The Advantages of Long Term Rental Loans for 1-8 Unit Properties by Jared Newman

The Advantages of Long Term Rental Loans for 1-8 Unit Properties

The single family rental market is booming. With low interest rates and high demand for housing, the prices of homes have soared along with market rents.

It’s time for real estate investors to take advantage and they can do so with a Long Term Rental Loan.

Speed

Traditional banks are swamped with consumer refinances from borrowers looking to take advantage of the low interest rates. Refinances that used to take 30-45 days are now on a 60-90 day horizon.

With a Long Term Rental Loan, investors can close in 30 days and increase their liquidity faster to purchase more assets.

Ease

Many lenders will require tax returns and pay stubs to verify income during their loan process. With a Long Term Rental Loan, investors can avoid jumping through hoops because income verification is not needed.

There are also lenders who have high debt coverage ratios that are calculated by taking the property owner’s income and analyzing it against all their direct and guaranteed debt obligations. With a Long Term Rental Loan, borrowers have more flexibility and can qualify with a DSCR of 1.0 or higher.

Lastly, some lenders require a borrower to vest in a newly formed special purpose entity to be formed. However, that is not required for portfolios with 9 or fewer properties with a Long Term Rental Loan.

Unlimited Loans

A real estate investor can only have up to 10 Fannie Mae loans at a time. As such, if a borrower has 10 loans and wants to buy a new property, then they need to restructure their existing debt in order to obtain a new conventional loan from a bank.

Long Term Rental Loans are not capped. Real estate investors can have as many as they want.

Overall

At Conventus, we are excited to offer a product of single family Long Term Rental Loans and can make exceptions for 5-8 unit properties. We can fund bridge loans for borrowers to lock up properties quickly and then they can refinance into the Long Term Rental Loan product with a discount for rolling over. Please reach out if you have any loans you would like to discuss.  

by Jared Newman | jared@cvlending.com

Jared is a Loan Officer for the hard money lender Conventus, LLC and has been working in real estate since 2016. He is about to start an investment portfolio of his own with rental properties

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

Underwriting Hard Money Loans: Loan to Cost vs. Loan to Value by Jared Newman

Underwriting Hard Money Loans: Loan to Cost vs. Loan to Value

When underwriting a hard money loan, the lender can focus on the Loan to Cost (LTC) or the Loan to Value (LTV). Some may prioritize one of these ratios in all cases while others may choose to select one over the other in different circumstances.

In this article, I will outline how we view LTC vs. LTV at Conventus. I hope it is helpful to anyone interested in learning how lenders approach risk.

1. What are Day 1 LTC and LTV?

Let’s say a real estate investor buys a property for $1M, but the property is appraised to be worth $1.1M. The borrower may go to a lender and request a loan of $800K.

The Day 1 LTC would be 80% ($800K/$1M), whereas the Day 1 LTV would be 72.7% ($800K/$1.1M).

The definitions of Day 1 LTC and LTV are below.

●      Day 1 LTC: the loan amount divided by the total cost of the project to date

●      Day 1 LTV: the loan amount divided by the total as-is value of the property

2. What are Day Done LTC and LTV?

In the scenario above, let’s say the real estate investor plans to put in $50K of their own money to add value to the $1M property. They expect the property will be worth $1.3M when the rehab is completed.

The Day Done LTC would be 76.2% ($800K/$1.05M), whereas the Day Done LTV would be 61.5% ($800K/$1.3M).

If the borrower financed the $50K rehab, the numbers would be as follows instead:

●      Day Done LTC: 81%  ($850K/$1.05M)

●      Day Done LTV: 65.4% ($850K/$1.3M)

The definitions of Day Done LTC and LTV are below.

●      Day Done LTC: the loan amount divided by the total cost of the project when completed

●      Day Done  LTV: the loan amount divided by the total after repair value of the property

3. Why we prioritize LTC

As can be seen above, the difference between LTC and LTV is LTC is focused on the cost of the project while LTV is centered on the value of the property.

In most situations, we care more about LTC than LTV. LTC reflects the borrower’s skin in the game, and our top priority is to protect our capital. As such, we focus on originating loans where we know the borrower has some equity in the project.

In particular, it is crucial for us to focus on LTC for construction completion loans. In these situations where the project is less than 95% complete, it will be difficult for an appraiser to determine the as-is value. They will not have any comps to use. As such, we rely on LTC to figure out what loan amount to give the borrower.

That said, we still keep LTV into account. If the borrower puts in $1M of work into a property and it appraises at $800K, we will figure out the discrepancy and ensure the loan amount still makes sense.

4. When do we focus on LTV?

When a project is 95% or more completed, we will focus on LTV if we are doing a refinance. The loan will be less risky because the property is ready for sale and the borrower will have no incentive to walk away. If we did need to foreclose, however, we would list the property with a safe margin because the LTV for refinances is lower than it is for purchases.

Overall, I hope this article helps to explain how we underwrite loans and how our guidelines match our business model to protect our capital first and make a profit second. We believe that strategy allows us to be aggressive on pricing and establish long-term relationships with our borrowers.

Loan to Cost and Loan to Value are always at the top of our minds. Please reach out if you have any loans you would like to discuss.

by Jared Newman | jared@cvlending.com

Jared is a Loan Officer for the hard money lender Conventus, LLC and has been working in real estate since 2016. He is about to start an investment portfolio of his own with rental properties

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

Negotiating for Borrowers: Points vs. Note Rate by Jared Newman

Negotiating for Borrowers: Points vs. Note Rate

When a borrower is negotiating terms with a lender, he/she needs to determine the amount of points and note rate that will work best for their situation. Here is a breakdown of what it looks like when a borrower chooses lower points or a lower note rate.

As a disclaimer, this blog post is meant to show borrowers the options they have and not direct them in a certain way. Borrowers should always keep their specific situation in mind when discussing terms with their lender. 

The table below shows what will be the least expensive option for the borrower for their loan based on time.

Here is an example for a standard fix and flip loan with a 12-month term. Let’s say the lender provides the borrower with the options below for a $500K loan. 

• 9.99% and 1%

  • $4,162.50/month and $5,000 upfront

• 10.99% and 0.5%

  • $4,579.17/month and $2,500 upfront

• 11.99% and 0%

  • $4,995.83/month and $0 upfront

See the breakdown of the total fees the borrower would pay in the table below. The dollar amounts are rounded to the nearest number.

As can be seen, each rate could be the best option for the borrower based on the amount of time that it takes for them to complete their project. If the project takes exactly six months, then it will not matter which rate the borrower chooses.  

That said, if the borrower is managing multiple projects, they may prefer to keep more of their current reserves to use on other projects rather than saving a few thousand dollars in the long run by paying upfront points. The borrower should always ensure they have a solid estimate of how long their project(s) will take and run various scenarios of numbers to select the most optimal terms.

It will be helpful to be transparent and upfront with your lenders if you are working on several projects concurrently, so they can understand your plan. Conventus aims to work with borrowers to help them achieve their goals and complete the vision of their projects.

by Jared Newman

Jared is a Loan Officer for the hard money lender Conventus, LLC and has been working in real estate since 2016. He is about to start an investment portfolio of his own with rental properties

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

Reaching the Top of an Agent’s List to Find Fix/Flip Deals by Jared Newman

Real estate investors have a variety of methods to find fix/flip deals, whether it is direct mail, driving for dollars, connecting with wholesalers or realtors, or another strategy. If you are focused on networking with agents, then do your best to go above and beyond to help them help you.

It can be easy to pick up the phone and call a listing agent, but it may be more difficult to convince them you should be at the top of their list when they have a deal.

Here are some ways to gain their attention.

Double End the Transaction

Make sure agents know you will use them not just for the purchase of the property but also for the sale of the property. They’ll make at least six percent of the total fees, maybe more if they find the initial seller and the ultimate buyer. 

Do not just assume they are aware you’ll double end the transaction for them. Ensure they know they will make the most money possible by working with you. Everyone wants to make money, and this is an easy way for you to entice them.

Also, be true to your word even if you decide to wholesale the property. If you choose to wholesale a deal to another investor, ask that investor to sign a listing agreement with your agent.

Be Responsive 

If an agent comes to you with a deal, be certain to respond quickly, at least within 24 hours. You may be busy, but they will not come back to you if they lose out on the deal because you didn’t get back to them soon enough.

Explain Why You Do Not Want a Deal

Some agents may come to you with a deal they believe will net you a significant profit, but you may determine that’s not the case after running the numbers. As an example, maybe they’ll bring you a deal where you can buy the property for $500K and sell it for $600K. They’ll say you’ll make $100K!

But after diving into the numbers, you might see that the rehab will take $50K, the holding costs will be $30K and the remaining fees will be $15K. So, you’d only make $5K.

There is no way you would do that deal, but do not just brush the agent off. Lay the numbers out, so they understand why the profit margin wouldn’t be enough.

Similarly, if there are other reasons, like high crime areas or poor school districts, let them know. They’ll appreciate the explanation and know what type of deals you want to see moving forward.

Overall, you can differentiate yourself from other investors by using these methods when speaking to real estate agents. In a competitive market, this is critical whether you are a new or experienced investor.

by Jared Newman

Jared is a Loan Officer for the hard money lender Conventus, LLC and has been working in real estate since 2016. He is about to start an investment portfolio of his own with rental properties

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

How to Find a Rental Property by Jared Newman

How to Find a Rental Property

by Jared Newman

There are millions of properties available on the market, but it can be a challenge to find one to purchase and rent out to a tenant. The first step is deciding where you would like to buy.

 If you are considering building a massive portfolio, it will be simpler if you look for a property within driving distance that you can manage on your own.

If you choose to search for properties in other areas, you will need to pay other people to manage the property or you will need to obtain help from locals to manage the property yourself. If you choose the former strategy, then your profit margins will be reduced. However, if you choose the latter strategy, then there will definitely be risks if you do not know anyone local whom you are confident you can trust.

Once you have decided which city you want to buy a property, it's time to pick a type of property. If you are starting out with your first purchase, it is will be easier to begin with a residential property (1-4 units) than a multifamily building with dozens of units.

A condo can be a safe investment because you are less susceptible to major damages to the property. The Homeowners Association (HOA) for the condo building will pay for any problems that come up outside of your unit. The drawback is you will need to pay HOA fees that will cut into your profit.

A single-family house can be a better investment than a condo in terms of the profit margin since there are no HOA fees, however, you will need to be willing to commit more time to managing the property since there are more issues that will come up. For example, if you own a condo, you will not be responsible for covering damage to the roof, but you will need to handle those types of issues when you own a single-family house. An additional benefit for a single-family house is tenants often tend to stay longer in a house than a condo. Typically, tenants stay in a house three-to-five years compared to two years for a condo.

Another option is buying a duplex, triplex or quadriplex. You will need to invest more money to purchase one of these types of multi-unit properties as well as spend a lot more time managing these properties and all the tenants. However, the rate of return should be higher. If you live in one of the units, then the main benefit is the rent you collect from your tenant should cover your mortgage payments.

Once you decide which type of property you would like to buy, consider whether you would like to manage the property yourself or hire a property manager. If you would like to pay someone else to manage your property, you will need to ensure you have enough profits to do so.

Next, it's time to start looking for properties. Set the parameters accordingly for the type of property you want. Create a spreadsheet that calculates the income and expenses, and figure out what your Cash on Cash Return on Investment would be. It should be at least 10%. Sample tables are at the bottom of this post.

Once you have crunched the numbers and believe you will be profitable, make sure to someone you know who has experience in real estate. See if they agree. If they do, then start calling real estate agents and find out more information about the properties you found on Realtor.com.

Overall, it takes a lot of patience to find a solid deal, but keep at it. It will be worth it! Once you have agreed to terms for a property, contact Conventus for a loan!

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.

How to Create a Real Estate Strategy by Jared Newman

How to Create a Real Estate Strategy

by Jared Newman

There are numerous ways to generate wealth from real estate. To determine which strategy will be the most profitable for you, it is worth considering how you can leverage your experience and strengths.

If you have experience in construction and are looking to take risks for high rewards, then you will pursue a different strategy than if you have experience in property management and are more interested in a passive investment that will provide more reliable returns.

Three of the most notable real estate strategies are listed below. Regardless of which strategy aligns with your interests the most, Conventus can help you with financing!

1.     The Fix and Flip Strategy

a.     Right now, there are a plethora of TV shows like HGTV's "Fixer and Upper" that have made fixing and flipping become known as one of the most popular real estate methods. It is a great way to make money if you have an understanding of construction as well as a contractor you trust to do the work. You also need to be willing to make a significant time commitment since this strategy requires moving as quickly as possible during the rehab process to fix the property and sell it, so you can move on to the next property.

b.     The first step is to find an area where there are plenty of properties that need some tender love and care. It would be best if you can find a property in your own city, so you can oversee the rehab process. That said, there are many areas around the country where opportunities exist. 

c.      After Hurricane Harvey hit Houston in August 2017, the city was stuck with hundreds of flooded homes that were in total disrepair. With properties available for pennies on the dollar, it did not take long for investors to swarm the market. In October 2017, 6,381 single-family homes were purchased, a 7.5% jump over the same time last year.

d.     When you are looking for a property to fix and flip, run the numbers and ensure you'll gain a profit after buying the property and rehabbing it. It's key to find a contractor who will give you a reliable estimate for the rehab budget.

e.     Once you have a property and a contractor lined up, you should be set to go! Hopefully, there aren't many snags in the rehab process and you can flip the property for a nice profit. Then, it's on to the next flip.

2.     The Rental Strategy

a.     While the fixing and flipping strategy sounds exciting and can produce large profits quickly, if you don't have the time to commit or the contractor to do the work, then there are other strategies you can use. The rental strategy is a more passive and less risky approach to real estate, but it should produce consistent income each month. With this strategy, you can find a property that is already in good shape that you can buy and rent out to tenants.

b.     Be certain to run the numbers to ensure you will generate a profit after making monthly debt service payments and the expenses for the property. If the property is in solid condition, that should help lower your expenses.

c.      If you have the time, you should also try to manage the property yourself, leveraging your realtor's contacts. Otherwise, you may find yourself paying up to 10% of the monthly rent to a property manager. For that reason, it's best to buy a rental property near your primary residence, so it will be easier for you to manage the property. One popular way to start is to buy a duplex where you live in one unit and rent out the unit next door.

d.     Investing in a rental property will require more patience because it will take longer to make a significant profit, but it is an excellent way to diversify your investments and build up equity. Once you've rented out a condo or single-family residence, then you may feel more comfortable buying a multifamily building, which should increase your profit margins.

3.     The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Strategy

a.     Made famous by real estate community website Bigger Pockets, the BRRRR strategy is a great way to quickly build a portfolio of properties. It might seem like a challenge to take on five steps, but this strategy is more or less a combination of the first two strategies, so it shouldn't be too complicated.

b.     You can start by buying a property that needs repair and fixing it up. Instead of flipping it, you can hold on to it and rent it out. Next, once you have demonstrated the property is bringing in income, you can obtain a cash-out refinance to buy another property and begin the process over again. Soon enough, you'll have more properties than you ever imagined!

There are hundreds of ways to make money from real estate, but these three strategies have been proven to work. Come to Conventus for your financing and we will provide you with more advice and hopefully a head start to the establishment of a strong real estate portfolio!

About Jared Newman

As a Loan Officer/Processor at Conventus, I love learning as much as I can about lending and real estate. With the goal of becoming financially independent, I am curious to see how other people are using real estate to achieve that goal!

Disclaimer

The information provided in Conventus BLOGs and accompanying material is for informational purposes only.  It should not be considered legal or financial advice.  You should consult with an attorney or other professional to determine what may be best for your individual needs. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Conventus does not make any guarantee or other promise as to any results that may be obtained from using our content. Conventus makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site and is not liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.  Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.