It happens everyday. Well-prepared entrepreneurs are walking into the banks with brilliant business ideas with well developed business plans — and are walking out empty-handed. Many of these professionals are ultimately able to obtain financing from a private lender. For individuals who do not want to give up a certain percentage ownership in the business as is often required by venture capitalist and deal with the angel investors who may demand a board position or significant day-to-day control, the private lender is the best alternative. On the whole private lenders are looking for the same information and will conduct a similar due diligence as the banks to make a positive funding decision. They are looking for great business ideas, at the right time, with a great business plan, backed by experienced and professional people with some financial stake in the business. Private lenders will not only fund projects the banks reject, they will creatively structure loan repayment and become an irreplaceable resource.
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Input from a real estate mogul
Make $1 million with 3 properties. Assumes the following for each property: a purchase price of $182,600, annual rent of $26,400 and annual expenses of $17,780.
(Money magazine) -- Becoming a landlord has always been a well-worn path to millionaire status, with good reason: Not only does owning properties let you generate a second source of income, your tenants' checks will help you build equity in your investment.
The case for owning rental real estate is even more compelling now thanks to depressed prices, super-low interest rates, and the fact that the shortage of rental housing is the most acute it's been in five years, according to CoreLogic.
With median prices on existing homes at around $182,600, you won't get rich by owning one home. Based on modest estimates for appreciation and reasonable expectations for profits, it's likely to take three or more properties to produce the cumulative equity and rental earnings you need to get to the nominal sum of $1 million down the road. (Throughout this story, references to $1 million are to the nominal -- not inflation-adjusted -- figure.)
This entry explains how investing in real estate can put you on the track to becoming a millionaire.
KEY MOVE: Expand your holdings to at least three properties
HOW TO GET THERE
Maximize your market. Once you own a property or two in an area, adding a third nearby generally makes sense, says Chris Clothier, co-owner of Memphis Invest, which buys and manages rental homes for investors. "It's usually easier to manage," he says. You can also save on maintenance by using a single contractor.
If fielding late-night calls about water leaks doesn't grab you, grouping your properties will also let you find a single company to manage your properties (typically for about 8% to 10% of the rent plus commissions).
Of course, you'll want greater diversification if you're buying in a smaller town dominated by a single large employer.
Think duplex or triplex. That extra unit probably won't cost you much more, yet the extra rent can be significant.
Three years ago real estate agent Greg Markov bought a triplex in Phoenix for $70,000, or about $5,000 more than what he would have paid for a single-family home in the same neighborhood. With more units, Markov's maintenance costs are higher -- he budgets $2,000 a year, vs. $1,000 for a one-family home. Yet the three units throw off $1,500 a month in rent, not $900.
Finance creatively (private lending). Take what the market is giving you. Buying with cash, for instance, will get you the best prices. So if you have, say, $150,000 saved up, try purchasing house No. 1 with savings. Then within six months, take out a privately-backed loan on 80%--- a cash-out refinance. You can use that $120,000 to buy house No. 2.
In 2010, Greg and Audrey Charlap of Hermosa Beach, Calif., obtained financing for a $755,000 store/warehouse with three apartments upstairs. The rent checks cut the real estate tab for their business, baby-products retailer Pampered Tot, by 35%, Greg says.
GETTING INTO GEAR
Where to look. Begin your search near large employment centers or universities, where strong rental demand will ensure profitability.
How to price it. Your operating income -- rents minus expenses, not including debt service -- should be at least 1.25 times your principal and interest, says mortgage broker Kathleen Kramer.
How to dress it up. Don't scrimp on amenities. A few upgrades, such as granite countertops, will make your rental stand out and reduce vacancies.
Have any questions?---Need help?
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Loans For Incoming Producing Property: Commercial Real Estate loans for sky scrapers, multifamily apartment buildings, and Industrial properties. Transactions can close in 5 days to 45 days depending on the transaction.
Apartment Equity Participation: If you are behind on your payments or headed for foreclosure and have the following: 100 units or more, Nothing over 2-Story, No bad areas, Section-8 Ok, Rehab Ok. New construction or construction to perm does not qualify.
Non-Recourse Loans for Multifamily & Assisted Living: This covers Multifamily construction/perm, purchase, refi, rehab and fixed long-term interest. Healthcare to include Assisted Living, Nursing Home, Alzheimer Care Facility, Cancer Treatment Centers, Etc. Up to 100% financing for Multifamily and Healthcare for Non-Profits. Contact us for details.
Commercial Bridge/Hard Money: Commercial Land Development: Entitlements, capital infusion, geographical regions, and market conditions are all considered in the approval process. With these issues satisfied, transactions can close quickly. Loans are interest only, most non-recourse, no prepayment penalty and up to 5 year terms.
Mezzanine Programs: Quick closings are available within 1 to 5 business days with complicated transactions taking longer. Typically, these loans are subordinated to first liens but debt/equity is also available.
Recourse vs. Non-Recourse Loans
Recourse Loans: loans that allow the lender to seize your assets in case of default. This means the lenders have power. They allow lenders to go after you for amounts that you owe - even after they have taken collateral. If you default on a recourse loan the lender can bring legal action against you, your wages, etc. and try to collect the amount you owe.
Non-Recourse Loans: loans that create more risk for the lender by not allowing the lender to pursue anything other than collateral. This loan usually has lower LTV (loan to value) ratios and higher interest rates than recourse loans.
Debt Service Coverage Ratio (DSCR)
While residential real estate uses a debt-to-income formula for judging your ability to repay a loan, commercial real estate is based on the debt coverage service ratio formula to qualify. The type and amount of your commercial loan is also dependent on other factors, including your business and personal credit history, your net worth or financial strength, the type of property and its overall condition, its cash flow, the geographical location of the property, and the general economic outlook of the local market.
In general, DSCR is calculated by:
Net Operating Income÷Mortgage Debt Service
A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean there is only enough net operating income to cover 95% of annual debt payments. Of course, lenders frown on negative cash flow, some allow it if the borrower has strong outside income.
*Mortgage Debt Service includes-commercial mortgage payment plus any additional holdback, off-site management, vacancies, replacement reserves, repairs and maintenance.
There are many formulas used for successful procurement of rehab property, it's important to use one. There must always be a comfortable cushion between the purchase price and the selling price of the investment property. This cushion price will help you achieve a successful investment, even if you have repair cost over-runs, or hold on to the property longer than you had anticipated.
Here's the best formula:
Establish an after repair value (A.R.V.) for the property: a property inspector and general contractor must be involved in this process.
Multiply the A.R.V. x .65 (This will give you 65% of the A.R.V.)
Establish a comprehensive estimate for the cost of repairs.
Subtract the cost of repairs from the 65% value of the A.R.V. ( This should give you the maximum price that you pay for the property).
This is (typically) what rehab lender's offer:
Loan will be 100% of the sale price and 100% of the repair funds, not to exceed 65% of the A.R.V. (after repair value).
Seller's concessions may be used to finance the closing costs, as long as the loan does not exceed 65% A.R.V.
There are usually no prepayment penalties.