Questions Every Real Estate Investor Must Ask Themselves!

When Socrates said, “Know thyself,” it is unlikely he was talking about real estate investing, but it is still good advice.   Before considering any major investment, you need to make sure you know what you can or can’t do, what your goals are, and what you are comfortable with.  Here are some questions to ask yourself, so you are prepared to seize a good investment opportunity when it presents itself.

Am I an Accredited Investor? Knowing your status is non-negotiable. Some investments are only available to accredited investors and knowing your status will help you to narrow your focus. An Accredited Investor is generally someone who has 1MM in net worth, not counting the value of their primary home.

Am I a conservative or aggressive investor? Do you like to play it safe with a lower steady fixed rate of return or are you someone who likes high risk, high reward situations? Risk tolerance, considering where you are in life, knowledge of the industry and the market cycle, should all play a part in this decision.

What type of investor am I, Passive or Active? Are you a hands-on type of investor who wants to be uber involved in your investments? If so, you may want to consider more active investments such as fix and flips, rentals, note buying, etc. Just remember that these types of investments take a lot of time and involvement.

If you are working full time or just starting out, something passive may be your best bet! Consider real estate investment funds and other low involvement opportunities.

What is my level of knowledge when it comes to RE investing?

Are you just starting out? Then you probably shouldn’t take on a 100K intensive rehab project for your first flip. No matter your investment decision, take time to learn and fully understand what you are doing.

Who is in my network that I can leverage for their talents/expertise?

We have all heard the quote “Your network is your net worth.” — Porter Gale. This is especially true in the real estate world. This industry is constantly evolving and having a strong network is a must. Every RE investor should have a good agent, lender, attorney, CPA, and contractor on their side with whom they can ask questions and brainstorm. Go to real estate club meetings, mixers, and conferences. Get to know people and surround yourself with like-minded individuals. Lean on the strength of others to compensate for your areas of weakness (we all have them) and you, too, can contribute your strengths to help others.

What type of funds am I using to fuel this investment? Analyze the effects of that choice.

There are many ways to fund your investments but sometimes that can come with certain restrictions, tax liabilities, etc. For instance, if you lend money on a fix and flip out of your IRA (structured funds) and the borrower defaults forcing you to foreclose, you need to be sure that you understand the foreclosure laws within an IRA as this would be handled differently than if you had lent the money with cash.

If you choose to invest as an individual, do you know how this investment might affect your taxes? Everyone’s situation is different, but these are the questions you want to know the answers to BEFORE you jump in.

Are You an Accredited Investor?

(We are not offering tax, legal, or investment advice. Please consult a professional)

There are many opportunities out there for passive investors to take advantage of.  Knowing if you are an accredited investor will help you to navigate the waters.

 “Accredited Investor” is a term used by the Securities and Exchange Commission (SEC) to differentiate between those investors whom the government believes to possess “financial sophistication” and those individuals who might require more protection/oversight. The government believes it is their duty to keep the world’s less savvy investors from so called “riskier projects” since they do not have the sufficient investment knowledge or reserve funds to handle a significant loss.  Unfortunately, this rule excludes many investors from unique high-yield opportunities that could be life-changing. However, the good news is that if you are an accredited investor, your options are endless.

Many accredited investors look for ways to include non-accredited family and friends in their investments. Unfortunately, there is no legal way for them to be directly involved in an accredited opportunity. Always seek guidance from a licensed attorney when structuring your investment.

As of late last year (August 26, 2020) the SEC adopted amendments to the definition of who is considered to be an “Accredited Investor” as defined in Rule 501(a) promulgated pursuant to the Securities Act of 1933 (the “Act”). The great news is that many who did not qualify before do now. You or your entity can be an accredited investor if you are any one of the following:

  • A natural person whose individual net worth, or joint net worth with that person’s spouse or a cohabitant occupying a relationship generally equivalent to that of a spouse (a “spousal equivalent”), at the time of his purchase exceeds $1,000,000 (excluding the value of the person’s primary residence and any debt secured by such residence up to the value of the residence; any debt in excess of such value must be counted as a liability); (MOST COMMON)
  • A natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (MOST COMMON)
  • A bank as defined in section 3(a)(2) of the Act, or a savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; an insurance company as defined in section 2(13) of the Act; an investment company registered under the Investment company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; a Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small business Investment Act of 1958; a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the Employment Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered adviser, or if the employee benefit plan has total assets in excess of $5,000,000, or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
  • A private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
  • Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, partnership, or limited liability company not formed for the specific purpose of acquiring the securities offered with total assets in excess of $5,000,000;
  • Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, partnership, or limited liability company not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
  • A director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
  • An entity not otherwise qualifying as accredited that own investments in excess of five million
  • Any entity not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000;
  • Any natural person holding in good standing a Series 7, Series 65, or Series 82 license, or any other professional certification or designation or credential from an accredited educational institution that the Securities and Exchange Commission has designated as qualifying an individual for accredited investor status;
  • Any “family office,” as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 with assets under management in excess of $5,000,000 that is not formed for the specific purpose of acquiring the securities offered and whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment; or Any “family client,” as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940, of a family office (as defined above) and whose prospective investment in the issuer is directed by such family office.

Prove your Status

There are multiple avenues one can go to get proof of their accredited status. A licensed Attorney or CPA, Investment Advisor, Broker Dealer, or Verification Platform such as VerifyInvestor.com, Accredited.AM, and Investready.com can all be of assistance. Be sure to get verification in the name/entity you plan on using for the investment. For instance, if you are going to invest in your LLC, your LLC will be the one that needs to be verified as different rules are applied to prove status. Once you have received an accreditation letter it is usually only valid for a certain length of time.

To prove one’s status there are multiple assets taken into consideration. For some, verification is quite easy and can be proved by one simple bank statement while others might have a little more legwork to do. Rest assured that knowing and proving your status is well worth it.  While everyone’s situation is different, having an understanding of qualified holdings might make the process less tedious.

Qualified holdings may include:

  • Investment Real Estate (non-primary residence) – Prove ownership through Deed, Note, etc. Be sure to have the valuation, appraisal, broker’s price opinion (BPO), County Appraisal District (CAD) valuation, or other document to prove the assets value.
  • Banks Accounts, Individual Retirement Accounts (IRAs), Certificates of Deposit (CD’s), Brokerage accounts, Annuities, Insurance etc. – Prove value by providing the latest statement or obtaining a letter from the financial institution stating value of account.
  • Vehicles (automobiles, motorcycles, boats, planes, etc.)- Show title and provide a valuation
  • Personal Property– Use a third-party valuation

In short, knowing your status will help aid you in your alternative investments to come. For more information on Investor Loan Source & ILS Capital accredited offerings please visit www.dontbuystock.com.

Loan Servicing

Cash

A real estate loan servicer is a company/person that is tagged in after closing by the lender to handle the administrative aspects of a loan. Surprisingly, many mortgage companies and owner finance lenders do not service their own loans but hire a third-party company to serve as a liaison between themselves and their borrower, ultimately managing the loan.   

There are many companies who specialize in servicing real estate loans, and they often offer an array of services. The type of loan you have, and the lenders needs, will determine what services are opted in to. Often the fee associated with the management of the loan is written into the closing documents and passed on to the borrower.

Finding a loan servicer you can trust, and one that fits your needs is imperative. Always read the fine print and be sure to have a clear understanding of your servicing agreement.  If you operate nationwide, be sure to find a servicer that does, too.  Remember that not all servicing agents are created equal. Some are very specific on the types of loans they can service while others are a one-stop shop.

As a lender there are many things you must stay on top of for things to run smoothly. Your servicer is there to make sure nothing is missed. Depending on your need and/or terms agreed to at closing you may expect your loan servicer to keep track of the following:

Accepting borrower paymentsCollecting fees
Keeping track of loan balances, amortization schedules, and records of paymentsSending out late notices and acceleration/demand letters
Collecting escrow for taxes and insuranceManaging extensions
Paying taxes and insuranceProviding payoff’s
Releasing drawsServing as the main point of contact/interfacing with the borrower

Servicing a loan is not only time-consuming, but one must know how to navigate through the legalities and compliance issues that may arise. Laws vary from state to state and can change over time. Often there are strict rules and timelines when it comes to collections, notifications, etc. and your servicer will help you stay on top of it all.  If you are going to finance the sale of a property yourself, a loan servicer is necessary to ensure everything is done legally and correctly, and protects both the borrower and the lender.

Common Myths Regarding Hard Money

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.

What Investors Should Know About Title Commitments

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.

ARV, LTV and LTC: What Does it All Mean?

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.

Debt vs. Equity

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! 

The In’s and Out’s of Due Diligence

The Importance of Due Diligence

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.

Buyer’s Due Diligence

  • Physical Inspection – plumbing, structural, roof, HVAC, pests, septic, well, etc.
  • Crime (including sex offender) statistics
  • 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!

Calculating DSCR

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/.

How to Add Value to Investment Properties

Everyone wants to get the most BANG for their buck when it comes to real estate investing, but where to start can be overwhelming. Luckily, there are a few simple things you can do to accomplish just that and increase the value of your fix and flip property.

Add a fresh coat of paint.

The older your property is the more likely it will need a new paint job inside and out. Stick to neutral colors, as the majority of people may not share the previous owners love of red walls. A dove, oatmeal, or cream color are great choices for inside as they go well with most décor. A lighter color will also make your interior rooms appear larger.

If your interior is covered in dark wood paneling, consider removing it. This trend went out in the 70’s and we can say, “good riddance!” Another option would be to paint over it. Many beautiful renovations choose a soft neutral white to brighten the space. Pair it with a light beige or gray on the walls and it will look beautiful, while staying within budget.

For the exterior, power washing can do wonders and remove years of dirt and grime. If a new paint job is in order, then do not hesitate. You can also consider replacing exterior doors and doing some simple landscaping – at the very least mow the yard. This will help your curb appeal and entice buyers.

Trash the carpet?

Flooring decisions should be based on the condition of the flooring, the price range of the home, and your budget. First, check under the carpet to make sure you do not already have wood floors. You may luck out. If you do, a quick refinish can save you a ton of money.

Consider keeping existing floors if they are in good condition and are consistent with what buyers expect and demand in that particular market and price range. If you do trash the carpet, be sure to select a flooring option that is within your budget and will add value to the property. For example, you don’t want to blow your budget and install premium hardwood floors in a home that you plan to sell for $100,000. Manufactured wood, tile and/or carpet may be the better option.

Upgrade light fixtures.

Outdated light fixtures can easily date your home.  Conduct a quick web search to find more appealing options that will modernize the space. This quick fix can change the entire tone of a room and is well worth it.

Also, consider changing out your light switch and outlet coverings. If your electrical allows for it see if you can install a dimmer.

Upgrade the appliances.

Stainless steel, matching, and energy efficient appliances can help increase the value of your property. If you find dents on the doors to your appliances consider replacing just the door. 

Consider bathroom upgrades.

If you can add another bathroom, do it. Even a half-bath can increase your home value by 10% +/- in some areas. If that is not in the cards, focus on updating the ones you have. Regrouting the tile, removing the tacky wallpaper and replacing old shower fixtures can do wonders for your space. Opt for a new vanity, frame the mirror, build a vanity – the options are endless and all will help the home show better.

Add a bedroom.

Another way to add value to the home is adding bedrooms. This may not always be an option, but there are ways to add bedrooms without adding square footage to the home. One idea is to turn an existing study into a bedroom by adding a closet. This can be an easy alternative that adds significant value to your investment without breaking the bank.

Don’t forget to deep clean.

This should be common sense and part of everyone’s rehab process. A little elbow grease never hurt anyone and if you simply just do not have the time, consider hiring professional cleaning service. Otherwise, a dirty home may be a red flag for prospective buyers who may assume that the home was not well taken care of. Be sure to remove stains from the carpet (if you decided to keep them), make sure your bathrooms are mold and mildew free, clean the baseboards, etc.

Upgrade the kitchen cabinets.

Depending on your budget and condition of your existing cabinets, you may not need to completely replace them. Consider splashing a new coat of paint on them and replacing the door pulls. This simple step will help to update your kitchen in a major way.

Replace windows.

Replacing older windows will give you the chance to update the look of your home. Be sure to opt for energy efficient options, as this will significantly add value to your investment project.

Remember that you do not have to do it all. Chances are you have some major big-ticket items that must be taken care of first.  When considering rehab, especially the cosmetic stuff, always consider your target buyer, location, and budget. If your rehab is in a lower income area you may want to skip the fancy modern light fixtures no matter how good of a deal you get on them. Prioritize and spend money on what matters.

Talk with industry professionals about the right updates for your project. Discussing these options with a hard money lender you can trust will help ensure you make choices that will increase the value of your real estate investment, without blowing the budget. Be sure to include a contingency in your scope of work to help cover unexpected expenses and stick to your budget. Many new flippers get wrapped up in the fun of cosmetic upgrades opting for unnecessary improvements and imposing their personal style preferences. Always remember that your fix and flip property is an investment, not your forever home. Focus on what matters and choose the best renovations for resale.