Buy Now Hard Money

Underpromise. Overdeliver.

Part 3 in a series

First, if you are considering investing funds in real estate without doing the actual leg work, there are many ways to consider handling that investment. But here are some things to consider before you take the plunge:

  • Am I comfortable investing in something where I won’t be there every day to see what’s happening?
  • Do I want to stay hands off, or am I dying to swing a hammer?
  • Do I want to keep my day job and grow my capital, or do I want to jump in with both feet and a blow torch and thaw out frozen pipes on a Saturday night?
  • Can I afford to quit my day job?
  • Do I simply want returns on my money, or would I rather peer down into that toilet bowl?

These questions sound slanted toward persuading someone to invest hands off. But the reality is that jumping in there is right for some, and not for others. Sometimes new investors don’t realize all the options out there, and they start into a project for which they are totally unsuited and unprepared. So this will start the discussion of hands-off investing methods.

My warped humor

Self-directed IRA’s are a great source of funds for hands-off investing, because these are funds you can’t access yet anyway. If you have a conventional IRA from a previous job, or a solo 401(k) from self-employment, you can use those funds to purchase or lend. I personally have a self-directed Solo 401(k), a self directed IRA and a self directed Roth IRA. If you google self directed IRA, you’ll get tons of information.

A few ways to invest in real estate without the day to day management issues:

  • Be the credit partner: you put up your signature and good credit history, and sign on a mortgage, so that the other partner can buy the property using your good credit.  In return for this you get a piece of the ownership, and a mortgage in your name, but usually don’t work on the day to day property management or rehab.  The downside to this is that you are risking your credit score and are on the hook for the mortgage should the property values plummet further.  And an unfinished rehab should your partner be unable to finish the project will leave you…..well you get it.  You’d be better off if you had some day to day knowledge of the management or the project and could step in if the unforseen happened.
  • Be the money partner: you put up your money to fund the deal, either the entire purchase and rehab, or the downpayment money for a conventional or hard money loan.  You are typically an equity partner, meaning you get a piece of the ownership of the deal, but don’t have to manage the purchase, the rehab, the rental or the sale of the property.  Before we go any further, please check out an article I wrote about protecting your capital when investing in real estate.  Sometimes when you are a money partner, you hold a mortgage in second position, so you should understand the ramifications of this.
  • Hire a property manager: you can hire a manager for property that you hold for rental income. Bear in mind that if you participate in a large property, you will almost always have a property manager, sometimes onsite.  But for single family and small multi’s, the cost to hire a manager is high, cuts into your cash flow, and is no guarantee of a trouble-free investment.
  • Lend the money: There are pros and cons to this strategy as well, and the next couple of posts will go into more detail on exactly this.  You can be the first to get paid, and sometimes participate in the profit in the deal at the same time.

Part 2 in a series

If you are starting out in investing, chances are you want to invest hands on. You probably want to either invest full time, or simply add to the family finances with a deal or two a year.  Deciding the type of investing that works for you, and how much time and money you should invest, are important decisions.

Choosing a direction and focusing will make a big difference in how successful you are.  One thing you should consider is the skill set needed for various niches in the investing world.

If you are an experienced investor, you know more about what you are doing and how much time and financial resources you should allocate to real estate.

But if you are just starting out, make sure you are not cashing in your kid’s college fund the first week.  Allocate a portion of your capital to real estate investing to stay diversified.  As you become more experienced and you have invested in a few successful deals, then you can increase the allocation to real estate.

If you prefer hands-on investing, then consider what niche you prefer.  Here are a few examples:

Buy and hold Multi-family investing:

Requires some cash for a downpayment, and thick skin.  Buy some books to learn about calculating cashflow BEFORE you start looking at properties.  Learn some property management skills BEFORE you buy your first multi.  It’s amazing how many people buy a multi without having any real understanding of how the numbers will play out, or what a landlord should and shouldn’t do.  For example, in Massachusetts a landlord can hold first months rent, last months rent, and a one month security deposit.  But in New Hampshire, the max is first months rent and a one month security deposit.  No pet deposits, either.  You need to know these things or they can trip you up.

Wholesaling:

Requires the ability to keep going no matter how many times you hear “no”.  You must contact a boatload of homeowners to find one who will sell you their house at a price low enough for profit.  Finding sellers is a numbers game.  Requires no cash except what you spend for marketing to homeowners.  If you can find good deals, you’ll have no trouble selling them to your local real estate investors who want to rehab.  Spend some money on a marketing course, and attend your local REIA’s to build your buyer’s list.

Rehabbing:

Make sure you can either do the work yourself (properly) or you are good at managing contractors.  Paying retail for contracting will kill your profit, or you’ll be bidding so low on a property that lots of people will outbid you.  Rehabbing requires the ability to find deals, the ability to evaluate how much you should pay, the ability to manage the rehab, the ability to market the house for sale and evaluate the price you should be listing at.  The last two can be handled by a real estate agent, but you must know the end value before you can make your offer.  If you don’t have the funds to buy cash, you’ll need hard money or a money partner, because banks won’t lend on properties in serious disrepair.

I’m getting a little long here, so I’ll discuss hands-off investing tomorrow.

Part 1 in a series

I come into frequent contact with people wanting to make the jump into real estate investing, but not knowing where to start.  I’m on the Board of several Real Estate Investor Associations, and co-founded one of them, so my network includes many new investors.

Sometimes they ask where they can find deals. (That’s the mother lode, by the way.  It’s sort of like asking Coca-Cola for their formula.)  Finding deals- really good deals, I mean – is the skill that investors need to cultivate.  Great deals are found off and on market.  They are frequently found by speaking with sellers directly, some of whom don’t want to list their property conventionally with an agent for many reasons.

If you have the personality and the persistence to seek out sellers directly, this will probably be your best source of good deals.  You will need to make possibly hundreds of contacts per actual deal realized.  There are many trainers who teach these skills, and I am not the expert in this arena.

If you can find the deal, and have no funds, there are huge networks of investors who will buy your deal without your ever having to close.  Selling the deal is easy, finding the deal is the key.

Good deals can be found on the MLS if you are working with an investor-friendly agent.  But remember, if that agent has been in the business for a long time, they have a huge buyer’s list of real estate investors ready to snap up the best deals, and they call these investors first if they have proven they can perform.

Sometimes they ask if we lend their purchase price plus the fix up money. A new real estate investor frequently comes into the game with little to no cash.  They find what they think is a great deal on the MLS, and want to buy it, but have no cash for purchase or repairs.  They are told by the “gurus” that a hard money lender will lend them 100% of the purchase and rehab costs.  While that may have been true 5 years ago, it ain’t happenin’ now.

If you are determined to buy a property and rehab it for resale, but have no cash, you should partner with someone you know who does have cash but doesn’t want to manage a rehab.  Hard money will seldom lend out the full amount for a project, but if your partner puts up the needed downpayment, then you can use hard money for the rest.  If you are one of these people who have the funds but don’t want to manage a rehab, then read on.

Sometimes they ask if I will lend out their money, because they want to be involved but are not sure when to pull the trigger on a deal, and aren’t sure they want to be a landlord, or do a rehab and flip.  So this series will discuss what you should know before you decide to lend out your funds, either directly to a real estate investor, or through a hard money company.  Here are some of the issues we will be covering:

Do you need to be an accredited investor?

Should you buy into a pool or lend directly?

How do you choose the deal you will lend on?

How do you find these good deals to lend on?

Should you ever lend in second position?

What about business loans instead of real estate loans?

How does the SAFE Act impact your lending?

How do you protect yourself from fraud or incompetence?

How much of my portfolio should I allocate to lending?

What happens if the borrower stops paying?

Should I form an entity to lend?

Should I lend outside of my geographic area?

Covering all this is beyond the scope of one post, so I’m going to write a series.  If you have additional questions you’d like me to address, please, by all means, jump in and let me know.

This post is from an email from John T Reed.  He’s one of my favorites and isn’t much on sugarcoating, so I love reading his stuff.  He sent this email to pitch his book, How to Protect Your Savings from Hyperinflation and Depression. It’s ok with me that he pitches, I’m a capitalist at heart.  I’m currently reading this book – just started actually, so I’ll report back later my impressions.  But I was so impressed with the email that I asked his permission to post here, and he agreed.   I have included links to the book.  He doesn’t sell on Amazon, so all proceeds go directly to the author.

Whatever your opinion or impression, education is always a good thing, and this article is chock full, so read on:

There must be huge cuts in federal spending right now. We’re not going to get them.
You have to protect yourself.

The U.S. national debt ceiling was set at $14.29 trillion in February, 2010. It looks like we are going to hit that ceiling in the next few months.

Politicians are starting to agitate about which way to vote. As usual, many are lying about it.

Not passing a law to increase that ceiling is tantamount to enacting a balanced budget amendment. Not raising the national debt ceiling means deficit spending ends immediately. It means the U.S. government would henceforth have to live within its means.

The means of the U.S. government are the $2.2 trillion it collects each year in taxes. Current federal spending is $3.5 trillion.

That means the U.S. government has to borrow the difference—$3.5 trillion – $2.2 trillion = $1.3 trillion. That difference is called the deficit. The U.S. government borrows by selling U.S. Treasury bonds.

If Congress refuses to raise the debt ceiling, the U.S. government is not allowed to sell any new bonds except to refinance old ones.

Some politicians are saying that not raising the ceiling risks the “full faith and credit” of the United States.

Not really. As I just said, we can still sell bonds for the purpose of paying off existing bonds.

The average term of U.S. bonds is 49 months. That means about 1/4 of the bonds come due each year.

1/4 of our current $14 trillion debt is $14 trillion ÷ 4 = $3.5 trillion. So if we do not raise the debt ceiling, we would only be able to sell $3.5 trillion of bonds this year and something similar in future years. The politicians want to sell an additional $1.3 trillion.

We would not have to default on any existing U.S. bonds if we do not raise the debt ceiling. So the “full faith and credit” of the U.S. government would not be in jeopardy if the debt ceiling was not raised.

Would not raising the debt ceiling have any other effect then?

Oh, yeah.

It would mean we would have to gradually cut federal spending by the amount of the deficit over the next twelve months. That’s $1.3 trillion which is $1.3 trillion ÷ $3.5 trillion = 37%.

So we would have to cut federal spending 37% by the end of the twelve months after the ceiling was reached.

If you applied that percentage across the board equally to every category of spending, it would mean that Social Security and federal retired pensions recipients would see their monthly checks go down by 37%. 37% of federal employees would have to be fired or have to accept a 37% pay cut including military, FBI, Border Patrol, and so on. Medicare would be cut 37% presumably meaning patients would have to pay that much because doctors and hospital probably would not accept such a cut and would refuse to treat the patients unless the patient or some other person paid the difference.

Congresspersons and the president would have to take immediate 37% pay cuts—so would their staffs.

Opponents of not raising the ceiling say the world would lose faith in U.S. government promises if the government reneged on Social Security, etc.

They should. Those bogus promises were made by politicians playing Santa Claus with taxpayers’ money. There is literally not enough money in the world to pay Social Security, federal pensions, medical care benefits and so forth that have been promised by federal politicians.

The net worth of the world is minus $34 trillion. The gross domestic product of the entire world is $70 trillion. The unfunded liability (money we should have put in the bank but did not) for Social Security and Medicare alone was $107 trillion in 2008. There is no hope that we can ever pay that.

Would a recovery and unemployment going down to 5% solve the problem? Not even close. That would only increase annual tax revenues by about $150 billion.

Would tax increases solve the problem? Not even close. Numerous experts like Former Fed Chairman Alan Greenspan have said that. If you could increase taxes 25%, which is probably impossible unless you broadened the base (made the 50% of Americans who no longer pay any tax other than Social Security tax start paying income tax), you would still only get about $500 billion more revenue. Not enough.

Selling all the national parks and federal buildings like the Smithsonian? Not even a dent.

If the U.S. continued to make on-time payments to bond owners, the “full faith and credit” of the U.S. would not be adversely affected. Indeed, I suspect the world bond market would feel relieved that the U.S. government was finally getting serious about living within its means and behaving in a way that will likely result in bond holders being paid back as promised.

No doubt, liberal politicians will say that seniors and the sick should take precedence over bond holders.

Okay. Go with that. But understand it takes you to the same place very rapidly. If the U.S. government defaults on the bonds instead of the Social Security and other federal entitlements, the world bond market will instantaneously impose their own debt ceiling. That is, they will refuse to buy any more U.S. bonds. In other words, defaulting on the bond payments would change the U.S. government’s credit from AAA to defaulted. To put it in laymen’s terms, the credit card of the Congress and the President would be cut to pieces and canceled.

The “full faith and credit” of the U.S. government would, in that case, indeed, be destroyed.

If and when the world bond market, which mainly consists of U.S. citizens and institutions, stops buying U.S. bonds, those same cuts I described above will have to take place immediately. Basically, there are two entities that can shut down the U.S. government selling bonds and engaging thereby in deficit spending:

• Congress and the President voluntarily
• the world bond market involuntarily

Same result no matter who initiates it.

Furthermore, remember the refinancing of maturing U.S. bonds I described above will also not happen if the bond market stops buying our bonds. In other words, we would have to pay off the $3.5 trillion of bonds that were due this year and we would only have $2.2 trillion of tax revenues to do it. And we could only use that $2.2 trillion to pay off maturing bonds if we totally shut down the entire U.S. government. Even if we did that, we would still have to default on the deficit spending—$1.3 trillion—portion of the maturing bonds because we would not be able to sell the bonds or collect the taxes needed to pay them.

This is a hell of a mess, isn’t it? Your elected officials have been building this mess since 1930—both parties albeit more the Democrats.

So what is probably going to happen?

On January 25th, Obama, Paul Ryan, and Michelle Bachman all delivered State of the Union addresses. Obama promised more of the same, calling spending on Democrat pet projects like green jobs “investment.” His concessions—three-year freeze on non-defense, discretionary spending except where union contracts exist, cutting back on the requirement to issue tons of 1099s, vetoing earmarks, were all symbolic trivia, no substance.

Ryan said the right things but almost in Federal Reserve code that only an expert on fiscal and monetary policy would truly understand. Bachman gave the best of the three talks with a more militant Tea Party list of plans,. Like Ryan, she was truthful, but failed to tell audiences exactly what it all meant because if she had there would be demonstrations in the streets today.

Surprisingly, the best State of the Union Speech on the 25th was made by John Stossel on Fox Business. He even had a little presidential podium only it said Stossel instead of The President of the United States. He also entered the room shaking everyone’s hand and had lots of flags. But after a pause, he began his speech with, “We’re in DEEP trouble.”

Stossel said almost exactly what I am saying about what has to be done. But it’s not going to happen.

They will probably vote to raise the ceiling. Republicans will probably demand some token spending cuts from the Democrats. They will probably refuse most of them. That will result in the debt ceiling arriving and the government not being able to sell bonds because refusing to vote on the ceiling is the same as voting against it.

During that post-hitting-the-ceiling period, Democrats will probably try to reprise the Clinton-era trick of saying the “Republicans shut down the government.” It worked for them back then. I doubt it would work again. If two sides do not agree, you cannot logically blame the lack of agreement to either side. Each side can explain their position and the public can decide which is more reasonable.

Both parties are guilty of succumbing to forgetting their campaign promises and going along with business as usual when they get to Washington. Republican House Speaker John Boehner called voting for the debt-ceiling increase “being adults” and Republican “strategist” David Winston called voting to increase the debt ceiling “governing.” Call it what it is: kicking the can down the road—again, stealing from our children and grandchildren, and making sure we have to do “nine” when a “stitch in time” would have saved them. Criminal careerism gets more to the heart of it.

Ultimately, they will all get together and raise the ceiling with some meaninglessly small cuts. If it’s not a trillion or more, that means the situation is still deteriorating.

Then the media will start discussing when we will hit our next debt ceiling. Once again, everything I said above will apply only the cuts required to match outlays with tax revenues will be bigger.

In other words, the choice is not 37% cuts now or more borrowing. It is 37% cuts now or bigger cuts next year or even bigger cuts the year after that, etc. etc.

37% is the best offer the American people are ever going to get. And they will almost certainly haughtily reject it.

Congress and the president will not vote to cut federal spending 37%. When they have to choose between personal political suicide or national financial suicide, they will choose national financial suicide. That means we will be hit with bigger cuts in the future. “It could happen tomorrow” is the first sentence in my book How to Protect Your Life Savings from Hyperinflation & Depression.

The back cover of that book says,

There is no grown-up in Washington or on Wall Street looking out for you. You have to be your own grown-up.

But the vast majority of Americans are behaving exactly as if they believed some Washington/Wall Street grown-up were taking care of them.

What can/should you do? Implement the “Action Plan to Protect You” in chapter 27 of How to Protect Your Life Savings from Hyperinflation & Depression.

John T. Reed

John T. Reed Publishing 342 Bryan Drive Alamo CA 94507 | 925-820-7262

www.johntreed.com

Copyright 2011 John T Reed Publishing
Reprinted with Permission

A few weeks ago I wrote about my cell phone cleaning up my language for me when I dictated into it, and it transcribed my voice into text.  It was hysterical, if you missed it, check it out here first:

For those of you who don’t know me, my name is Ann Bellamy.  It matters because of what I’m about to share.

Well, a business associate was reading my newsletter that I just sent out, and was laughing at my cellphone humor.   He also uses a service that transcribes his voicemails into text, so he completely identified with the whole voice transcription thing.  Coincidently, at that moment, I left him a voice mail, and his transcription service service sent him the following transcription:  “Hey, Tim. Its Anne Baloney. Give me a ring when you have a minute 603-801-2247. Thanks”

Boy, if that doesn’t say it all!

Ok, this is a little bit of a rant.

I get many phone calls from investors seeking financing for large multi-family complexes in other states.  These investors are typically seeking the down payment funds to purchase large complexes in emerging markets.     I don’t know any hard money companies that supply down payment money for commercial purchases, because the hard money loan would then be in second position behind the conventional loan used for the bulk of the purchase.  Even if the buyer is assuming a mortgage, that assumed mortgage will stay in 1st position.  So the usual procedure is for the buyer to solicit funds from other investors, pooling the money to come up with the down payment for the purchase.  So far, so good.  There are a number of local investors who have done very well with this strategy, and I’m all about cash flow, so I think that’s great. There is of course a local guru who teaches just this strategy.  This post is not about those experienced investors.

The issue comes when the investor is brand new, and is looking for funding for a 200 unit complex in anywhere, usa.  Let’s just choose Topeka, Kansas for no particular reason, or for the reason that I don’t know anyone looking for multi’s in Topeka.  I’m sure the guru tells them that you don’t have to have experience with multi’s to do this particular type of investing.  And if the guru is your partner, or your partner is very experienced,  then maybe that’s true.  But if you are doing this on your own, and have never so much as owned a duplex, how on earth can you know what you don’t know?

Most of us who have been investing for a while have made some big mistakes.  And hopefully, we made them on smaller deals, learned from them, and re-adjusted for the next deal.  I know I did lots of things wrong on my first few deals.  I even built an entire house  2’7″ too close to the road.  (But that’s the subject of another post on another day.)  The point is, when you’re new, you make mistakes.  And you don’t even know what the gotcha’s are until you live through them.  Which is what I mean by you don’t know what you don’t know.  You are too new to even conceive of some of the issues.

On large multi-family properties your mistakes are multiplied by the dollars involved.  So a bad decision on a 2-family might cost 10,000.  Multiply that by 200 units, and you’ve made a $1,000,000 error.  And if you are risking your own money, and you want to give it a shot, then by all means go for it, if you can find a financial institution that will fund you.

But here is the rub:  If you are raising other people’s money, and using that money to put either into an equity stake, or at best a second position mortgage, then you are risking their money without even knowing what you are in for.

So I don’t want to pee in your cheerios,  so to speak, I want everyone to go out and be very successful.  But for goodness sake, go buy a small multi first.  At least then you’ll have some experience with what to look for, at least on a small scale.   Believe me, it will be eye-opening at the very least.  And don’t tell me that you’re going to use a property management company, so you don’t need to know anything about managing apartments.  How will you know what to look for in choosing a management company, if you don’t know anything?

I could go on and on, but I think I’m all set with the Cheerio analogy.  Way too visual, isn’t it?

I welcome comments on this topic, please chime in, especially if you disagree.

Overall, this book is considered to be the most definitive guide on landlording.  I don’t agree with everything in the book, certainly I don’t provide curtains in starter apartments.  Blinds, yes, but not curtains.

But the author has a great handle on landlording.  Not to be confused with real estate investing.  This is not a book about how to buy multi-family properties, but rather what to do with them once you have them.  And how to plan ahead for when you DO have them.

If you buy only one book on landlording, this should be it. But don’t buy just one book, you should be reading all the time.

I also like Jeffrey Taylor’s approach, you can find tons of information on his website: www.mrlandlord.com There is a great forum where landlords chat and give problems and solutions, so head over there too.

Hard Money Myth #5

Hard money lends 100% of your purchase and rehab costs

The reality:

This is the “skin in the game” concept.  It used to be, in an appreciating market, that it was easy to find 100% financing, even with hard money.  Not any more.

If you are borrowing all of the purchase money, and all of the rehab funds, and you run into a problem, what keeps you slugging away to get the deal finished?  Your own stake in the project, that’s what.

While it’s great to know that most of us are 100% honest and have great intentions, the reality is that most of us need motivation to keep grinding away at a solution to a problem with a project that has gone bad.  It can be unexpected repair costs, unexpected building inspector requirements, sudden market declines, bad weather, bad timing, seasonal fluctuations, health issues, whatever.

There are many factors that turn a project from profitable to the pits.  Knowing that you will stay engaged to get your capital back keeps us all in the game with you.  It’s not a warm and fuzzy post, but this is why you will sometimes have trouble funding a deal that looks like a no-brainer to you, but a possible money pit to the lender.

Hard Money Myth #4

Hard money lenders make risky loans.

The reality:

While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true.  Because such lenders are typically lending their own money (as opposed to a bank employee lending someone else’s money) they are particularly risk averse.  Unless a hard money lender really understands how to value the collateral against which he is lending and the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV.  Infrequently a hard money lender will consider history with a borrower because of the borrower’s consistent performance.

On the other hand, with understanding comes knowledge, and a hard money lender may make a loan that others consider risky because he simply has better information.   If a lender understands a market and has an exit strategy himself should he/she have to take back a property, the lender perceives less risk and might lend where others won’t.

This is why many hard money lenders are truly local, and don’t use conventional appraisals to make decisions on valuation.  They may use the appraisal as a source of information about the property, but they will value the property themselves based on their knowledge of the local market and the trends in a neighborhood.

Foreclosure concentration December 2010According to foreclosure-tracking firm RealtyTrac, the number of foreclosure filings nationwide dropped for the second straight month in December. After falling 21 percent in November, filings were down by an additional 2 percent in December.

“Foreclosure filing” is a catch-all term, comprising default notices, scheduled auctions, and bank repossessions.

Like most months, a small number of states dominated December’s national foreclosure figures. 6 states accounted for more than 50 percent of all bank repossessions.

  1. California : 17% of all repossessions
  2. Florida : 11% of all repossessions
  3. Arizona : 6% of all repossessions
  4. Michigan : 6% of all repossessions
  5. Texas : 6% of all repossessions
  6. Nevada : 4% of all repossessions

December’s foreclosure filings fell to its lowest levels since June 2008, but we can’t read into the report too much just yet. Foreclosure volume continue to be dampened by lawsuits and moratoriums related to controversy surrounding the so-called robo-signers.

Foreclosure activity may have lessened in December anyway, but we can’t know for certain.

Distressed properties are in high demand among home buyers, accounting for one-third of all home sales; typically sold at a steep, 15 percent discount as compared to non-distressed properties.

Buying foreclosures can be a terrific “deal”, whether for the end homeowner, or an investor planning to rehab and resell.