What is Private Lending or Private mortgages?

What is private lending?

Q: What does it mean to become a private lender?
A: Becoming a private lender gives you the opportunity to make a loan which intern you will earn better than average returns that are up to five times as much as the rates you were getting with traditional resources.

How is the money used?

Q: How does an investor your money?
A: As professional real estate investors we use private money to fund new investment properties that produce a return for the investor in addition this helps cover the cost associated with buying and selling properties. For properties we already own and manage there are times when we’d want to convert some of our equity into cash without selling the property this allows us to acquire more assets which will help increase returns for both us and our investors.

Why?

Q: Why don’t you go to banks for a mortgage lender?
A: Banks and other lenders require applications, approvals, and must follow guidelines imposed by the banking industry. Plus, there are limited to the number of loans they can move to any one company or Investor. On top of that, the time it takes for their approval process is never certain.
Real estate investors can move much faster without these limitations by using private lenders. That allows them to work with many more asset managers and real estate investors seeking money to help build their investment for folio. They are able to negotiate more profitable deals while offering property owners a quick and easy sale without applying for a new loan or deal breaking contingencies.

Q: How can real estate investors afford to pay better than average returns to my private investors?
A: We make our money by providing valuable services to sellers, buyer‘s, renters, and private lender‘s. By taking out the middleman, we can avoid the cost normally paid out for real estate commissions; mortgage broker fees and learning fees. We also employee marketing strategies as soon as we purchase a property. Typically realtors don’t start this process until it’s too late. Often times we are able to find our own buyers allowing us to secure a strong sale price and save on sales commissions. Our renovation process is almost down to a science with crews that know we are not retail clients. We pay wholesale prices to all contractors and typically get both discounts on the materials. We are buying so conservative and undervalue that we are able to offer our buyers a fully renovated property at or below everything else in the neighborhood. Generally we are acquiring our properties at or below 70% of the after repair value including all rehab, soft cost, and carrying expenses.

Help For Sellers

Q: How can we help sellers?
A: With your cash funding real estate investors can offer something very few buyers can. We are buying on their timeline in as little as 14 days. Knowing we’re going to renovate the home we are buying as is condition. This is a private sale between the seller and us. The property is not on the MLS where multiple people have a chance to bid on it. Being a private sale this helps the seller to not have to worry about paying any junk fees, attorney fees, closing costs, Home warranties, inspection fees, realtor commissions, etc.

Market conditions

Q: Am we concerned about real estate prices going down?
A: Our goal is to purchase quick and sell even faster. Most projects are complete in 1 to 3 months and it will be sold in 4 to 5 months. The market doesn’t tend to shift that dramatically in the matter of months it typically is a longer process for an area to decline, unlike the stock market that can change overnight. Remember we’re buying and strategic areas were inventory is already low and the demand high to greater minimize our risk. Also, we are buying properties 30% to 50% under market value, which leaves a cushion for us in case a unexpected change occurs in the market.

Rate and Term

Q: What is the typical interest rate real estate investors pay?
A: The interest rate depends on the deal at hand, what works for you and what works for the real estate investor. It will be much higher than any traditional investment, such as a CD. Most of our lenders are paid anywhere between 6 to 10% based on the deal. Factors that determine rate are the risks: LTV, length of the loan, condition of the asset, type of renovation, how hot the market is, Is the asset cash flowing currently or is it vacant.

Q: How long will your investment funds be tied up?
A: Most private loans are set up on a one year terms, however it depends on what Private Lender wants and needs as well as the deal itself. Some deals are completed in less than six months but some real estate investors would pay you a minimum interest rate agreed on for the full six months which is the right thing to do. Much of it depends on the plan for the property. There are cases that can offer a longer plan of 1 to 5 years depending on your needs and wants.

Minimum Investment

Q: What are the usual minimum investments?
A: Private lenders usually need a minimum available to invest of $100,000 for most deals however there are some deals that come along now and then where a lower amount could be excepted. There are deals that which could except an investment of less than $100,000, if that’s where you’re more comfortable getting started. Some of the long-term investors are fortunate to have access to our multifamily deals. These are on a case to case bias for accredited and none accredited investors and are based on a 3 to 5 year or longer holds. You can download our free ebook on 7 Reasons Why Multifamily Investing Makes Sense.

Guarantee?

Q: Does the government ensure your investment?
A: No. There is no government back guarantee on these real estate investments. However, your protection and security is the amount of equity in the property that secures the note and mortgage we sign and you as the lender. Remember most of our investment properties that we require already have 30% to 50% of equity in them before renovations.

IRS approved for a retirement accounts

Q: Has the IRS approved using your retirement accounts?
A: YES! The IRS does establish guidelines that must be followed in order for a retirement account quotation IRA, solo 401(k), health savings account, Coverdale educational savings, etc. To invest in real estate notes tax deferred for tax free. You’ll need the service of a company approved by the IRS to act as your custodian to invest your retirement funds. We are more than happy to share a few different companies who can handle this for you as well as assist you in the process.

Cost and insurance

Q: Do real estate investors provide title, property, and lenders insurance?
A: Absolutely! Real estate investors should never buy property without the title insurance, property owners insurance, and a lenders policy if there is a loan on the property, naming you as the lender / loss payee on the policy. This makes sure you are paid back first in the case of any casualty in the lenders name.

Q: What does it cost for one to invest?
A: It is should be a real estate investors policy to pay for all the closing cost so that your entire investment goes to work for you. We will pay for the closing agent, prep fees, notary fees, overnight mail fees, bank wire fees and reporting cost. We do not charge any fees or commissions to private lenders.

Loan positions

Q: What is a junior lien or a second mortgage
A: It’s a loan secured by real estate that is positioned behind a senior mortgage or known as a first mortgage.

Documents and paperwork

Q: What kinds of documents and paperwork should you receive?
A: Your closing packet should include: original promissory note, copy of deed of trust or mortgage, confession of judgment, copy of property, personal guarantee, Simon around, insurance binder naming you as the mortgagee, title insurance, lender insurance, and property insurance policy protecting you against any problems.

Common questions

Q: If the loan defaults and the real estate investor doesn’t keep their promises, how are you protected?
A: In unlikely scenario this happened the real estate investor should simply transfer ownership of the property to you. If the real estate investor did not or could not and you have the legal right are they secured. The best way to legally protect your interest in case of a default would be to hire an attorney. They normally would seek to get your investment back, any unpaid interest, any collection calls, all your attorney fees and maybe even more. Being that we are not licensed attorney or accountant, please see Krewella legal and tax representative who will advise you.

Next Step

Q: How how do I get started becoming a private lender?
A: Once you have found a real estate investor you want to work with and they know how much you want to invest for a better than average rate of return, when those funds will be available, and how long of a term you’re willing to go, the real estate investor would begin looking for a deal for you. When they select one that meets your goals in about an objective, you will receive all the details on the property.

Q: Would you possibly work with other people I know that might be interested in being a private lender?
A: It’s our policy to work with people we are already have existing relationships with and with people all day with her. In other words, we work with people by referral only. You can certainly refer Potential Lender’s to us. I’ll explain the program to learn about their investment checked in and goes just like we did for you. Once we get to know them there is a possibility they can also become one of our private lenders, but not everyone is a fit. Word of mouth is typically how we are able to work with private lenders like you.

Active vs Passive Investing

What kind of investor do you want to be? Hands on? Hands off?

Now that you know the benefits of investing in real estate, you need to decide how hands-on you want to be.

• Hands-on investors are called Active Investors. If this is your speed, you’ll want to explore rental properties or flipping properties. 
• Hands-off investors are called Passive Investors. If this speaks to you, you should consider becoming a private lender or investing in a real estate syndication.

Let’s Take a Deeper Look

Wether you want to be a active or passive investor it all starts with do you want to be hands on or hands free in an investment. This should be done before you invest a single dollar.

An active investor is someone who has an active role in the investment. For example this individual or group is active in finding, evaluating, funding, acquisition, management, and disposition of the asset.  and a passive investor is someone who takes a passive role, letting others do the active management on their behalf thus being a hands free investor sitting back and watching everyone else do the hard work.

Active Investing: 

When people think of real estate investing, traditionally they are thinking of buying a rental property.

Having $100,000 to invest, they can buy a rental property up to $400,000. You use that $100,000 towards the down payment with a $300,000 loan. You then do all the work! You will have to deal with tenants, turnovers, and trash or put a manager in place who helps you find tenants, collects rent each month, and deal with turnovers.

If something breaks, like the furnace, you’re responsible for the repair $$$! When the tenant moves out, you’re responsible for finding a replacement.

The upside is you get to keep all the profits, decide whether to make upgrades or how long to hold the asset, and when to sell. You are in control.

Passive Investing: 

For those who want to invest in real estate but don’t want to deal with the hassle of being a landlord and dealing with things like tenants, termites, turnovers, and trash they can be passive real estate investors.

Here, rather than buying the entire property and dealing with all of that, you put $100,000 into an investment with an active investor. With multiple other investors, just like yourself, that put in between $50,000 to $100,000, or even more into an investment called a syndication for bigger multifamily property.

Together, instead of you acquiring a single-family rental property, as a group of investors we can buy an apartment building. 

As a passive investor, you put in your money, and that’s the end of your active role in the investment. You are now hands free, and don’t have any other responsibilities. You get to focus on your best life, your career, your children, your grandchildren, traveling, adventure, or whatever you please and makes you happy.

The general partners (aka the sponsor team) handles the acquisition of the asset, the day-to-day management of the asset, the paperwork, and any maintenance issues. They also decide when to sell and are responsible for carrying out the process.

For the duration of the investment, you will get monthly or quarterly cashflow distribution checks. At the end of the whole thing, you get your $50,000 to $100,000 back or whatever your original principal capital was, plus a share of the profits from the sale.

All without having to do any work…… Hands Free Passively!

That leads to the main difference. Active investors have all the control, but all the responsibility & liability. Passive investors give up control in return for not having to do any of the work but still rep the rewards.

Q: Which option is best for you: Active Investor or Passive Investor? 

A: There is no right or wrong answer. It all comes down to what do you want? Depending on where you are in life, do you have the time, do you have the knowledge, do you have the team? Would you rather be enjoying time with your family and friends, enjoying your best life, focusing on your current career? Or would you rather start investing into rental property and doing all the work yourself?

Five Factors That Contribute To Going Active or Passive

1. Are you busy with your full time job or other commitments but you’d still like to receive the benefits of investing in real estate? 
2. Are you interested in investing in real estate, but lack the capital or experience to confidently invest on your own? 
3. Are you comfortable with others making business decisions for your investments? 
4. Are you someone that would rather enjoy your time with family and friends rather than having your plate full with yet another thing?
5. Are you someone that is looking for a new, secondary, or supplemental income stream without dealing with the 5 T’s ( Tenants, Termites, Toilets, Turnovers, Trash)?

Depending on your answers, it should be pretty clear now what direction you will go now. Oftentimes for those interested in investing actively, starting out as a passive investor can help you build up the skills and understanding of acquisitions, management and disposition process of a property. However if you answered no to #3, you may have a hard time investing passively. General partners typically have 100% control over the business plan, meaning as a passive investor you’re giving up direct control. 

Multi-Family Property Classifications and Your Investment Strategy

What is meant by the multi-family property classifications A, B, C, and D?

In investment terms which of these property types are classified as core assets and which can be considered core-plus assets?

If you are looking to pursue a conservative investment strategy or if you prefer a more aggressive one that has the potential to deliver a higher yield in which class of multi-family property should you be looking to invest?

All these questions and more will be clearly answered in this article.

 

Classification – Class A

Class A multi-family properties are buildings that are less than 10 years old. If they are more than 10 years old, they will have been extensively renovated.

The fixtures and fittings will be of the very best quality.

The amenities will be comprehensive and of a luxury standard.

While Class A properties tend to generate a lower yield percentage, they can grow exponentially and they tend to hold their value even in major economic downturns.

In terms of their investment profile, they are considered to be core assets.

An article on multi-family investing at millionairedoc.com explains why Class A apartment buildings, with a ‘core asset’ risk profile, offer a lower yield percentage:-

“Owners purchase these properties using lower leverage, therefore with lower risk.  REITs and institutional investors purchase these assets for income stream.  The lower risk profile results in lower returns in the 8-10% IRR range.”

A property in the Class A category would not likely have a “core plus” risk profile unless it were slightly downgraded in some way perhaps by a less favorable location, housing type or a number of other factors.

 

Classification – Class B

Class B properties are older than class A properties. Usually, class B properties have been built within the last 20 years.

The quality of the construction will still be high but there could be some evidence of deferred maintenance.

The fixtures and finishings will not be as high quality and the amenities will be limited.

 

Classification– Class C

Class C properties are built within the last 30 years. They will definitely show some signs of deferred maintenance.

The property will be in a less favorable location and it will likely not have been managed in an optimum way.

Fixtures and finishings will be old fashioned and of low quality. Amenities will be very limited.

Both Class B and Class C properties can be candidates for a ‘value add’ investment strategy.

By bringing deferred maintenance issues up to date or by upgrading the property by means of an interior and/or exterior renovation there is an opportunity to increase the tenant occupancy and receive a higher return on your investment.

In his article, ‘what are the 4 investment strategies?’ Ian Ippolito explains why pursuing a value add investment strategy is a higher risk:- “Much of the risk in value-added strategies comes from the fact that they require moderate to high leverage to execute (40 to 70%). Leverage does increase the return, but also increases the

risk, and makes the investment more susceptible to loss during a real estate cycle downturn.”

 

Classification – Class D

Class D properties are generally more than 30 years old. The property will be showing signs of disrepair and will be run down.

The construction quality will be inferior and the location will be less desirable.

The property may be suffering due to prolonged and intense use and high-level occupancy.

 

 

 

 

 

 

 

 

 

 

 

Both Class C and Class D properties can be candidates for an ‘opportunistic’ investment strategy.

Because these properties require major renovations they are the highest risk investments but they can also yield the highest returns.

Summary

In overall terms, the US multi-family real estate market continues to give excellent returns for well-informed investors.

This article has clearly explained how different types of multi-family properties are classified.

The article has also given an overview of how each class of property fits the different types of investment profiles.

We trust that this information will assist you in assessing your multi-family real estate investment goals.

For further assistance please connect with our team.

Why Multifamily Investment Makes Sense

Multifamily Market Overview

The demand for rental accommodation continues to significantly outpace supply. The current status quo is that rental housing supply is falling short by hundreds of thousands of units each year across the United States. This situation, according to The National Multifamily Housing Council and The National Apartment Association, looks set to continue for many years to come.

Current demographic preferences reveal a trend at both ends of the age spectrum for renting as opposed to owning. The younger demographic are finding it more challenging to get the financing for property ownership and the baby boomer generation favor downsizing and the increased freedom that allows. The result is that the demand for rental property is increasing.

The combination of these two market factors gives a strong positive indication for sustained revenue growth in the multifamily sector.  The conditions look set to remain positive for multifamily investment in most locations for the foreseeable future.

Let’s take a look now at four more reasons why investing in multifamily makes good financial sense.

#1 Economy of Scale

The basic meaning of the economic term, ‘economy of scale’ is that there is a fundamental cost-saving benefit to being bigger.

To quote Investopedia, an ‘economy of scale’ is an advantage “that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.”

How does this concept apply to the argument that multifamily investing is more advantageous than investing in single-family property?

To give a simple example, if you have been collecting 10 rents for 12 months from your multifamily property and then the roof needs fixing, that’s a much better scenario than collecting 1 rent for 12 months on your single-family property and then the roof on it needs fixing.

The rationale applies even more if you add more single-family properties to the equation. The cost of managing 10 individual properties, which could be spread across multiple states, and the cost of hiring different contractors to care for each one would be punitive. The cost would be much greater and the management less efficient and less cost-effective than caring for one multifamily property of 10 units in one geographic location.

#2 Greater Control of Property Value

With a single-family property, you are almost completely at the mercy of market forces.

If you need to sell in a down market your hands will be relatively tied. The value of your property will be determined by what other properties have sold for in the local area at that time.

A multifamily property is perceived somewhat differently because of its commercial nature. It is managed and run as a business and therefore a significant part of its value is determined in the same way as a business. This means that the value is much more in your own hands.

Businesses are valued largely on their profitability and, in a similar way; a multifamily property’s value is determined by its net operating income.

Something as straightforward as adding a laundry facility or some paid parking are two examples that can very positively affect the profitability of your multifamily property and in turn, its value.

With a multifamily property, there are many more ways that you can bring your management and entrepreneurial skills to bear to increase the value of the property independently of the surrounding property market.

In a nutshell, you have the ability to raise the value of your multifamily property by decreasing expenses and increasing income.

#3 Positive Cashflow

In addition to the ideas mentioned previously, namely,
adding laundry facilities and paid parking, there are lots of amenities that could be added to your multifamily property to keep a positive cash flow.

In addition, the old adage of not having all your eggs in one basket applies here also. A tenant vacancy in a single-family rental property will bring your cash flow to a grinding halt. In contrast, if one of your units in your multifamily property is vacant, the impact on your cash flow will be minor because you will still be collecting rent from all the other units.

#4 Tax Benefits

One of the great things about supplying housing for the populace is that in doing so you are helping the government fulfill one of their important responsibilities. Not surprisingly, in return, the government offers you certain tax advantages.

One of the most significant tax advantages for multifamily property owners is something called ‘depreciation deduction,’ in effect it can allow you to deduct a large amount of the income your property generates. For details on how it works, take a look at the following Investopedia article, How Rental Property Depreciation Works.

Another way multifamily property tax laws benefit you is that you are permitted to use some of the cash flow from the property itself to pay down the mortgage.

It is permissible to collect revenue but show a much smaller amount of income on your taxes. This allows you to take a portion of that rental income and use it to pay down your debt on the property, which will steadily increase the equity.

With the help of a good tax advisor, you may find that there are many other legitimate ways to capitalize on the tax deductions and incentives and even grants that the government makes available to multifamily property owners.

Summary

In the present fluctuating economic climate multifamily properties are tangible assets that represent a sound focal point for your investment and wealth creation strategy. 

Due to shorter lease terms that give room for regular increases in rent, multifamily assets represent less of a risk than other commercial real estate investments.

The prevailing demographics are also favorable. The steady increase in the number of professionals in the workplace, families, and empty nesters looking to downsize and simplify their lifestyle means that focusing on the multi-family market makes sense.

Multifamily is and will continue to be a solid strategy for investors looking to achieve financial freedom by means of strong investment returns that are attractively low risk.