Archive for Financing
Commercial Real Estate: Hard, Hard, Hard Money Loans
When purchasing commercial real estate, financing is the most significant factor in determining whether the project is worth pursuing. Although there are a variety of commercial real estate loans on the market, we are going to look at hard money loans in this article.
Hard money loans for commercial real estate are often a matter of last resort. They aren’t good deals, but they can save a financing situation that has gone critical. Most hard money loans come with significant upfront costs and astronomical interest rates. When you are facing the prospect of losing a commercial property, however, they can be a godsend because they also are granted very quickly.
Hard money loans are considered very risky and are issued by private financing groups, not banks or lenders. The loans tend to be only available as the primary loan on the property, which isn’t that rare a situation in commercial property.
Unlike home loans, hard money loans are all about the potential sales price of a piece of commercial real estate. The party considering lending you money is not going to look at the appraised value of the property. They are going to look at the probably sales price if the commercial real estate has to be sold a few months after making the loan. Depending on the condition of the property, this figure will typically be between 50 and 75 percent of the appraised valued of the commercial property.
Put another way, a hard money loan is a short-term loan designed to get you past an immediate problem. It is undeniably a loan of last resort and is not an ultimate solution to a financing problem with a commercial property. It does nothing other than buy you time, and at a fairly hefty cost. If you are in a tight spot and can resolve the problem with a few extra months time, a hard money loan may be the answer.
Real Estate Investment – One Simple Formula
The ads in the small-town newspaper were always the same: A house for sale with 5% down and payments of 1% of the purchase price. It might be a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.
Finally it was explained to me that it was a way to get a great return on capital. It was the opposite of buying with no money down. You bought for cash.
A Real Estate Investment Formula
It is simple, really. When you buy for cash, you often get a much better price. A house that needs a little work might be worth $75,000, for example. By offering $65,000 cash, you negotiate your way to a $68,000 purchase price. If not, you walk away – there are always others.
Then you put few thousand into high-return repairs and improvements. Paint, carpet, and maybe asphalt for the dirt driveway. For our example, we’ll say you put $5,000 into it.
Now it’s worth $85,000 perhaps, but you target those buyers who can’t get financing easily, and you finance it yourself. By making it easy for the buyer, you can get $90,000 for the home – and do it without paying an agent’s commission. Whatever the sales price, you let the buyer put 5% down, and make monthly payments of 1% of the purchase price. Of course, you get higher than market interest too.
The buyer is thrilled that they are buying instead of renting, and you get a capital gain of perhaps $14,000 after expenses, plus good interest. Your total rate of return is somewhere over 25%!
You can save money by doing your own foreclosures if they become necessary. After foreclosing, raise the price a bit and sell it all over again, of course. By the way, if you can get an average return of 18% on your money, you’ll turn $75,000 into more than one million dollars in about fifteen years.
Financing Home Improvement Projects After The Credit Crunch
Do you want to go about financing home improvement? Does your kitchen need remodeling or do you want to add a deck to your house?
You can often finance your home improvements through your first lender as a rider to the loan. If you have significant equity in the home, you can get a second or home equity loan.
Seconds, also known as home equity lines of credit are your best bet for financing home improvement. However, it is more difficult to get these loans in the current economy because there has been a credit squeeze. Countrywide, which financed many second mortgages, failed as an institution.
Still, if you have decent credit and you can show that value will be added to the bottom line of your home, you should be able to go about financing home improvement projects that you wish to undertake.
Home improvement loans can include projects that maintain or increase the value of your home. Landscape improvement and the installation of swimming pools are often included in home improvement loan categories.
Before you even start to consider the financing home improvement solutions, you need to have a plan. You need to know exactly what you are trying to accomplish and have a good idea of what it is going to cost you. Talk to a contractor before you talk to the bank. Include in your figures an amount for builder’s cost overruns.
You need to ask yourself some questions before you apply for a financing home improvement loan. For instance, is the value of the upgrade worth more than the cost? If not, will the increase in satisfaction you derive from the upgrade be worth the additional monthly payments? Are there possible tax implications? Your property taxes may rise if you improve the home, but your income taxes may be lower based on your mortgage deduction.
If you are buying a fixer upper, you can often get a loan in excess of the actual value of the home with the condition that you use the additional money to build value into the home and make it habitable.
If you have equity in your home, you can sometimes take out a second.
You can also refinance your loan so that you have one mortgage that covers the original amount owed plus the new amount for financing home improvement all at one low rate.
Finally, you can finance home improvement with an unsecured loan, also known as a signature loan.
If you want to make significant upgrades to your property, get financing home improvement loans.
Asset Protection for Real Estate Investors
Many real estate investors started out running their investing business as a sole proprietor because they really didn’t know any better. Most survived with only minimal damages, but quickly realized they needed to take the time to assess the best legal structure to use for real estate investing.
If you ask 10 experts you are likely to get 10 different opinions. With that in mind, here’s our opinion. Please don’t let our advice interfere with common sense and sensible business practice — ie, consult with your attorney or accountant (or the website of your state’s secretary of state) when choosing a business structure.
Many say that if you are a beginning investor, it’s probably best to not worry about asset protection until you actually have a few assets to protect. On this point we disagree. Our opinion is that you carefully consider the method(s) you will be acquiring and disposing of your real estate assets. Then huddle with your team/advisors and set up a business structure that will provide the best asset protection for the way you plan to run YOUR business. Why do we suggest getting the asset protection part done up front? Because you can turn around an investment deal faster than you can set up a business. Better to have your asset protection plan in place when you do the deal, than to try to go back and get everything re-done in the name of the business. Our recommendation is to never take title to investment property in your own name.
So, now that you’re going to structure that business, what structure should you take?
Assuming you want to set up an entity for handling your investment properties, the most popular are an LLC (Limited Liability Corporation) or a C Corporation. There is a lot of debate about which one is better. Many investors prefer the C Corporation because a certain amount off the top is taxed at 15percent and you can have a kick-butt employee (you) benefit plan to write off expenses. Others prefer the LLC, even though the income is passed through like a sole proprietor. The LLC is easy and inexpensive to establish, and just as easy to dissolve. In fact, we know investors who set up an LLC for each property they hold.
There are other ways to structure your business and shield your assets, but don’t even get us started on S Corps, or on the more complicated structures whereby you establish one entity which owns the others. Just trust us that you’ll want to talk it all over with a trained professional or a mentor.
Why is the tax issue such a big deal?
Here’s a simplified example using the C Corp. If you make $100K as a sole proprietor you are taxed on the full amount (35 percent) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars. However, with a C Corporation if you could make the same $100K on paper, but have $50K in allowable expenses that you can write off. So you get taxed on that $50K at 15 percent and only have to pay $7,500 in taxes compared to $35,000 if it was your personal income being taxed. You still can buy the same stuff, but you are taxed less if you structure things correctly.
A very wealthy man once said It’s very hard for a C Corporation to make any money! What he meant was that C Corporations can expense almost everything until there is little or no profit.
Think about it… and then call a professional.
No Money Down Real Estate Investment
The simplest no money down real estate investment is to take over the payments, also called “loan assumption.” You’ll need to be approved by the original lender, so you’ll need good credit.
If you cannot get approved for an assumption, or do not want to borrow, consider investing “subject to.” You’ll make the monthly payments but the loan remains in the seller’s name. Be sure to have an air-tight agreement that cannot be construed as predatory or misleading.
What if there is no mortgage?
Lenders want to make a good investment. Even in today’s economy when many lenders will shy away, there are still plenty (including private ones) who will be glad to finance you, as long as they know they will get their money back in the value of the property.
What if the seller wants more than what is owed on the mortgage?
There may still be a way to structure the deal…
- Arrange to take over the remaining payments – either by assumption or by subject-to; and
- Determine the equity and arrange to pay the seller in equal, regular installments over a period of time, say between 5 and 10 years. DO NOT PAY INTEREST ON THE EQUITY. You are not borrowing; you are taking over full responsibility for the house and loan(s). Motivated sellers understand this.
If you do use this two-part approach, both parts must work in your favor. You are in the real estate investing business to make money and must learn to walk away from any unfavorable deal.
For a free eBook on No Money Down Real Estate Investing, use this link.
