Hard money loans are short-term higher-interest loans that assist real estate developers and investors acquire property and bankroll expenses related to their real estate projects so that they remain solvent, liquid, and increase their chances of success. They’re an integral part of the real estate investing process with some clear upsides and downsides.
The Pros of Hard Money Loans
There are several reasons why serious real estate investors rely on hard money loans to finance fix-and-flip projects. Here are the top benefits of hard money loans for house flippers:
l Speed – Hard money loans can be acquired much more quickly than traditional bank loans. They do not usually require credit checks and other due diligence that causes the process to move more slowly at banks. Many hard loan lenders are able to provide money for real estate investments because their primary consideration is whether an investment is a good deal or not.
l Flexibility – Every hard money lender has their own set of criteria to loan money for a real estate project. Most hard money loans do not come with a list of restrictions that usually beset conventional loans. For that reason, they are more flexible and allow real estate investors to change project goals midstream if necessary.
l Leverage – Hard money loans provide tremendous leverage for fix-and-flip investors. The investor can enter a project without putting their own money at risk and remaining liquidity.
The Cons of Hard Money Loans
While there are incredible benefits to using a hard money loan for fix-and-flip real estate investments, there are some downsides. Before taking a hard money loan, do your due diligence on the loan, the lender, and, of course, the property investment.
Some downsides to hard money loans include:
l Interest rates – All real estate investors should consider the cost of capital. Hard money loans are typically higher-interest loans because they are riskier for the lender.
l Higher-risk – The lender is not the only person assuming a risk on hard money loans. The borrower is also taking a risk. Because the loans are higher-interest and short-term, these loans are riskier because they can lead to high financial burdens if not entered wisely.
l Must be paid back quickly – Hard money loans are short-term loans. They are typically for 12 months or less, and the investor is on the hook for repaying the loan in the time frame specified. If they are not paid back on time, the investor may be seen as a bigger risk on the next loan and find it difficult to get a loan for their next fix-and-flip project.
Where to Find Hard Money Loans
Hard money loans are not hard to find. Banks, however, do not offer them. Years ago, local private real estate lenders were the primary source of hard money. More recently, however, the JOBS Act of 2012 has made it easier to find hard money loans online. Real estate crowdfunding platforms, marketplace lenders, and other peer-to-peer business models may or may not refer to themselves as hard money lenders, but that is, in essence, the service they are providing.
When you are ready to fund your next fix-and-flip property, be sure to conduct your due diligence on potential lenders thoroughly. Whether you get your hard money loan from a single lender or from an online marketplace with multiple investors financing your project, make sure you look at the lender’s loan history and review the terms of your loan closely. Ultimately, you’ll want to find a partner with a track record of success lending on the property type you’re interested in developing, so that you can grow together over time with more successful projects down the road.
Learn more about Sharestates track record.
When you think about luxury communities near top U.S. ski destinations, what comes to mind? For many people, names like Telluride, Breckenridge, Big Sky, and Park City are at the top of the list. But do ski properties make good investments? Today, we’ll discuss the pros and cons of investing in ski properties. Is it worth it?
Pros of Investing in Luxury Ski Properties
Ski resorts offer investors a unique opportunity. For starters, this is a luxury market, and it’s not just a luxury market. It’s a high-end luxury market. People who buy ski resorts are often buying their second home, and the thought process is typically different than it is for buying a first home.
Before you rush in on a ski property investment, you should decide what you are going to do with the property. You have several options. If it is a fix-and-flip property, you’ll need to make sure your after-repair value will leave you room for a profit. Other options such as renting the home, offering it as a timeshare property, or making it your second home could be just as lucrative in the long-term, but you must decide on your plan. Develop your exit strategy before you enter the investment.
That said, there are some distinct advantages to investing in a ski property. These include:
- The clientele – Since you are dealing with a luxury property, and quite possibly a second home, you will be doing business with people who have a lot of money at their disposal.
- A ready-made market – Ski properties have a built-in market. Not only are they luxury investments, but ski property buyers are in a class by themselves. According to the Mountain Resort Market Outlook by RCLCO Real Estate Advisors, mountain resort sales transactions correspond with the number of skier visits at the resort. If you invest at a popular resort, you’ll be sitting pretty.
- Potential ROI is higher – Because luxury ski properties tend to start in the upper six-figure range, your potential ROI is higher, especially if you invest in a fix-and-flip and buy at a better-than-average LTV.
- Predictable market – Ski resort property markets are more easily predictable than average housing markets. For one thing, it’s seasonal. If you wait to buy at the beginning of ski season, you are too late and will see more competition. Another consideration is the specific geographic location. A more popular resort lends itself to potentially higher transaction values and less time on the market. Another market indicator may be the overall state of the economy.
- The timeshare option – Many winter vacationers do not want to own a property they will only live in for two or three months. A ski property lends itself to timesharing. In fact, there is a solid market for vacation properties that offer fractional opportunities.
In general, there are plenty of upsides to investing in luxury ski properties, but there are also pitfalls.
The Cons of Investing in Ski Properties
One downside to investing in high-end ski properties is property taxes. Higher values homes come with bigger tax burdens. If you are a buy-and-hold investor, prepare to pay a lot of real estate taxes. Other downsides include:
- Property maintenance – If you own the vacation property, you are responsible for the upkeep. If you don’t live near the ski property, that can be a burden. You’ll need to hire someone you can trust to keep an eye on the property.
- Association fees – Many ski resort properties are a part of co-ops, or they are condominiums. If you invest in these properties, expect to pay association dues.
- Risky investment – High-end luxury vacation properties are risky investments. All sorts of things can go wrong. And if you lose on these investments, you could lose a lot of money. The key is to buy at the right place in the right location, and at the right time. Remember, develop your exit plan before you enter the investment.
Ski properties are great opportunities for serious investors if they have a solid business plan. Just make sure it’s solid before getting started.
Here are some properties in Park City that have been funded by Sharestates
- Loan Amount: $2,562,000
- Purchase Price: $2,400,000
- Property Type: Residential
- LTV: 80%
- LTC: 80%
- ARV: 58%
- Loan Amount: $2,103,000
- Purchase Price: $900,000
- Property Type: Residential
- LTV: 80%
- LTC: 73%
- ARV: 64%
To look at more real estate properties that Shareshares has funded or to inquire about funding your next project click below
A transitional real estate market is when the market is swinging from a buyer’s market to a seller’s market, or vice-versa. Such a market can have an impact in many areas of the real estate sector, but what does it do to the lending market?
In a buyer’s market, conditions tend to favor buyers. That means the supply of housing exceeds the demand for housing and buyers have the advantage regarding price negotiations. In a seller’s market, the opposite is true. Demand exceeds supply and sellers tend to have the upper hand. Either condition can lead to an onslaught of new mortgages, but the terms of the mortgage may change based on these market conditions to favor either the buyer or the seller. In a transitional market, neither party has an advantage in negotiations, and that can impact the lending market in different ways.
Throughout 2018, the Fed raised interest rates several times. This has created quite a stir in the markets. Rising interest rates tend to mean a slowdown in new mortgages as the cost of lending rises.
What Happens When the Cost of Lending Increases?
When it becomes too expensive for people to buy homes, they tend to rent more. As a result, that often leads to more multifamily real estate development. It can also lead to more single-family rentals under certain conditions. Real estate developers tend to borrow more money to pay for the cost of these developments, and that’s when transitional lending tends to peak. This has been the case in the development market since the foreclosure crisis. More people have opted to rent, for a variety of reasons, and developers have responded.
National Real Estate Investor Online estimated, in 2017, that the transitional lending market was at $50 billion, up from $20 billion in 2011. They also saw no reason for that to slow down and noted that the real estate market indicated more debt rather than equity for the foreseeable future. However, it is now two years later and we have watched interest rates go up several times. This change in Fed policy will likely lead to a slowdown in transitional lending as developers gauge market direction. Should home renters start to buy again, we could see a shift from debt to equity in the housing markets. What will that do to marketplace lending?
Debt or Equity: It’s Important to Know Where The Market is Headed
Home buyers and sellers should understand the current market condition and where the real estate market is headed before they decide to buy, sell, or rent. U.S. News recently published an article on what to expect from the housing market in 2019 and wrote this:
Home sellers are also seeing growing number of alternatives to placing their home on the market. The last few years have seen growth in the number of iBuyers and similar investment companies that specialize in quick cash purchases of properties to renovate and resell them. Rather than listing their home with a broker, homeowners can sell the house directly. Platforms are debuting where larger companies facilitate the transaction by teaming up with local investors who make the purchase and renovate.
Fix-and-flips are just one market. There are also new housing development and rental markets. Home ownership went from below 63 percent in 2016 to 64.4 percent in the third quarter last year. That’s encouraging, but interest rates rising last year could result in another slight slow down. And in January 2018, new housing starts were at a 10-year high. They went down throughout the year.
In a transitional market, lending may not be at its best, but it’s also not at its worst. That means investors may have to search harder for the right deals, but they should be open to both debt and equity deals as long as they can justify potential returns against the real risks. In other words, keep an open but critical mind.
For more information about how to fund your next real estate project click below.
When it comes to real estate, several old adages may apply to almost any market. Today’s market could be characterized as “for every downside, there is an upside,” or, “what goes down must come up.” The truth is, real estate markets, like all financial markets, move in cycles. There are times when home sales are booming and times when home sales are declining. There are times when multifamily rentals are hot and times when the market is cooling. You could say the same about commercial real estate, industrial, or any other real estate market. Today, we’re talking about single-family rentals. Ten years after the foreclosure crisis devastated the real estate industry, single-family rentals are the fastest growing market segment in real estate.
The Growth of Single-Family Rentals
The Terner Center at UC Berkeley reiterates this truth in a recently published white paper titled “The Rise of Single-Family Rentals After the Foreclosure Crisis.” In their white paper, The Terner Center stated that 3.8 million households transitioned from homeowners to home renters. By 2015, nearly one in five single-family homes was occupied by a renter, an increase of 34% in one decade. In 2006, 13.1% of single-family homes were rentals, and 31% of all rentals were single-family homes. By 2015, those numbers had risen to 16.8% and 35%, respectively. What’s causing this rise, and how long will it continue?
While the foreclosure crisis isn’t the only factor giving rise to residential rentals, it is one of the factors. Others include downward pressure of household incomes by the recession, rising student and consumer debt, and tightened credit standards at lending institutions. No matter how you slice it, families are choosing to rent, and they’re choosing to rent single-family homes.
Is There Still Opportunity to Invest?
There is plenty of evidence to suggest the trend will continue. CNBC reported in September last year that institutional investors were still in on single-family rentals. Multifamily Executive also wrote about this trend last January. The evidence is more than anecdotal. When it comes to residential rentals, there is a market for both equity and debt investment, and these opportunities can come from some interesting segments of real estate investing. At one time, the residential rental home market was dominated by cottage-industry investors while institutional investors focused on multifamily. After the foreclosure crisis, many institutional investors swept in and bought up residential homes that went into foreclosure, and they rented them out. These investors are still invested in residential rentals, which makes it a strong market overall.
When it comes to portfolio management, diversification is still the best protection from any market downturn. Investors who have not bought into the current single-family rental trend should see this moment as an opportunity. Check out the open single-family investment opportunities on Sharestates.com.
President Trump recently directed several federal agencies to focus on spending in certain opportunity zones in order to encourage development in those areas. What are these opportunity zones, and how can real estate developers and investors use them to increase their portfolios and take advantage of the promised tax breaks?
What is an Opportunity Zone?
Last year, Congress passed the Tax Cuts and Jobs Act, which created the opportunity zones that the president is now beginning to focus on. The idea is to encourage long-term investment in low-income communities in order to revitalize those communities and reinvigorate the economy. The program allows real estate developers an opportunity to reinvest their capital gains into such communities and projects while receiving tax benefits for doing so.
Opportunity zones exist in every state in the union, the District of Columbia, and five U.S. territories. That gives state and local governments and economic agencies incentive to help promote them, which makes sense because real estate is an intrinsically local business.
In choosing which communities to call opportunity zones, Congress established an eligibility baseline based on poverty rates and median family income but tasked state governors with nominating the individual communities to be designated for these zones. Doing it this way allowed state governors, who are accountable to the people in their states, a stake in the economic outcome of the initiative. Being closer to the ground, so to speak, governors would have better insight and deeper knowledge into the economic realities of the communities being considered.
To learn more about opportunity zones, visit the Economic Innovation Group at https://eig.org/opportunityzones.
Who is Eligible for Tax Breaks in Opportunity Zones?
It’s important to note that tax incentives are not offered across the board for all opportunity zones. Eligibility is based on the nature of the capital used for these developments.
In order to receive a tax benefit from investing in opportunity zones, a developer must use capital gains as equity reinvestments through a special purpose opportunity fund that is eligible for the tax benefit. That’s very important because many developments use multiple streams of financing. While it is fine to use multiple streams of financing for these developments, developers must understand that only qualified capital can be used to gain access to the tax benefits.
An opportunity fund is a specific type of investment vehicle structured as a partnership or corporation. To receive the tax benefit in question, the fund must invest in eligible properties within eligible opportunity zones.
Currently, capital gains can be deferred depending on how capital is tied up in a qualified opportunity fund up to 15 percent if held for more than seven years.
How To Know Which Opportunity Funds and Opportunity Zones Qualify
The U.S. Treasury Department in conjunction with the Internal Revenue Service has issued a set of guidelines for developments on proposed regulations and guidance on the tax benefits associated with opportunity zones. Along with the guidelines, they have published a spreadsheet that lists qualified opportunity zones. Developers can also access a map of designated qualified opportunity zones in the same location. You can find these on the Community Development Financial Institutions Fund website. As the program is further developed, we should see more guidance and more solid regulations regarding opportunity funds and opportunity zones.
Opportunity funds and opportunity zones promise real estate developers tax deferrals for helping to spur development in economically disadvantaged neighborhoods all across the country. When these neighborhoods are revitalized, it should boost local economies and continue to spur development for many years to come.
To view open Sharestates investment opportunities, click here.
Capital expenditures for commercial real estate are not easy to come by. Developers should work on acquiring a positive track record in the types of developments they wish to attract capital. But they must also learn to be more agile in seeking out investments. One way to achieve this is to use crowdfunding and marketplace lending websites that give developers broader access to investors they may not reach in other ways.
Deloitte also recommends that CRE developers rebalance their property portfolios. They recommend focusing in two specific areas: Creating memorable tenant experiences and diversifying their investor base to attract higher capital investments. Those are both good suggestions.
On the first point, Deloitte recommends making use of emerging technologies such as mixed reality to give potential buyers and tenants a 360-degree immersive view of property options as well as Internet of Things, artificial intelligence, and predictive analytics.
Another practical suggestion offered in the report is to include more flexible lease arrangements such as hybrid leases where tenants can have both short-term and long-term options.
Rise of the Proptechs
Property technology companies are coming into their own. In fact, 95 percent of the respondents to Deloitte’s survey said they expect hospitality and multifamily proptech companies to have moderate to significant influence on commercial real estate development in the near future. Ninety percent expect mixed-use to be influential while 81 percent and 77 percent expect retail and industrial proptech companies, respectively, to have influence.
Interestingly, in 2014, there were 255 proptech launches globally and $3 billion invested in those companies. In 2017, there were 21 proptech launches with $13 billion of commercial investments entering the sector. Investors clearly are interested in those proptech companies that show promise.
Overall, technology allows investors and CRE developers to be more agile in the marketplace.
Non-Performing loans are loans where the borrower is at least 90 days past due in making a payment and not likely to get caught up or make additional payments on the loan. For banks, these loans have traditionally been a problem because they represent a higher default rate and lowers the profit margin of the bank on its lending practices. Of course, lending institutions in general always account for such losses and write them into their interest rates to ensure that their total lending portfolios are in the positive regarding returns. Banks have learned to sell these loans on a secondary market at a discount allowing the assignee the right to collect on the loan, if possible.
Non-Performing loans can be a problem for any type of lender, not just banks. That includes real estate crowdfunding platforms. Such loans may be a bane to the lender, but they represent a unique opportunity for investors.
The Risks of Financing Non-Performing Loans
One of the most obvious risks of financing Non-Performing loans is the failure to collect. For the original lender, selling the loan at a discount can get it off its books, and the lender can recoup some of its investment without taking a total loss. However, the loan’s purchaser then assumes the burden of collection, which can be costly and is inherently risky.
Not only is it risky to purchase a Non-Performing loan in terms of its cost to the buyer, but there are also costs associated with collecting. It can take considerable resources to chase down a borrower and convince that borrower to pay off a loan.
In terms of financing real estate Non-Performing loans, if the property is a multifamily property, the loan purchaser could be getting a property where the majority of tenants aren’t paying their rent. In that case, not only is the loan Non-Performing, but the underlying asset is Non-Performing and represents a huge liability.
Rewards Associated With Buying Real Estate Non-Performing Loans
While investing in Non-Performing loans is inherently risky, there are rewards associated with these loans that are unique to the Non-Performing loan market as a whole.
- First, Non-Performing loans can be purchased at huge discounts. Let’s say a loan of $100,000 was made but only $25,000 has been paid back. That $75,000 in unpaid principal is a huge liability to the lending institution. An investor that buys that loan at 50% is now sitting on a potential substantial return on investment.
- Investing in Non-Performing loans puts you in the first lien position. That means you get paid first should the borrower decide to continue making payments.
- When you buy a Non-Performing real estate loan, you control the underlying asset. In other words, if you never receive a payment for the discounted loan you purchased, you can foreclose on and sell the property for its true value recouping your investment and a nice return in the process.
- As financier of a Non-Performing loan, you have the option of renegotiating with the borrower and setting new terms on the loan. You can offer better terms to the borrower based on their current financial situation and turn your investment into recurring passive income.
Non-Performing real estate loans are a huge opportunity for investors who are serious about turning a discounted asset into a positive ROI and potentially a passive income that will keep your returns flowing in for years to come.
Here at Sharestates we offer Non-Performing loans as one of our programs. Click on the button below and read about what we offer.
Commercial real estate development continues to be a solid investment. Many developers reasonably expect returns of ten percent or more. Successful developers first discern what type of financing their projects need based on liquidity, development scale, and how much stake they retain in each project. There are at least four different avenues of financing available to commercial developers. Each avenue has its pros and cons, and this brief overview should give you a better idea which option might be the best fit for you. Here are four different types of financing available to today’s commercial real estate developer.
Bank loans typically offer lower rates than other types of loans. The use of traditional qualifications lowers the risk of default for the borrower because it is a recognized system that motivates the borrower to maintain a solid credit standing. Since loans are long term, they are often extended to 20 years or more allowing the developer to pay them off over time while maintaining some liquid assets for future developments. While there are solid benefits to obtaining a bank loan for commercial real estate development, there are some drawbacks. Banks are more rigid when it comes to down payment, income verification, and credit score requirements, and they often won’t approve loans for non-conforming product types. The approval process for bank loans is also longer. Some loans can take up to three months for approval, and banks have high prepayment penalties
Hard Money Loans
The primary benefit to hard money loans is the speed at which they can be processed—sometimes in as little as a day. This is due to fewer eligibility requirements, which don’t extend far beyond the amount of equity the borrower has in the property and the borrower’s cash on hand. Private lenders provide money to investors on projects that banks and other traditional lenders won’t finance, such as fix-and-flip projects. Interest rates are higher on hard money loans. This is due to the risk factors to the lender and the convenience to the borrower. Private lenders usually charge points—a percent of the loan amount—to be paid prior to the first payment installment. The average is two to four points per loan. The heightened risk to the lender dictates shorter loan terms, which typically don’t extend for more than two years
The beauty of equity offers is that developers can get financing for their commercial real estate developments without taking out a loan. That means there is nothing to pay back, but it also means the developer must give up partial ownership of the project to investors. That results in sharing profits with investors on the back end when the property sells or, if it is a rental or lease property, sharing in the ongoing receivables. If the project fails, the developer’s reputation with investors could take a hit. Some private investors will likely see him as a bigger risk on future developments
Marketplace loans offer commercial real estate developers a fast and easy application process, and there are usually no prepayment penalties. On the flip side, the borrower could be subject to higher interest rates if they do not have a good credit history or lack experience in commercial development. One downside could also be seen as a positive. Marketplace loans tend not to exceed $40,000, which means larger projects have to go elsewhere. However, smaller projects can get the funding they can’t get elsewhere.
Commercial real estate development continues to be a lucrative financial space, and developers stand to gain their greatest profits by knowing which of the available financial options fit their goals. With thorough due diligence, developers can value each of the options and choose the one that is best for each real estate project.
There are almost as many ways to develop real estate as there are real estate developers, but it’s important to understand that the market does move in cycles. Today, one type of real estate development could be more popular, or more profitable, than another. Tomorrow, or next year, it could be something else. For that reason, real estate developers need a way to discover what is hot in real estate and where the most profitable opportunities are.
The following list of resources is not exhaustive, but this should get you started in learning where to find the best real estate opportunities right now:
U.S. Census Bureau – The U.S. Census Bureau is a bevy of useful information to real estate developers at any stage of their career. The federal government has statistics on new residential housing starts, building permits obtained, construction spending, and much more. These statistics are available on a national as well as on a local/regional basis. While the information is great information to know, strong indicators of capital expenditure growth and new housing starts does not necessarily mean that’s where the market is going. Huge supply does not mean huge demand, but knowing the trends in new construction development is essential.
Multiple Listing Service (MLS) – The MLS is a tool for real estate agents, but it has local property information that can assist developers in predicting where the market is headed. For instance, you can use the “days on market” metric to judge a slow down in the local market. A lot of properties staying on the market longer means there are fewer people buying homes in that specific local area. A lot of homes selling faster could mean home prices are too low or there is a lot of competition among home sellers, which could indicate a low-supply condition. There are a myriad of ways to read MLS data to glean trends in residential, commercial, and industrial real estate. It’s a valuable resource.The Bureau of Labor Statistics – The Bureau of Labor Statistics compiles information on occupation trends, unemployment, and other key employment indicators. These are important because a big rise in unemployment could mean a lower demand in new housing starts, especially if people are unemployed for a long period of time. On the other hand, a rise in executive or management level occupations in a particular metro area could spell an opportunity for new residential homes. A rise in retail occupations could mean more commercial real estate opportunities while an increase in manufacturing might spell opportunities in industrial development.
Urban Land Institute (ULI) – ULI is one of the most important organizations for keeping tabs on real estate development trends around the world. They are instrumental in impacting land use policies, keep an eye on real estate development trends, and foster real estate development innovation.
The U.S. Fed – The Federal Reserve publishes the most comprehensive information on economic indicators available. They also establish monetary policy, which impacts interest rates, real estate prices, and many other economic indicators.
Real estate developers must keep an eye on trends from within the real estate sector as well as trends outside of real estate that could have an impact on real estate markets. Understanding how key economic indicators could impact specific real estate sectors such as single-family residential, multifamily, commercial, and industrial is crucial. Real estate developers also should understand how to determine whether the trend is upward for new construction versus rehabilitation and renovation. Being able to read the signs of the markets will mean more profits in your pocket in the long run. Even watching the latest trends in real estate crowdfunding can help developers identify the best opportunities right now and in the future.
Are you looking to fund your next development project? Learn more about Sharestates many loan programs. https://www.sharestates.com/sponsors
GDP growth came in at 2.3% for the year in 2017, and a whopping 4.2% in Q2 2018. Consumers are buying confidently provided that tax cuts will improve yearly income even despite stagnant wage growth. Sharestates multifamily clients are anticipating that U.S. rent growth should maintain its current pace, largely thanks to cities in the South and West, where supply hasn’t outpaced demand.
Multi-family real estate is a staple in the real estate investment community. According to Sharestates CEO and Principal Allen Shayanfekr, “Despite moderating elements, because the economy is healthy, the apartment market is similarly healthy, even if the boom from earlier in this economic cycle has tapered off. ” He goes on to say “Our multifamily clients are anticipating that U.S. rent growth should maintain its current pace, largely thanks to cities in the South and West, where supply hasn’t outpaced demand.”
Read Allen’s full article in Forbes today by clicking the button below.