real estate investment mortgages | InvestingInProperties.com

A New Year’s Property Investing Tips

Time for review…

The beginning of a new year makes for a perfect time to go over your property investing strategy. There are several key elements in any good property investing plan that should be reviewed at regular intervals…so why not now? It shouldn’t take very long to do this review, so let’s get started!

Annual rent roll review

A solid property investing strategy is to review your annual rent roll to ensure you are maximizing market rents from all your units. If you don’t already have tenants under leases, consider creating set leases with small yearly bumps included in them. If you have current leases coming due this year at different intervals, make sure you have a good idea of what bump-ups you want to ask for. Market research is critical here. Go out and check your competition. See what the going rate is for similar units as the ones you have coming available, or that will be up for renewal. Never leave rent roll money on the table. Always be maximizing your cash flow in this way.

Maintenance review time

Have you deferred any needed repairs to your units and/or buildings from last year? Make sure you create a schedule for the needed repairs, lest they become even bigger problems that could cost you exponentially the longer you put off the fixes. Budget for the repairs, and include them in your pro forma cash flow expenses for this year to get a more accurate picture of exactly how much you will net from your property investing.

Debt structure review

If you have long term mortgage notes in place from a long time ago, consider refinancing while rate s are still relatively low. This could end up saving you greatly in the long run. If you paid all cash for a property recently, consider whether this would be a good time to increase your leverage by taking out a mortgage on the property now. If you’ve added improvements to it in the past year, this would also help free up your cash. Crunch your numbers first, and see if the extra debt load from the new mortgage will still allow you a positive cash flow. If so, then a new mortgage may be a great way to help free up your cash for more property investing.

Pre-tax time review

Prior to April 15^th, the beginning of the year gets you to focus early on whether you are maximizing your depreciation on your buildings. It’s also an excellent time to get in to see your accountant to go over these matters – before they are snowed under with work come tax time in April. Maybe they will have some new suggestions about how best to maximize your day to day expenses, as well as your capital expenses to help offset your cash flow income, realizing a smaller tax bite come tax time.

Insurance review time

Consider the beginning of the year as the perfect time to review your current building insurance policies. Yu should already be working with one dedicated insurance agent for all your property investing needs. Go over with him any adjustments he would recommend to make sure you are adequately covered in the event disaster strikes – or you have a negligent tenant. Also remember to review your current liability insurance policy on each of your buildings. This may the most critical insurance item to review. Make sure your insurance agent feels you are properly covered in the event of a tenant accidentally hurting themselves on your property, and suing you.

To sum up…

Utilizing this time of year as a great time to review all these key elements of any good property investor will help you substantially. You’ll end up maximizing your cash flows, as well as reducing taxes, and making sure you’re adequately covered in the case of emergencies or disasters.

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Obtaining Commercial Property Loans

Commercial versus residential loans

So you’re considering the big move up to some form of commercial property investment. This could mean retail – a single store or small strip mall, for example, or office building or warehouse or light manufacturing building as well. It could also mean any residential multi-family housing that contains five units or more. Since commercial space is traditionally a much greater leap in pricing than single or small multi-family residential housing, how best do you finance the potential investment?

Most individuals don’t have the deep pockets required for such serious cash outlays relative to simple residential buildings. And I have advocated in previous articles here for the concept of partnerships as a way to pool investor money for larger and more lucrative investments. But at some point, if you’re going commercial, you’re going to require a commercial mortgage to handle the ability to make the deal happen. So where is the best place to look, and how are commercial loans evaluated?

Commercial lending departments

Most banks offer commercial loans, but they are traditionally processed in a separate department from residential lending within each bank. Rules tend to be more stringent than residential loans, and a common axiom is that interest rates associated with commercial mortgages will definitely be higher than for residential loans. In addition, while amortization times may compare favorably with residential loans, expect much shorter time limits on when the mortgage will come due, and so balloon payments should be expected within five to seven years on most commercial loans. Thus, you can expect your monthly payments to be comparable to residential loans due to longer amortization schedules, but you will have to prepare for that short term balloon pay-off of the loan.

Debt to income ratios

Another key difference that commercial loan evaluations require relative to residential lending, include a greater weight placed on debt to income ratios. For residential mortgages, one’s personal income is paramount in determining whether you may qualify for a loan. In commercial lending, the building’s ability to throw off cash flow through its net operating income is paramount. So all your income statement documentation (or pro formas if the building is new) must support this positive net cash flow. A lender will look at the building’s debt service coverage ratio (DSCR) as a key determinant. This ratio is a simple measure that looks at the projected net operating income, then divides it by the mortgage payment amount. Most DSCR’s need to come in at a minimum ratio of 1.2 as a general rule of thumb in commercial lending.

Loan to value ratios and credit scores

In addition, lenders will look at the loan to value ratio you’re applying for, and in most cases, 70% LTV would be the maximum ay bank will allow. Of course, the lower the LTV, the greater the likelihood of your obtaining the loan – simply because the bank’s risk is reduced when you have more equity at stake in the property. The lender will also look at your credit score to get a good idea of how you’ve handled credit through your lifetime. Obviously, the higher, the better. Minimum commercial credit scores need to be in the 720 range…but your chances for obtaining a commercial loan increase greatly as your approach the upper end, or 850.

Landlord experience

Another key ingredient in a lender’s commercial loan department deciding on your loan approval, will be your previous landlord experience. General business experience (if you have already run a successful business) will also be taken into account in a very positive way too. You’ll want to show proof through examples and documentation of your past landlord/business experience. Showing that you’ve been successful in the past will be a boon to any attempt to obtain a commercial loan. It also helps to write up a separate business plan for your potential new investment building to help sway a lender’s commercial loan officer. The more professional and business-like you come off, the greater your likelihood that a lender’s loan officer will see that you’re treating this mortgage seriously, and that will afford you a greater opportunity and chance to be rewarded with the mortgage loan.

Hard money lenders as last resort

If all else fails, and you are unable to obtain a commercial loan from a bank, there of course, hard money lenders out there in droves. I have previously written several articles here on where to find them and how to apply with them. But – they are only to be used as a last resort. Their rates and terms tend to be ridiculously onerous – especially since they know they represent your last ditch attempt to make a commercial deal happen. Only utilize them if the deal still makes sense after being initially turned down by a bank.

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Unlocking Hard Money For Investment Property Loans

Using hard money lenders

Hard money loans are basically a form of short-term borrowing available to property investors. They are like bridge loans, in that they are designed to get in and out of very quickly. Hard money loans are typically used by those in dire financial straits, like borrowers facing foreclosure or bankruptcy. But property investors utilize their services as well – and with good reason. Simply put, hard money loans are a much better alternative to all cash deals.

Private investors

The average hard money investment property loan is supplied with capital put up by private investors – usually as a pool of money that is used to drive much greater profits for its investors. This private capital is traditionally unregulated, which gives the hard money industry a kind of “Wild, Wild West” feel to it’s practices and reputation. Pejoratively, many consider hard money lenders as sharks feeding off the misery of those in bad financial straits. As a property investor, you will certainly need to approach any hard money investment property loan with a great deal of caution and foresight prior to signing on the dotted line.

Who hard money is designed for…

That said, if you do not have excellent credit, or if you’re self-employed with much income written off, or if you are investing money from a self-directed IRA, then it may be difficult for you to obtain conventional mortgage financing. You could pay all cash for your next property acquisition. But hard money lenders allow you the ability to utilize leverage – even in the short term.

Think of hard money lending as a local train on the real estate train line. Conventional bank loans are quite onerous to qualify for, but they offer the best rates and terms for property investors. They are like the express trains on the line. Hard money investment property loans are like local trains in that you will need to continually be stopping off at more points along the route. Points where you need to pay off your existing short term loan’s balloon payment by taking out another short-term loan to supercede it.

Is this more costly, time consuming and fear-provoking? Absolutely. But, hey – you’re a property investor. You should be used to living with debt and risk – and be comfortable with it. Your safety is knowing there are always going to be hard money lenders out there with their private funds to ensure you make it through to your next “stop” on the line.

Leverage ability

While paying all cash for a property is the “safe” way of investing, it provides no way to leverage your financial strength. Assuming you could not obtain conventional financing, hard money lenders offer the next best alternative to all cash deals. While your cash flow will be severely impacted because of the relatively exorbitant interest payments on hard money loans, even a small positive cash flow will yield great leverage over several years of making timely payments on the loan. Remember, besides the cash you put up on the property as your down payment, you will be paying off the principal on your hard money loan each month – thereby helping to increase your return on investment (ROI). Over several years, a small positive cash flow will yield much greater ROI’s than an all cash purchase would.

Costs for hard money investment property loans

If you’re going swimming amongst the sharks, your protective shark cage is knowledge. You need to know ahead of time that typical hard money loans carry interest rates that can run anywhere between 12 and 18 percent. Balloon payment are de rigeur, and these mortgages usually come due within 1 to 3 years. In all but rare instances, hard money lenders require being in the first mortgage position, so they can get their money out first if you default.

In addition, typical loan-to-value (LTV) ratios on hard money investment property loans range between 50% to 65%. And this LTV is based upon the “quick sale” market value of the property…that is – what the property will fetch today – not three months from now after you’ve fixed it up. Another potentially scary cost to take into account are points (up front interest charges). Typically, they can run anywhere between 4 to 8 percent of the total mortgage amount.

Not for the faint of heart

As a borrower, the hard money loan is definitely not for the faint of heart. You should already be comfortable taking on more debt, especially of the short term variety. You should also be well aware of the consequences in case of default.

The hard money lender takes on the increased risk of borrowers with less-than-stellar credit. For this, they are able to charge exorbitant interest rates, with onerous terms, and even more Draconian conditions if the borrower defaults.

A mature, responsible investment property investor/borrower should not be scared off by the terms of a hard money loan. They realize they can use the leverage to their advantage to help grow their real estate holdings. And they enter into hard money investment property loans with eyes wide open.

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