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Private Money: How to take advantage of current real estate values?

Posted by Ken Meyer on Fri, Oct 21, 2011

investment properties,private investors,hard money lenders,investment property loans,high yield investments,private investor,private lenders,private money loans,california hard money lenders,Real Estate,buying investment property,private lenderThat is the question that I am frequently asked by private investors, clients, family, and friends. Over the past five years, I have researched and cautiously moved forward on buying investment properties which I have either rehabbed and flipped or rehabbed and held as rentals. Additionally, I have made private money loans and have bought existing loans from other private lenders. Throughout this process, I have learned that in spite of what the “get-rich-quick” promoters might say, there is actually a lot to know and a lot of work involved. However, with that said, investment properties today are one of the best high yield investments out there, and I believe, at far less risk than in the Wall Street Casino.

I have stayed focused on single family residential real estate. It’s simply an easier place to start, smaller dollar amounts to play, and easier to move in and out of the properties. As an investor you basically have three options. Buy and flip the property for a quick profit, buy and hold the property for monthly rental income plus future appreciation, or simply be the lender and place a lien against the property as collateral.

Below I have created a basic breakdown of what each of these options might look like. Obviously, there are always variables and negotiations that will impact the final outcome of each transaction. However, the breakdown below will give you a basic structure to use when thinking through the potential income from each of these options.

1.Buy, Rehab, and Flip:

Purchase price:                  $158,800
Loan Fees*:                       $     3,576
Escrow/Title:                       $    2,400
Net purchase:                     $164,776
Eviction Costs:                    $          0
Rehab:                                $ 21,000     
Utilities:                               $       500
Insurance:                          $    1,200
Miscellaneous:                    $    1,000  
Loan Interest**:                   $    4,130

Total cost to investor:     $192,606

Target sale price:               $230,000
Minus Liquidation cost:       $  11,500
Net to investor:                   $218,500  
Net Income:                       $ 25,894   (13.4% Return)   

Note:
•* Loan Fees (65% LTV, $103,250, 2.5 points plus $995.00) 
•** Loan Interest (12% = 1% per mo. x 4) 
•If turned 3 times during the year the annual return equals 40.2%
•Because you borrowed 65%, your actual out of pocket investment was $88,890 divided by your actual net cash back of $25,894, your true return on investment was 29.1%. If turned 3 times during the year your annual return would be 87.4%. (Thus, the power of using leverage).

2.Buy, Rehab, and Hold: (same property as above)

Investor total cost:               $192,140           
Projected rent income:        $    2,200
Loan Payment:                    $   1,032
Less vacancy allowance:     $     125
Maintenance and repairs:    $      75
Insurance:                            $      50
Property taxes:                     $    165   
HOA dues:                            $        0  
Management fees:               $         0
Net Income:                        $     753 month (X 12 = $9,036)  

Annual cash-on-cash return would be 10.2% plus future appreciation.

3.Lend using the property as collateral:

Purchase price:                   $158,800
Loan amount 65%:              $103,250
Interest rate 12%:                $    1,032 
Minus servicing fees:           $        15
Net to investor:                 $    1,017 month (11.8% annual return)

So I tell everyone, yes there is good money to be made in Real Estate and now is a great time to jump in and take advantage. There is a lot to know, but once you learn how to do it and get comfortable with it, it is a skill that will serve you well for a lifetime; regardless of what’s happening in the economy.

My recommendation is to find a professional who is buying investment property that already has a track record at what you want to do and learn from them. Obviously, they have invested a lot of their time and effort to learn and gain that experience so you need to understand that there must be a compelling reason for them to take you under their wing. You might consider becoming an equity partner with them. They typically need more cash to expand the number of homes they can buy. They can work with a relatively small investment and in some cases can use IRA funds as well.

I will tell you that even though I have bought and sold 22 houses over the past several years, I personally have chosen to simply be the private investor or private lender because I don’t want to dedicate the time that it takes to find the deals and manage them to a close. However, I work with some excellent contacts who have teams that rehab investment properties, and are buying and closing multiple deals every month. Give some thought to what you’re comfortable with and start making money like the pros. Do not let your savings or your mind sit idle and miss this great real estate buying opportunity. Feel free to call me at (949) 481-3266 or email me @ kenmeyer@trustdeedcapital.com any questions you may have and I would be happy to refer you to people with a proven track record.

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