes. These changes could impact the value of your investment. Overall, it is crucial to do your research and stay up-to-date on the latest market trends and indicators in order to make informed decisions about where to invest your money in real estate.
Research local demographics and economic factors In addition to looking at market trends and indicators, it is important to dive deeper into the local demographics and economic factors of a potential investment market. This information can give you a better understanding of who your target audience may be, what their buying power is, and how the local economy is performing.
One key demographic factor to consider is population growth. If an area is experiencing an increase in population, there may be a higher demand for housing and rental properties. Additionally, you’ll want to consider the average age, income, and education level of the population in the area, as this can give you insights into what types of properties they may be looking for.
On the economic side, look for signs of job growth, unemployment rates, and average income levels. A healthy job market can be an indicator of a strong real estate market, as people will need places to live and work. Keep an eye on industries that may be expanding or relocating to the area, as this can also have an impact on the real estate market.
You can gather much of this information through online research but don’t be afraid to reach out to local experts for insights. Real estate agents, property managers, and local chambers of commerce can all provide valuable information about the area’s demographics and economic factors. The more you know about a potential investment market, the better equipped you will be to make informed decisions about your real estate investments.
Increased value of real estate or property house. Businessman owner home investment planning real estate business, Percentage rental income earning profit Investor thinking strategy.
Evaluate supply and demand in the market Once you have a good understanding of the local economic conditions and demographics, it’s time to assess the supply and demand for real estate in the market you’re considering. In a nutshell, the supply is the amount of available properties for sale or rent in the area, while the demand is the number of buyers or renters seeking properties.
Ideally, you want to invest in a market where the demand for real estate is high, but the supply is relatively low. This creates a favorable environment for real estate investors because it drives up prices and allows you to make a profit when selling or renting your property. To evaluate supply and demand, you can start by analyzing market data, such as property sales and rental prices over time. This can give you an idea of how quickly properties are selling or renting, and how prices are trending in the area. You can also look at data on new construction projects to get a sense of how much new inventory will be coming onto the market.
In addition to market data, it’s also helpful to talk to local real estate agents and property managers who have a finger on the pulse of the market. They can provide insights into the types of properties that are in high demand, and how quickly they are being snapped up. Ultimately, by understanding the supply and demand dynamics of a real estate market, you can make a more informed investment decision and increase your chances of success.
Assess potential risks and challenges in the market Before investing in any real estate market, it’s important to assess potential risks and challenges that may impact the success of your investment. By identifying these factors early on, you can make informed decisions and adjust your strategy accordingly.
One major risk to consider is the overall economic stability of the market. A sudden recession or downturn in the local economy could impact the demand for real estate, causing property values to decrease and potentially resulting in losses for investors. It’s important to evaluate the long-term economic viability of the market, as well as any potential vulnerabilities that may put your investment at risk.
Another factor to consider is the regulatory landscape in the market. Laws and regulations related to real estate investments can vary greatly from one location to another, and failing to comply with these rules can lead to costly legal disputes or penalties. Be sure to research any relevant regulations and consult with legal professionals to ensure that your investment complies with all local laws.
Other challenges to consider may include the level of competition in the market, the quality of available properties, and any natural or environmental factors that may impact property values or make it difficult to manage properties. By assessing these factors before investing, you can determine whether the potential risks and challenges are manageable and worth pursuing, or whether it may be better to consider alternative investment opportunities. Overall, assessing potential risks and challenges in a real estate market is an essential step in the investment process. By carefully evaluating these factors and seeking advice from professionals, you can make informed decisions and set yourself up for success as a real estate investor.
Seek advice from real estate professionals Choosing the right investment market for real estate can be a daunting task. It requires thorough research and a keen understanding of market trends and economic indicators. But don’t worry, you don’t have to navigate the real estate investment market on your own. Seeking advice from real estate professionals can provide valuable insights and guidance on the best investment markets for your goals. Real estate professionals such as agents, brokers, and property managers have firsthand knowledge of the local real estate market and can offer informed advice on the most lucrative investment opportunities.
When choosing a real estate professional to work with, it’s important to find someone with expertise in your specific investment goals. For example, if you’re looking to invest in commercial real estate, you’ll want to work with a commercial real estate broker. If you’re interested in investing in a specific neighborhood, you may want to work with a local real estate agent who knows the area intimately.
Before selecting a real estate professional, do your due diligence and ask for referrals from other investors or do some online research. You want to work with someone who is trustworthy, experienced, and has a proven track record of success.
In addition to offering advice on investment markets, real estate professionals can also provide insights on local real estate laws, regulations, and procedures. They can also help you navigate the buying and selling process, negotiate deals, and manage your property once you’ve made an investment.
Investing in real estate can be a profitable venture, but it requires careful consideration and planning. Seeking advice from real estate professionals can give you a competitive edge and increase your chances of success in the real estate market. So don’t hesitate to reach out to local experts to help guide your investment journey.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
There are many misconceptions regarding hard money lenders in the real estate industry today, and yet for those in the know, it continuously proves to be a real estate investor’s biggest asset. Do not be put off by the stigma surrounding the word “hard money” or by stories you’ve heard about a friend of a friend before learning more. Here are the top arguments I hear from naysayers on a continual basis and the reasons why they are simply not true!
Myth #1: Hard money is only for the desperate real estate investor.
This is the biggest myth of all. Many hard money lenders are privately funded, meaning they do not require bank financing to close a loan. Therefore, many hard money lenders can be more flexible than the bank when underwriting a loan if the deal makes sense. Hard money is great for those who are self-employed as they do not need to prove their income with a W-2, as well as immigrants, those with less than perfect credit scores, investors who work with properties that appear to be less than desirable, those investors who have reached their loan limit with their institution, and those investors who just need to close the deal fast. Hard money is for everyone!
Myth #2: Hard money loans are expensive.
While hard money loans tend to give most people “sticker shock” it is important to remember to look at the big picture. Most hard money lenders can lend a higher percentage of your project’s cost than some stringent traditional lenders, allowing you to bring less out of pocket funds to the closing table.
Hard money loans tend to have shorter repayment periods and prepayment penalty times. This means you can pay the loan off faster with less interest in total. Investor Loan Source, a national private lender, even has a one-time close feature allowing you to convert your short-term rehab project to a long-term rental without going back to the closing table. This allows you to avoid paying closing fees a second time.
In addition, because of the fast-closing times of most hard money lenders (who can often close within 10 business days or sooner) your potential for profit rises. After all – time is money. In an environment as hot as the current real estate market, the wait for a traditional bank loan can cost you opportunities.
When combining these perks your hard money loan tends to be a less expensive choice overall.
Myth #3: Hard money loans are risky.
This myth is almost laughable. Most of the time hard money lenders are lending out their own money and making a risky loan is not in anyone’s best interest. Hard money lenders often have a vast understanding of the real estate market and what is entailed for a project to be successful. It is not uncommon for lenders to be successful businesspeople who have the entrepreneurial spirit and a reputable background in real estate, investment banking, accounting, law, etc. If you choose an experienced hard money lender, this will ensure that proper due diligence and calculations are done to help determine whether an investment will be profitable for you, the borrower. They want you to be successful so that you will use them for your next real estate investment project.
Myth #4: Hard money lenders want to take your property.
Stop right there! Hard money lenders are in the lending business NOT the foreclosure business. They do not want to own your property. When a foreclosure is pursued, you can be sure it is because every other avenue was exhausted. Regardless of whether you go the traditional lending route or hard money, be sure that you understand your loan terms, have a solid exit plan in place and care apable of repaying your debt.
Truth: Hard money lenders are important resource.
Do not pass up the opportunity and benefits that come with taking out a hard money loan for your next real estate investment deal. It may make sense to use hard money based on your needs and the investment opportunity. Finding a lender you can trust is the single most important choice you can make. Looking for a hard money lender? Consider Investor Loan Source. Visit www.ils.cash to learn more.
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
What is a Title Commitment and Why Do Investors Need One?
The title commitment for insurance is the insurers promise to issue title insurance after closing and should be carefully reviewed and understood. It is essentially a disclosure document that outlines any issues/requirements that need to be addressed prior to closing as well as any liens, obligations, and defects affecting a property. This is a snapshot in time looking backwards. Your title commitment will not ensure any title issues that arise after this date (ex. liens put on the property after the commitment is issued, etc.) and expires six months from the effective date seen on Schedule A of the commitment. After closing, your title company will issue your official Title Insurance Policy using the commitment previously provided. This document is important as it protects you should any disputes arise regarding ownership and provides coverage against losses due to title defects.
Loan Policy and Owner’s Policy
There are two types of title policy’s: the loan policy and owner’s policy. The loan policy is usually a requirement of any lender and will protect their interest in the property they are loaning money on. This policy is usually written at the loan amount. It does NOT insure the owner should any title issues arise. A separate owner’s policy can be purchased that will insure you for the full amount of the property purchase price (not just the loan amount) and will remain in place as long as you have an interest in the property.
Title Commitment Sections
Each title commitment is made up of three parts: Schedule A which covers the basics of the transaction, Schedule B Section I which lists all requirements that must be addressed prior to closing, and Schedule B Section II which addresses exceptions to coverage.
How to Read a Title Commitment
Schedule A
This part of the Title Commitment covers the basics of your transaction. It is imperative that all information here is correct. You will want to check your effective date, the name of the person who currently holds title (verify that this is your seller), the legal description (title companies do not insure addresses only legal descriptions and it must be correct), the proposed buyer and sales price (coverage amount for the owners policy), and the name of the lender and loan amount (coverage amount for the loan policy). You will also want to check that the commitment is countersigned by the insurance company.
Schedule B Section I – Requirements
This section outlines requirements to be addressed prior to closing in order to obtain coverage. You can expect to find information regarding paying off the sellers existing mortgage/lien, obtaining release of liens on the title, recording new loan documents, Taxes and HOA dues past due and current, and correcting errors in title. Fulfilling these requirements are sometimes as simple as providing documentation to the title company.
Schedule B Section II – Exceptions
This section lists things that will not be covered under your policy such as HOA restrictions, mineral and water rights, utility and access easements, encroachments, plat restrictions, liens not found in public record, etc. Most things you will find here are pretty standard however, you must review this section carefully as it may impact the way you use your property and ownership.
Investing in real estate is an important decision. When choosing a lender, be sure to select an experienced one that will walk you through the process and answer any questions you may have. Investor Loan Source is happy to assist you along the the way.
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
Lenders often use these acronyms to define their loan products. Understanding these terms will help you to choose the right lender for your project.
ARV: After Repair Value
This term is used by appraisers to tell the value of a structure once all items on the scope of work (SOW) have been completed. Most lenders will loan a percentage of this valuation to a borrower and then hold the repair funds in escrow.
LTV: Loan to Value
This term is used to define the amount a lender will loan on a particular property in reference to the valuation. For instance, if you are looking to buy an investment property that has an appraisal of 100,000 and your lender loans 70% LTV, then you can expect a loan on this property for 70K. If your contract for purchase is for 80,000, then you must bring at least 10,000 to closing. If it is under, you may be able to cash out.
LTC: Loan to Cost
Some lenders use this to tell us the percentage of funding one can expect on a purchase. Sometimes this is regulated by the state. For instance, if a lender tells you that they loan 90% LTC, you can expect to receive a loan of 90,000 when your purchase price is 100,000. This means you will have to bring the difference to closing.
How They Work Together
Let’s imagine that Sam has a rehab property under contract for 60,000. He needs to invest 20,000 into this property for repairs, bringing his total loan amount to 80,000. His ARV appraisal states that after his work is done on the property it will be worth 100,000. However, Sam’s lender only loans 70% ARV and 90% LTC. Since the property is under contract for 60,000 the lender will only loan 90% of that amount which is 54,000. In this scenario the lender agrees to loan 100% of the repairs (which will be held in escrow) up to the after repair value of 70% which is 70,000. Since the contract is for 60,000 and the loan amount on the contract will be 54,000 there is 16,000 left to use towards repairs, meeting the 70% ARV or 70,000. Remember that Sam needs 80,000 total and that is what the appraisal was based on. Therefore, Sam must bring the difference to closing which is 10,000.
Let’s look at another example. Imagine that Mary has a rental property she is looking to refinance. The appraisal comes in “AS IS” at 80,000. Mary still owes 30,000 on her lien leaving her with 50,000 in equity. Her lender agrees to loan 70% of the LTV an 100% of the LTC. In this case she would get a loan for 56,000. Of that 30,000 would pay off her prior lien leaving her with 26,000 to cash out on. In this scenario Mary is only paying her closing costs. Please note that in some cases lenders will allow you to roll in closing cost fees.
Find a Lender You Can Trust
Finding a lender you can trust is essential in this business. Understanding their loan thresholds can help you to evaluate deals before you invest a significant amount of time into a project that may ultimately not work for your circumstance. Be sure to choose your lender that will explain the loan terms and any items that you don’t fully understand.
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
With so many options out there for real estate investors to choose from, understanding the pros and cons of debt vs. equity deals will help you make an informed decision.
What is a Debt Deal?
When investing in a debt deal you are the lender on a property. In exchange, you are promised a set rate of return dependent on your investment amount. Principal is either paid back throughout the life of the loan or in a balloon payment after a pre-determined amount of time. Examples of debt deals are real estate notes/mortgage-backed securities and real estate debt funds.
Pro’s of Debt Deals
Less risk – You become the lien holder and are granted certain rights, such as foreclosure, in the case your borrower defaults on the agreed upon terms
Steady Income – debt deals are great for those investors who depend on the income. They have a predictable payment schedule (usually monthly or quarterly) and pay the pre-determined rate.
Shorter lock-in periods – Most debt instruments have a life span between 6 and 24 months or until project completion. This is an ideal time-period for persons not willing to tie up their funds in any one asset for extended periods of time.
Con’s of Debt Deals
Capped Rate – Since your earnings are pre-determined there is no chance to profit more if the project is uber successful. Less risk equals less return.
Pre-Payments – There is always the chance that your borrower may pay off the loan early. This can leave you looking for a place to re-deploy funds sooner than expected. You also risk the chance of not recouping your investment fees and interrupting your expected income.
Higher Fees – Most debt investing opportunities include a fee for bringing you the opportunity. They could potentially pass the origination fees on to you in addition to legal document prep of the transfer documents and recording fees.
No voice – As a lender you have no say in how the project is run. The owner retains this right.
What are Equity Deals?
Equity deals are real estate investment opportunities where you take part ownership in the project. Returns can come in the form of cash flow produced by the asset such as rent, and your share of that return is dependent on your investment amount. When the property is sold or refinanced you too take a percentage of profit. Equity deals can be offered as one-off opportunities, equity syndications, REIT’s, etc.
Pro’s of Equity Deals
No cap on returns – Investors can generate higher returns than they might in a debt deal since returns are based on the performance of the asset.
Hedge against inflation – Real estate appreciates over time and keeps pace with inflation. When the cost of living goes up your cost of ownership does not. Rents are raised and the value of your property investment rises as well. As an equity holder you share in the profit spun from this. Be sure your investment takes advantage of the buy low, sell high mantra!
Tax advantages– You can dramatically reduce your tax liability each year through depreciation. Real estate owners (not lenders) can benefit from this. Always consult your CPA for the pro’s and con’s of any investment and how they might personally effect you.
Con’s of Equity Deals
Risk – Higher reward equals higher risk. There is no guarantee your asset will perform well or even as expected. You run the risk of losing some or all of your investment.
Holding Period – Equity deals are usually accompanied by lengthy hold times and no liquidity.
Before committing to any investment, you should do your research. Learn everything you can about the investment and those offering it. Have your attorney help evaluate the legal paperwork and point out risk. Ask your CPA what the tax implications are for this investment in direct correlation to your situation. Do not be afraid to ask questions to those offering the investment. You want to be well versed in your investment so you can have peace of mind.
In addition, ask yourself these questions:
What is my tolerance for risk?
Am I dependent on this income and need to know exactly what to expect and when?
What is my need for liquidity?
There is no blanket right or wrong answer to these questions. However, truthfully answering these questions can help you to decide what type of real estate investments you should be considering: Debt, Equity, or both!
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
When investing in real estate proper due diligence is one of the most important keys to success. There are many issues that can arrive after closing that could have been prevented with a little homework. Thankfully, many professional underwriters and lending companies will aide in this endeavor once a contract has been accepted.
The due diligence period generally refers to a set amount of time one has to investigate the aspects of the property after a contract is accepted and before closing. During this time the buyer may back out of the contract for any reason without repercussions. Generally, the length of time is pre-determined by either the state (usually 10-15+ days) or agreed upon in the contract and begins when escrow is opened.
Every lender and title company will have a set list of what they require to complete what they believe is proper due diligence on an investment. This not only protects them but you as the buyer. However, not everyone’s requirements and parameters are the same. A private individual lender may require very little due diligence to be done while the bank will have you jumping through hoops. Knowing what to look for and expect is crucial in this business regardless of if you are doing it all yourself or leveraging your team.
Upcoming building plans in the neighboring area / Zoning
Talk with neighbors to get the inside scoop on the area
Median Household Income
Surrounding Rental Rates
School Rankings
Repair Quotes (if applicable)
Estimate your Debt to Service Coverage Ratio – DSCR (if applicable)
Review of Seller’s Disclosures
Property Rights
Submit all requested documents to lender
Review all legal documents for accuracy and understanding
Lender’s Due Diligence
Review of all documents for accuracy and suitability
Contract / Assignment – review terms and make sure the seller has the right to sell property etc.
Deed or Proof of Ownership – review chain of custody
Interior and Exterior Photos
Scope of Work / Lease Agreements
Bank Statements
Background Checks – this can include criminal, credit, tax liens, death index, bankruptcy, lawsuit history, etc.
Insurance Quotes – verify amount, terms, address, type (hazard, flood, windstorm, vacant, occupied, builder’s risk, commercial etc), and insured names
Flood Determination – what flood zone does the property lie in
Corporate Docs (if applicable)
Certificate of Formation
Certificate of Filing
Operating Agreements
Amendments
Resolutions
FEIN or W-9
Entity Search – verify the entity is active and managing members
Driver’s License (state ID’s) – citizenship
Social Security or W-9
Contact Information from borrower
Appraisal / Survey – Value of property and boundary lines
Permits
Homeowners Association (HOA) – restrictions and verify dues are up to date
Verify Taxes are Current and that there are no liens
Review of Title Commitment
Legal Descriptions
Policy Amount
Encroachments / Easements
Liens – Verify Clear Title / Judgements
Review of Loan Package and Closing Disclosure
Commercial
Phase 1 Environmental (if applicable) and Phase 2 if needed
Proposed Plat Changes
Drawings / Spec’s
Executive Summary
Rent Roll
Feasibility Study
Pro-Forma P&L
Ready to Invest?
This list is in no way meant to be used as a complete guide to due diligence, but it aims to serve as a starting point. There are many things to consider when investing in real estate and are often driven by one’s school of thought. Asset based lenders vs. credit-based lenders will have varying requirements, as well those investors who invest in fix-n-flip, rental, and commercial loans. The bottom line here is to do your homework throughout the entire process. Make sure you ask lots of questions and that you understand the legal documentation you are signing. Consult with your lawyer or financial advisor if you have questions or are still unsure. Don’t be afraid to walk away from a deal if you find an issue during the due diligence period that the seller refuses to fix or can’t. Better to lose a small sum of cash than to get in over your head. Be sure to partner up with a lender that you can trust. Now that you are armed with this knowledge, get out there and find some deals!
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
If you are a part of the real estate investing world, then you probably have heard that properly calculating a property’s debt to service coverage ratio (DSCR) is crucial. If you are newer to investing, you may wonder why it is so important. Lenders use this equation to determine if a rental investment property’s cash flow is enough to cover their borrower’s loan payment in addition to all re-occurring expenses. As a borrower, the DSCR can help you gauge the profitability of your project saving you time and money.
The formula is quite simple, but first you must learn another acronym, PITIA. PITIA stands for property, interest, taxes, insurance, and association (HOA). These are the most common re-occurring expenses taken into consideration by a lender.
To calculate the DSCR take your annual rental income (numerator) and divide it by the property’s annual PITIA (denominator). The result is your DSCR. Anything below a 1 means you have negative cash flow and would be an unlikely candidate for approval.
Be sure to check with your lender regarding their DSCR requirements. As a rule of thumb, shoot for a DSCR above a 1.25. Remember, the higher the number the better chance for profitability. You can also find a DSCR calculator online at https://ils.cash/resources/.
Investor Loan Source, a hard money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including hard money lending for properties to sell on owner finance.
