Best Investment: Residential Real Estate Part – 3

In our previous 2 posts we discussed what are the markets where to buy properties and why these markets are great. Here I will go over a number of reasons why I think they are going to become some of the best investments ever. If you are able to become an investor at this time it can be very exciting.

Appreciation:
Today, as discussed earlier, banks do not provide loans to most borrowers that were and are interested in buying in these markets. In addition, banks do not provide investment loans anymore, or stated income loans, or more than 4 loans per borrowers etc.. the pool of available buyers as dried up severely. We could argue that banks are over reacting in the other direction before they were over lending, now they are under lending. By not lending they by default depreciate price even further allowing investors to buy at price that are arguably undervalued. Once lending restart at more “normal” level, values will by default increase providing investors some appreciation.

Lender:
Borrowers who once where qualified to have bank loans will not be able to qualify for a number of years. As the owner of a property, investors will be able to become lenders by selling the property at a new market value and holding the note doing an owner financing. It is clear that owner financing is going to become very popular. Here are the math:
- Investors: bought property for $100 with $30 down and having a loan for $70
- 2 years Later: Investor sells property for $130, asking for 20% Down Payment and carrying a note for $104. Doing so investor recoup initial investment and now is a lender.

Income:
This is a great solution as well. Investors buying at low price are able to rent properties and get positive cash flow which was much more difficult few years ago. As financial conditions improve investors will be able to get new financing on their property at lower costs increasing their cash flow per property. Properties define as Single family residence, condos etc.. are becoming stable and good source of revenues.

These reasons and other make hard money lenders interested in working with investors. Trust deed investors will see their capital more protected than before.

Understanding Private / Hard Money Lenders

In a previous post, I started to explain how Hard Money lenders see the wolrd. The more they are understood the more likely a financing will be approved. There are a number of miss appreciation, miss understanding about Hard Money lender one of th most famous one is that they will be happy to take over a property. In general this is not the case and is a complete miss understanding of a Hard Money or Private Money lender's objectives. As with everything, there are always exceptions but in 95% of the case Hard Money lenders do not want to take over a property.

Hard / Private Money lenders are either individuals and/or organizations who provide real estate financing to borrowers who can not secure the funds through conventional channels. Hard Money lenders are interested in getting return on their investment based on the rate they are receiving. They wants the loans to be pay back so that they can make new ones. In general they prefer to invest in loans throught Trust Deeds that will be paid back within 6 months to 24 months.

Hard Money lenders invest based on property values. Risk valuation is made on their understanding of what the real estate market is doing, the likelyhood a borrower is going to default and loan amount vs the property value. They are sceptical of appraisals and valuations they have not ordered.

A Hard Money lenders know that it may have to take over a property. It is part of the risk that they are taking, however, they don's want to because the capital is not active during that time. If the take over / foreclosure of the property goes smoothly and there is enough equity, the lender will recoup its investment plus fees and missed payments. If the take over / foreclosure does not go smoothly it can become very expensive for the lenders. In case a profit is generated from the sale most of it will get back to the owner who was foreclosed. If the property could not be sold the lenders need to start managing it. Hard Money lenders are not in the property management business.