It’s time for another informative REI (Real Estate Investing) Wealth magazine. For our 59th edition, we feature a prominent physician turned real estate investor and mentor: Dr. Chander Mishra, along with his wife and investment partner, Iva.
This power couple are on a mission to help spread real estate investing knowledge, especially in the healthcare industry. Inside our jam-packed issue readers will discover educational articles and companies ready to assist them in their REI journey.
Be sure to download our latest REI Wealth issue, CLICK HERE!
Founded in 2007, Realty411.com has assisted companies of all sizes and budgets expand their visibility and grow their business. Contact us for a complimentary marketing session: CLICK HERE.Investors, do you need a referral? Our investor network is nationwide: CONTACT US – Ph: 805.693.1497 – Text: 310.994.1962 – CA DRE # 01355569
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Why can’t commercial lending be as flexible as residential lending? Residential mortgage lending for one-to-four unit properties has become more automated and streamlined for investors as we move forward here in the 21st century. More homeowners and investors are seeking out experienced independent mortgage brokers who may have relationships with numerous financial institutions, nonbank lenders, or private money sources. With a few clicks of a button, the mortgage professional can quickly find the best financial solutions available for their clients and get approvals within minutes, hours, or days.
Commercial property lending, on the other hand, still seems stuck in the 20th century for many commercial applicants. It can be perceived as a “good ol’ boy/girl network” in that the commercial loan applicant needs to have some sort of a long-established personal relationship with their local community banker dating back to high school, college, or as fellow members at the local golf club before their loan requests are approved. If so, will they be types of friendly handshake approvals or not-so-friendly “take it or leave it” approvals?
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If the commercial loan applicant is fortunate to find a banker who may consider their deal, this same banker may request that the borrower move their deposits from other financial institutions to their bank before considering the applicant’s loan request. Should the loan be rejected either quickly or months later after a rather brutal loan underwriting process that may include a footlong stack of paperwork, the disheartened customer may give up hope and not know where to turn for another lending option.
Today, non-owner occupied residential properties (one-to-four units) offered as short-term or long-term rentals, multifamily apartments (5+ units), mixed-use, office, industrial, retail, and special purpose (auto repair shops, etc.) can all be viewed as a “commercial loan” by certain nonbank lenders that don’t collect customer deposits like traditional banks. With lower loan-to-value (LTV) ranges for certain asset-based loan products, the risk of default is lower for the nonbank lenders.
Wealth Creation from Commercial Property Ownership
Let’s take a look at commercial property trends and how much wealth was created for those fortunate owners who learned that it’s much better to let their money work hard for them than vice versa:
The estimated total dollar value of commercial real estate was $20.7 trillion as of Q2 2021. (Nareit and CoStar)
By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
The typical length of a building lease in the US is three to 10 years. (DLA Piper)
Commercial property prices rose by 20% between May 2021 and May 2022. (Green Street)
An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)
Self-storage commercial unit REITs produced a 70% market return in 2021 (REIT)
Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
Sales of multifamily apartment buildings increased by 22.4% year-on-year in 2022 (Colliers)
Prior to the March 2020 pandemic designation, the industrial real estate sector had grown for 40 consecutive quarters or over 10 years. (NMRK)
Industrial vacancy rates nationwide fell below 3.7% at the end of 2021. (Cushman & Wakefield)
The Inland Empire (Riverside and San Bernardino counties) in California averaged an incredibly low 1.2% vacancy rate for industrial space. (Commercial Edge)
California had 27 of the 50 highest office rental prices in 2021. (Commercial Search)
The average annual return for commercial real estate investors is approximately 9.5%. (Mashvisor)
For every retail unit that closes, five new stores open up. (NRF)
Technological Advances for Commercial Loans
What if the commercial lending process could be digitized, sped up, and completed on a secure online loan application with just one point of contact? Your odds of success for getting a commercial property loan approved for a multifamily apartment building, mini-storage site, or small retail center will be much higher if your financial contact person is very experienced with commercial lending and has access to numerous lenders.
Commercial loans are somewhat like giant jigsaw puzzles. While the applicant’s loan package may not fit the guidelines required at one, two, or 10 different lenders, there are other lenders that have more flexible guidelines which allow lower positive, break-even, or even negative DSCR (Debt Service Coverage Ratio) with or without income verification.
Properties with lower positive cash flow or even negative cash flow estimates will likely not qualify at a local community bank or credit union. Yet, they may qualify with other nonbank lenders that do allow break-even or negative cash flow. Some of our lending partners are asset-based lenders that don’t review the applicant’s tax returns as well as provide financing for property improvements. These types of incredibly flexible lending guidelines can make the commercial loan application process much easier for the borrower.
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An Imploding Financial System and Increasing Bank Restrictions
In 2008, the Credit Crisis (aka Financial Crisis, Subprime Mortgage Crisis, or Global Financial Crisis) default risks became more readily apparent as these prominent financial institutions or government entities collapsed and/or were bailed out:
Bear Stearns: The fifth largest investment firm in the world that was heavily invested in mortgage-backed securities, collateralized debt obligations (CDOs), and other complex securities or derivatives instruments.
Lehman Brothers: The biggest bankruptcy ever involving over $600 billion in assets.
Washington Mutual (WAMU): Largest bank implosion in US history with almost $328 billion in assets.
FDIC (Federal Deposit Insurance Corporation): They only held $40 billion in cash reserves at the time of WAMU’s collapse, so the government had to silently bail them out to prevent bank runs.
Countrywide Mortgage: Once America’s #1 residential mortgage lender that almost imploded prior to being bailed out by Bank of America.
American International Group (AIG): They were the world’s largest insurance company and were bailed out by the US government starting with $85 billion while growing to more than $182 billion several years later.
Merrill Lynch: The world’s largest stock brokerage firm at the time with $2.2 trillion under management and 15,000 brokers that was taken over by Bank of America.
A derivative is a complex hybrid financial and insurance instrument which “derives” value from underlying assets or benchmarks like interest rate direction trends. Some financial analysts have stated that the total value of all global derivatives may be somewhere within the $1,500 to $3,000 trillion dollar region. If so, these derivatives dwarf all combined global assets by a significant multitude.
Because so many banks, investment firms, and insurance companies are heavily invested in one another partly by way of derivatives, this was why the Federal Reserve, the Bank of England, and other central banks around the world had to step in and bail out these multi-billion or multi-trillion dollar financial or insurance entities, directly or indirectly through others like Bank of America. If not, the global financial system would have fallen like a dominoes chain reaction.
Later, the LIBOR (London Interbank Offered Rate) Scandal, which came to light publicly in 2012, gave us a glimpse of the sheer magnitude of the derivatives market. This financial scandal was about how certain financial institutions invested or bet on the future direction of interest rates tied to LIBOR (the benchmark interest rate at which major global banks lend to one another) while being claimed to be rigged or known ahead of time so that the derivatives bets had a better chance of success.
Several publications like Rolling Stones Magazine wrote articles about the LIBOR Scandal potentially being the largest financial scandal in world history that affected upwards of $500 to $700 trillion in global assets. The named financial institutions in various publications or lawsuits which were alleged to have benefited, directly or indirectly, in the LIBOR Scandal included Deutsche Bank, HSBC, Barclays, Citigroup, JP Morgan Chase, and the Royal Bank of Scotland.
What’s important to understand is that many of the best known banks in the world may only have a few trillion of depositor assets in their checking and savings accounts today. However, they may have exposure to upwards of $50 + trillion in derivatives. As a result of their financial exposure to derivatives, these banks may be unwilling or unable to make investment property loans to even their most creditworthy clients partly due to tighter lending restrictions that came from the passage of the Dodd-Frank Act back in 2010.
This is why mortgage brokers and their non-bank lending partners became the better funding solution for investors while “handshake deals” at local banks don’t matter as much because so many banks may be technically insolvent.
Ironically, it was claimed that delinquent subprime mortgages represented less than 1% of all financial losses related to the Credit Crisis or Financial Crisis. Rather, the complex derivatives investments that were leveraged 50+ times the original amount of investments such as interest-rate options were the root cause. Sadly, mortgage professionals and stated income subprime loans still continue to be primary scapegoats. As a result, fewer banks are willing to offer more flexible residential or commercial property loans that don’t verify income.
Value Analysis for Commercial Properties
How lenders analyze income and expenses for commercial properties can be quite complex and overwhelming. Properties that do not meet most or all of these stringent underwriting guidelines may be prime candidates for asset-based loans.
Let’s try to review and simplify some key valuation terms that lenders may consider before approving or denying a borrower’s request:
Loan-to-value (LTV): The proposed loan amount as a percentage of the estimated property value. Many lenders prefer a loan-to-value range somewhere within the 50% to 75% LTV range. For purchase deals, these same lenders prefer that their clients put upwards of 25% to 50% of the purchase price as a cash down payment, depending upon the creditworthiness of the borrower and the property type.
Net Operating Income (NOI): The NOI for a commercial property can be summed up as follows: Gross Income – Operating Expenses = NOI
The property’s operating expenses include insurance, property management, utilities, and other day-to-day costs related to maintaining the property. However, the mortgage payments are not included within the NOI calculation.
Cap or Capitalization Rate: It’s a mathematical formula used to calculate the real or projected future rate of return on a property based on the net operating income that the property generates. The lower the cap rate, the better the property. Higher cap rates, in turn, are viewed as riskier investments. Cap Rate = NOI / Current Market Value
Property values and cap rates are inverse to one another like a seesaw. Decreasing cap rates as seen with prime downtown properties that are fully occupied leads to increasing property values. Conversely, rising cap rates for older rundown commercial properties usually correspond with falling property values.
Value Estimate: The property’s value estimate can be determined by way of the following formula: NOI / Cap Rate
For example, let’s look at two multifamily apartment buildings located in different cities with the exact same NOI but cap rates that are not nearly the same:
Building 1: $160,000 NOI divided by an 8% cap rate ($160,000 / .08%) = $2,000,000 value
Building 2: $160,000 NOI divided by a 4.5% cap rate ($160,000 / .045%) = $3,555,556 value
Generally, multifamily apartment rates have the lowest cap rates for income-producing properties that aren’t considered to be residential (one-to-four unit) properties. As per an analysis for the 2nd quarter of 2022 by Real Capital Analytics and the NAR, here are their numbers:
Property Type Apartments Industrial Office Retail
Cap Rate 4.5% 5.7% 6.3% 6.3%
DSCR: The easiest way to remember the debt service coverage ratio (DSCR) is that it’s used to determine whether or not a property has positive (1.25x), neutral or break-even (1.0x), or negative cash flow (0.75x). The DSCR is the ratio of operating income that’s available on a monthly or annual basis to service or cover the monthly mortgage payment (principal, interest, property taxes, insurance, etc.). As a mathematical formula, the DSCR can be visualized as follows: NOI / Debt Service
A small retail center that generates $10,000 per month in operating income and has a projected $8,000 per month in total mortgage payments would be calculated at 1.25x DSCR because the monthly or annual cash flow is 25% higher than the debt service ($10,000 / $8,000 = 1.25x). The net difference between $10,000 inflow and $8,000 debt service outflow is $2,000. This can also be calculated as $2,000 divided by the $8,000 in debt service ($2,000 / $8,000) which equals 25% more net cash flow to arrive at 1.25x DSCR.
Debt Yield: The commercial property’s NOI as a percentage of their total loan amount. The mathematical formula is as follows: NOI / Loan Amount = Debt Yield
For example, a small industrial building owner collects $100,000 NOI each year. His existing mortgage loan balance is $1 million, so his annual debt yield is 10% ($100,000 NOI / $1 million mortgage balance).
Multiple Underwriting Approval Solutions
As you better learn how lenders analyze properties, you will clearly understand that you have more than one loan program available. Some properties and owners will easily qualify after sharing tax returns, liquid assets, profit-and-loss statements, and a detailed income and expense history for their property. Other investors, however, know that their property’s cash flow is break-even or negative, but the future upside for these properties can be tremendous after occupancy rates are pushed higher.
Many commercial property owners experienced unusually high vacancy rates in recent years due to the combination of the pandemic, skyrocketing inflation, rising tenant payment delinquencies, and increasing rates for consumer debt. If so, the income and expense numbers for these commercial properties will probably not qualify at a traditional bank.
Commercial borrowers are more likely to qualify with asset-based nonbank lenders that may not closely review the income and expense numbers for the property. The verifying of income for asset-based, nonbank lenders isn’t necessary because these loans are based more on the appraised value of the subject property and its future income potential. At a later date when the income and occupancy rates are higher while the operating expenses decline, the owner can refinance into a much longer loan term at a lower rate and monthly payment.
Remember, it’s much better to have multiple lending options available for your property purchases or ballooning loan or cash-out refinance needs than just one local bank. The more efficient and flexible the mortgage broker’s technological systems and nonbank lending sources, the more likely you will close your loan and create significant income and increased wealth.
Rick Tobin
Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.
Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.
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We are certainly in exciting times for real estate investing. A lot may feel like it is changing from our 12-year bull run. But if you’ve been through a cycle or two in the past, then this may feel a lot more familiar and predictable.
Success in the months and years ahead is going to largely depend on investors’ financial position and access to capital.
Critical questions all investors should be asking themselves right now include: If their debt has been optimized to survive, what’s next? And, will they be able to secure new funding to keep thriving and growing as more opportunities arise?
Meet Joe
We caught up with Joseph V. Scorese to gain insight on the lending landscape, including what we can expect from lenders and what types of funding is still available for investors.
Joe is Regional Development Manager, Northeast, for Lending One. A national private lender focused on providing loans for real estate investors, LendingOne has funded over $1B in loans.
He has personally been investing in this space since 1992. So, he certainly knows a thing or two about the market, how it works and how to make the most of it.
One of the things that Joseph is most passionate about is educating others on the availability of private money and how it can be used to grow their real estate investing.
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What Exactly Are Private Real Estate Lenders?
Joseph specifically wants investors to understand that there are alternatives to the credit sources that they used to be limited to.
In his opinion, traditional banks and mortgage lenders really let investors down in the wake of the Great Recession. He doesn’t see them stepping up to be competitive or provide the backing that real estate investors need now or will need in the next phase.
At the other end of the mortgage market spectrum have been hard-money lenders. They have certainly had their place in the market, although their high-interest rates and limited scope of underwriting hasn’t made them the optimal solution for many.
Today, LendingOne is a private real-estate lender. A distinctly different industry to the others. LendingOne is backed by Blackstone and its deep pockets of private capital.
They are an asset-based lender. Though in contrast to hard money, they also look at DSCR (Debt Service Coverage Ratio), plus the strength of the borrower and their experience. This allows them to make more aggressive loans — with better rates and terms than hard money lenders — while providing loans that traditional mortgage lenders wouldn’t consider due to their rigid underwriting criteria.
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The Current & Evolving Landscape
We picked Joe’s brain for his insights on the current market and what’s ahead.
While no one knows exactly how things will play out, with enduring inflation — the highest in 40 years — he acknowledges that we could probably use some cooling in the housing market. Not that we need a crash, but more sustainable growth would be wise.
We have already seen a significant reset in the past 90 days. Joe says that in addition to the extra inventory we’ve seen coming along over the past couple of months, there are a lot of foreclosures in the works. It could be another 12 or 18 months before they hit the market. Together these factors suggest that there is going to be a lot more negotiability for acquisitions coming and hopefully more discounts to be found.
So far the only obvious changes in the lending space have been in interest rates. Most of today’s investors weren’t around when rates were at 20% or even 14%. Joe says that while they might not get that high, they are indeed rising. He predicts they will likely hit the 8% to 9% range.
This should definitely be creating a sense of urgency among investors to do two things:
Optimize current debt structures to make it through this phase of the market.
Lock in great long-term fixed rates on new acquisitions while rates are low.
Additionally, investors need to be really getting in tune with their numbers, evaluating their assumptions and bids, and planning for new dynamics in the market.
Loan Programs To Fuel Your REI Business
Joseph V. Scorese says that LendingOne has $3B already committed to lend next year. He expects that to be consistent over the next several years.
LendingOne offers a variety of real estate financing options, including the following.
Fix & Flip Loans
Up to 90% of purchase and repair costs, and closing in as little as one week. BRRR-friendly, and interest-only payment options.
Rental Property Loans
Loans for individual rental properties, with 30-year fixed-rate options, no personal tax returns needed, and corporate borrowers allowed.
New Construction Loans
Ground-up construction loans with interest-only payments for up to 24 months.
Multifamily Property Loans
Multifamily bridge loans for value-add apartment building projects with loan amounts up to $15M, and no DSCR requirement at closing.
Portfolio Rental Loans & Blanket Mortgages
These loans are ideal for those with five or more rental units, with 30-year fixed-rate loans, and loan amounts up to $50M.
Smart Money Moves To Make Now
With the insights we gained from Joseph in our interview, it seems there are some obvious moves most investors should be making.
Recalibrate your buying criteria to demand better deals
Refinance now avoid rate shock on loans maturing in the next couple of years
Lock in long term fixed rate loan terms on new acquisitions now
Be sure you are staying on top of market changes on a daily basis
Find out more about LendingOne and their financing options at LendingOne.com.
Learn live and in real-time with Realty411. Be sure to
register for our next virtual and in-person events. For all the details,
please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.
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The number of NOD pre-foreclosures
notices are on the rise. Fortune magazine reports they are up triple digits in
2022 compared to 2021. There are several factors causing the uptick: COVID
mortgage forbearance overhang, the current recession, rapidly rising interest
rates this year, etc. The increase in the number of homeowners and landlords in
trouble is causing a lot of (both note and property) investors to start taking
a hard look at how they can profit from these changes in the market.
Precautions include:
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1. Depreciating prices. For those who came into the investor market after the last downturn, you may not be aware that residential property prices in many markets dropped by 40%, from peak (2008) to trough (2012). Some areas/types of real estate dropped by even more. The cautionary tale is to be sure to build in enough equity in foreclosure properties you seek to acquire. In an up market, where prices are appreciating double digits every year, how much equity you initially acquire is usually not the first box you check as an investor. However, as the old saying goes: That was then, and this is now. Assuming the recession worsens, you need to build in more of an “equity buffer” into each deal to protect yourself from making no profit (or actually losing money) when you go to sell the property or note.
2. Judicial vs. non-judicial states. The number of virtual wholesale note and property deals are increasing nationwide; wholesalers need to be knowledge about what laws apply in the state in which the investment is being made. About half the states in the nation are what is referred to as non-judicial. That means they typically employ what are known as trust deeds and trust deed notes. The foreclosure is undertaken without using lawyers and judges. Judicial states usually require you to go through the court system to adjudicate your claim. Non-judicial states usually cost less and take less time to foreclose.
3. Beware of Land Contracts (LCs). An LC is an agreement in which the owner/seller of a property agrees to act as the bank and personally finance the sale for the buyer instead of going through a 3rd party, such as a bank or credit union. The buyer makes monthly payments to the owner, but does NOT receive actual title to the property until the last payment is made; and the last one is often a “balloon” payment, i.e. for a very large amount (that the buyer perhaps cannot afford to make).
As an investor (of a property or a
note secured by a property) who is about to step into this breach, you must
give careful consideration to the LC contract that the owner has/had with the
LC buyer. What you want to avoid is getting subsequently sued by the buyer
after you bought out the interest of the seller.
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For example, does the seller own the
property outright, or is he still making payments to a lending institution? If
the owner himself did not make regular payments for any reason, the property
can be foreclosed upon, leaving the buyer with a worthless contract and no
home. Land contracts also leave the new owner (you) tied to the property. If
the buyer stops making their payments, you become responsible for the
land—which means you could lose the property altogether if the buyer fails to
insure it properly or pay their property taxes.
All of these tricky issues must be taken into account when you are considering an acquisition that includes a land contract. You need to have a very clear understanding of everyone’s rights and responsibilities beforehand. To play it safe, retain legal counsel to look everything over first.
4. Watch out for Super Liens in 20 states. There are approximately 370,000 homeowner associations (HOAs) in the United States. Collectively, this represents more than 40 million households (or about 53% of the owner-occupied households in America). Statistically, about 26% of all Americans live in HOA communities. Typical HOA/association dues & fees run from $200-$300 per month—many charge more, some charge a LOT more.
In most states, when a lender
forecloses on a property in a HOA, and the property owner has also defaulted on
their association fees, odds are the condo association won’t get paid for those
debts. That is because a successful foreclosure action by the holder of the
first position mortgage typically wipes out all junior notes and many liens.
However, in about 20 states (see the list below), “super lien” laws have been
passed that protect the association from being wiped out completely.
A foreclosure by a bank or credit
union can take many months. During that time the HOA is not receiving the
monthly payments due to them. When the bank finally forecloses and sells the
property, and surplus funds are left over, the HOA (in a Super Lien state) can
typically petition the court to channel that money to the association, assuming
the association has properly recorded a lien.
So, if you are a note or property
investor, be sure to check carefully if the state in which you are investing
(and where you could potentially foreclose on a property) is a super lien
state. If so, you need to take that information into account, and build those
costs into your bid price for the note or property.
To reiterate, about 20 states allow
for some form of super lien. Each of the states has differing laws when it
comes to how an HOA lien becomes a super lien. You can learn more about super
lien states and their individual laws regarding super liens by looking up your
state statutes which can usually be found online. The following states allow
for super liens, or some version of priority liens for community associations:
Alabama, Alaska, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New
Hampshire, New Jersey, Pennsylvania, Rhode Island, Vermont, Washington, West
Virginia.
What We Do: Provide 100% Joint Venture Funding, nationwide, to real
estate note and property wholesalers. Contact info: Tod Snodgrass, [email protected],
310-408-7015
Learn live and in real-time with Realty411. Be sure to
register for our next virtual and in-person events. For all the details,
please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.
We are very excited to announce our 3rd Annual Los Angeles Real Estate Grand Expo. The Grand Expo returns on Saturday, October 22, 2022, 9:00 am to 6:00 pm. We’re taking over the entire Iman Cultural Center for the day – it’s all ours! The North Hall (vendor hall), the South Hall (workshops), and the middle parking lot (loaded with tents and food trucks). The theme of this year’s Grand Expo will be “How to Invest in a Pre-Recession Market.”
Last year, the Grand Expo was the largest real estate event in Southern California! We had over 600 investors, 64 vendors, and 10 national speakers! This year will be even BIGGER! An entire day celebrating real estate investing and you can be involved. Best of all, the Grand Expo will be FREE to attend. This Expo is going to be big, really BIG!
SPEAKERS. There will be national guest speakers (in three breakout rooms). Here is a partial list of speakers:
1. Brent Kessler
2. Rusty Tweed
3. Shawn Tiberio
4. David Tedder
5. Merrill Chandler
6. Cliff Gager
7. Joe Arias
8. Tony Watson
9. Abbas Mohammed
10. Rick Sharga (Keynote)
INVESTMENT EDUCATION. Just think of it! An all-day in-depth educational extravaganza celebrating real estate investing. More importantly, this will NOT be a sales pitch. Each of the speakers have contractually agreed to educate and teach us successful real estate investing strategies. So regardless of whether you are a new investor, already own properties, or are very experienced, our Grand Expo is for you!
COMPLIMENTARY PRIVATE CONSULTATIONS. As a special unique feature of our Grand Expo, you can sign-up for private half-hour consultations with your favorite guest speakers. Registration will occur Saturday morning, starting promptly at 8:00 am. First come – first serve. So come early and schedule your private consultations. A once in a lifetime opportunity to get free advice from national real estate experts!
VENDOR EXPO: Don’t miss our “Vendor Expo,” which will occur throughout the day in the North Hall. We’ll have 70+ vendors where you can “meet and greet” real estate professionals with services and products that you’ll want to utilize in your real estate investing. (If you have a product or service that would be valuable to real estate investors and would like to be a vendor, please contact us directly.)
DATE: Saturday, October 22, 2022
TIME: 9:00 am to 6:00 pm.
LOCATION: Iman Cultural Center, 3376 Motor Avenue (between Palms and National), Los Angeles, 90034.
FREE PARKING: There will be plenty of street parking (metered and free) on side streets around the Iman. Plus valet parking ($15) will also be available.
FREE ADMISSION: Admission to our Grand Expo will be COMPLIMENTARY (free!), but reservations are recommended.
RSVP: Make your reservations now! (Last year, we sold out and people were turned away at the Skirball!) So don’t wait! RSVP at our special website: www.LAGrandExpo.com.
PRODUCERS. The Grand Expo is joint presentation of the Los Angeles County Real Estate Investors Association, Sam’s Real Estate Club, Ventura Real Estate Investors Association, and Realty411.com.
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Attempting to curtail foreclosed houses being turned into rentals, California passed SB-1079 in 2021. This law effectively, for 45 days, suspended any activity after the foreclosure. Prior to this law, houses that were foreclosed on could be purchased at the foreclosure sale by investors and immediately turned into rental property. When this happened, houses were taken off the inventory for home ownership.
California was desiring to promote homeownership, and reduced inventory pushed prices higher as well as increased renters vs homeowners. The theory behind SB-1079 was that it would discourage investors from bidding at the foreclosure because, for the next 45 days, an “eligible bidder” could match the winning bid. The effect of this would be that the investor would tie up his money for 45 days and not know if he would end up with the property. Thus, investors would most likely not show up and bid at the foreclosure and wait out the 45 days to see if any eligible bidders came forward. If nobody outbid the lender at the foreclosure sale, the investor could approach the lender to purchase the property. With SB-1079 in place, there is no incentive for an investor to outbid at the auction.
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One of the main problems with this law is that the party being foreclosed on has almost no chance of any over-bidding at the foreclosure. Prior to SB-1079, it was possible for the borrower who was being foreclosed on to potentially recoup some equity in the property if the house was bid up. For example, if the 1st mortgage was owed $100,000 and was the foreclosing party, and the house was worth $300,000, the lender would most likely credit bid their entire $100,000 loan. If another party bid $140,000, the lender would get paid their $100,000 and the owner of the house who was getting foreclosed on would walk away with $40,000. SB-1079 effectively shuts the door on that scenario, as the chances of someone outbidding the lender at the foreclosure are slim due to the uncertainty of the bidder acquiring the property at the sale. For the following 45 days, an “eligible bidder” has the opportunity to bid the same $100,000 as the lender and end up with the property. Although there are eight definitions of an eligible bidder, the primary ones include an occupant of the property as his primary residence [not the borrower or a family member of the borrower, however], effectively, a rental, a prospective owner-occupant, and a California nonprofit whose primary activity is the development of affordable housing. If the house is owner occupied, that eliminates the potential tenant purchase option.
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The main problem is that the homeowner will almost certainly lose 100% of any potential equity due to nobody outbidding at the foreclosure auction. At this writing, there are not many non-profits who are set up for development of affordable housing; thus, the only realistic way for the lender to be taken out after 45 days [after the foreclosure] will be those houses that were rented out to tenants or those who desire to own and occupy the house as their primary residence. This last potential is slim, as most buyers want to make offers on houses they can inspect and not wait 45 days to find out whether or not they will be allowed to buy the house.
Due to these new foreclosure laws in California, lenders will have to factor into their underwriting the potential added costs of holding a [potential] foreclosed property at the time they make their loan to the borrower, as the lender is precluded from selling or renting out the property for 45 days after the foreclosure. The lender may have additional costs during this period, such as securing the property against vandalism, vagrants, weed abatement, and the like.
It is still too early to tell if the statistics show if tenants come up with the needed funding options in order to secure the house for their own benefit, as the program is still in its infancy. Only time will tell if this experiment works out for potential would-be homeowners or if it was just a sure-fire way to make sure foreclosed homeowners recoup nothing.
ABOUT EDWARD BROWN
Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company.
Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.
Edward Brown, Host The Best of Investing on KTRB 860AM The Answer on Saturdays at 8pm and Sports Econ 101 on Saturdays at 1pm on SiriusXM channel 217 21 Pepper Way San Rafael, CA 94901 [email protected]
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Top Educators Share Insight at Our Online Investor Summit
Get ready for Realty411’s informational two-day online Investor Summit. Regardless of your level of expertise as a real estate investor, be sure to join us for incredible insight at this event.
Guests will not only learn in real time, but they will be able to engage directly with educators via chat. This is the place to ask your most difficult real estate and business questions.
Be sure to pencil in this life-changing virtual seminar designed to bring you up close and personal with leading experts. Make connections with top industry leaders and gain insider knowledge to skyrocket your net worth.
For this two-day online webinar guests will learn information about the following topics:
* Cities Where Top Investors are Buying In * How to Profit with Long-Distance Rehabbing * How Private Capital Can Help Investors Leverage * Steps to Creating a Game Plan to Win as an Investor * Developing Relationships with Leaders of Influence * The Latest News on Finance and Mortgage Lending * How Your Mindset Determines Your Investment ROI * Identity Theft Protection Safety Education * Information about Business Lines of Credit * How to Structure & Profit from Short-Term Rentals * Learn How Technology Can 100X Your Business * Discover How to Own a RAL (Residential Assisted Living) Home * And so much more – top experts – great insight!
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Has anyone asked you yet, “What is a Trust?” I am asked many times each month what a trust is and why someone should use a trust to hold title to their real estate investments. Oftentimes the person asking me these questions is a real estate investor or an attorney. Most attorneys are not familiar with Land Trusts, also known as title holding trusts, because most law professors do not teach about them in school. The result is that they typically do not recommend them to their clients. Many attorneys opt to suggest the use of an LLC to hold the title.
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You May Be in the Same Situation
If I am frequently encountering these questions, you may be too. Your current attorney may ask, “Why are you messing with all that unnecessary Land Trust stuff?” Or you could be interviewing a new attorney to work with, and they want to know why you are interested in trusts.
Perhaps a fellow member of the real estate investment club or association of which you are a member, or a real estate friend of yours asks, “Why bother with Land Trusts?” (By the way, if you are not a member of a real estate investment club, I encourage you to find one that suits your style and join. The benefits to you and your business are numerous.)
Let’s face it, the answers to these questions may not flow off your tongue. Since I’ve had more practice than you responding to these inquiries, I’ll share with you some of the points I make.
You know by now that there are many ways to hold title to real estate, whether it is a personal residence or an investment property. The title can be held in an individual’s name, joint tenancy, corporation, limited liability company, joint venture, partnership, limited partnership, association, or trust.
Each of these forms of holding the title carries benefits, detriments, tax, and asset protection implications. There is not space enough in this issue of my Land Trust University newsletter to compare and contrast all these consequences. We can concentrate on the Land Trust and its many advantages to the everyday real estate investor.
Start with the Basics
Let us start at the beginning. What is a trust? It is merely a few pieces of paper whereby one person or entity (the Trustee) holds the title for someone else (the Beneficiary). The Trust Agreement is a contract between the parties involved and as such, dictates the actions of all parties involved. There are many types of trusts available to use. As members of the Land Trust University, we typically deal with a Grantor Revocable Trust (GRT) to hold title to our real estate investments.
Technically, the IRS says that a GRT is NOT an entity but a “contractual arrangement.” The IRS does not require that a GRT has a tax ID number, and they don’t demand that a tax return be filed on behalf of the trust. All tax results from the property held inside the trust flow through to the Beneficiary who files a return. (See Revenue Ruling 92-105 and IRS Code Section 677.)
When combined with Corporations, LLCs, or other trusts, the Land Trust can be a formidable opponent to those who would like to inflict financial pain on the owner.
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Land Trusts were not designed to be asset protection tools on their own. Some practitioners perceive them as great estate planning tools that prevent the Beneficiaries (and Successor Beneficiaries) from experiencing probate.
However, I have found that the mere fact that a real estate investor does not own property in their personal name is a great benefit. And if the investor makes the Beneficiary of the Land Trust an LLC or Corporation, it yields the best of both worlds. Primarily, you receive the privacy of ownership afforded by the Land Trust (there is no “registry” for Land Trusts) and the asset protection benefits of the LLC/Corp as the Beneficiary.
Privacy Makes a Difference
Why is privacy of ownership important? I receive calls every month from people across the nation that think I am the trustee of a trust they are trying to investigate. (They find my phone number when they search the Internet for Land Trusts.) Typically, these inquiries are about a problem the caller is having with a tenant next door or across the street from them. They want to register a complaint or find out who to sue over their dissatisfaction with the adjacent property owner.
If your attorney or your real estate friend have not yet heard a war story from someone who was sued just because their name was on the deed, they will. You can also encourage them to read the testimonials and blog posts on my website. People whose lives were turned upside down because they were the defendant in a lawsuit contact me frequently.
These calls and the challenges people have lived through represent the top reason real estate investors use trusts. It is to stay out of the public purview. Trusts can help avoid frivolous problems. We have a highly litigious society in America today. If you make it easy for someone to sue you, they probably will. If it is difficult to sue you, or they can’t discover who you are, they probably will not . . . they will take someone else to court who is an easy target.
Many advanced Land Trust strategies can be employed in conjunction with other entities that can create dy-no-mite asset protection for the everyday real estate investor.
To learn more visit Randy’s FREE online training atwww.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for his free booklet, Reasons to Use a Land Trust. Readers can also reach Randy the old-fashioned way by calling me at 217-355-1281. (He actually answers his own phone, unlike most other businesses in America today!)
I encourage you to learn more by going to my FREE online training atwww.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone, unlike most other businesses in America today!)
Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.
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Marketing your business is a lot easier than it used to be. Thanks to the power of the internet, it is possible to unearth a ton of useful information about how your ads and promotions are performing. It all begins with your marketing analytics. Though you probably have a general idea of how to analyze the data connected to your marketing processes, there are probably a few pointers that could help you maximize your results. Look over these tips and discover how you can start to make the most of your data analysis.
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Start With Current Performance
Data is powerful because it can show you almost anything you want to see or understand about your company and its various resources. However, it is easy to get carried away with how much potential an analysis can have. This means you want to slow down and start your journey with a few simple tasks. Above all else, you want to start with your current marketing performance. How are your current campaigns resonating with customers? Are you seeing conversions at the rate you’d hoped? Knowing where you’re at is necessary for knowing where to go.
Aim for the Future
After you’ve given yourself a chance to analyze where your marketing efforts are at, it is time to use data to create a map for the direction you would like to head. What are the long-term goals you have for your business? Analytics can help you take a general objective for your company and transform it into an actual possibility. As you begin to analyze various performance metrics, you’ll see what is and isn’t working. By using this information to your best abilities, you can craft marketing campaigns that exceed all previous attempts.
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Remember To Keep Checking Back
An easy mistake to make after discovering something useful from a session of data analysis is assuming you’ve found a concrete solution. In truth, data is always changing. Whatever you learn along the way is usually only going to be applicable to this specific moment in time. You must constantly go back to the drawing board to interpret new data and weigh it against previous sets. The more you get used to the processes, the easier it will be to make data analysis a routine part of your marketing team’s tasks.
Getting the most out of your marketing analytics is all about understanding a few simple facts. Learn the basics, keep your ear to the ground for new trends, and take your understanding of your business to the next level.
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The average American homeowner has the bulk of the household’s net worth tied up in the equity in their primary home where they reside. As noted in my past Equity Rich, Cash Poor article, the average US homeowner at retirement age has 83% of their overall net worth tied up in home equity (or the difference between current market value and any mortgage debt if not free and clear with no liens). As a result, the typical homeowner only has about 17% of their overall net worth available for monthly expenses.
Real estate isn’t as liquid, or the ability to quickly convert to cash, as a checking account. We can’t just go to our local grocery store and ask the cashier to deduct the full grocery cart from our debit account tied to our home’s promissory note or deed of trust. Yet, we all have to eat, so what are some ways to gain more access to cash that originate from the equity in our primary home or investment properties?
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Let’s take a closer look at ways to convert equity in real estate into spendable cash:
● Sell your primary home or rental properties: If so, where will you live? Are rents nearby lower or higher than your current mortgage payments if you need to move? Are there any potential unforeseen tax consequences or benefits? Will you miss the monthly rental income from your investment properties?
● Sale-and-leaseback: You find an investor willing to purchase your primary home while allowing you to stay there for months or years as a tenant.
● Cash-out 1st mortgage: Pay off some or all forms of consumer debt (credit cards, auto loans, school loans, business loans, tax liens, etc.) with a larger mortgage while possibly lowering your overall monthly expenses significantly with or without any verified income.
● Reverse mortgage: A combination of a mortgage and life insurance hybrid contract that gets you cash out as a lump sum and/or with monthly income payments to you while not requiring you to make any monthly mortgage payments. Lower FICO scores are usually allowed and minimal sourced monthly income like from Social Security may be sufficient to qualify.
● Business-purpose loan as a 1st or 2nd: A type of loan that may be tied to an owner-occupied or non-owner-occupied property for so long as the funds are used for business or investment purposes such as assisting your self-employed business or buying more rental properties. These types of loans have much less paperwork and disclosure requirements and can be funded within a few weeks with or without income or asset verification.
Declining Dollars and Rising Expenses
Although U.S. wage earnings rose 5.1% nationwide between the 2nd quarter of 2021 and 2022, the published Consumer Price Index (CPI) inflation rate reached 9.1% in June 2022 which was the highest inflation rate pace in over 40 years. As a result, the purchasing power of our dollars continues to decline while consumer goods and service prices rise too quickly.
In July 2022, credit card rates and overall consumer debt balances across the nation reached all-time record highs. This was partly due to more Americans relying upon their credit cards to cover basic living expenses to offset inflated prices.
Simultaneously, the Federal Reserve increased short-term rates a few times so far this year while making consumer debt balances more expensive. At the June and July meetings for the Federal Reserve, they increased short-term rates 0.75% at each meeting. This was the largest back-to-back or consecutive rate hike for the Federal Reserve in their entire history.
To bridge the gap between expenses and income, total credit card debt balances surpassed $890 billion in the second quarter of 2022. The increase in overall credit card debt rose 13% in the second quarter of 2022, which was the largest year-over-year increase in more than 20 years. Near the start of 2022, the average American had close to $6,200 in unpaid credit card balances as per the Federal Reserve and Bankrate.
An additional 233 million new credit cards were opened in the second quarter. This was the largest new credit card account increase in one quarter since 2008 (or near the start of the Credit Crisis). A consumer who pays just the minimum balance for a credit card with a few thousand dollar balance may need more than 30 years to pay off the entire debt partly due to the horrific annual rates and fees that are generally much higher than 30-year mortgage rates.
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Short-Term Cash Supplies
It would take 64.4 days for a Californian to run out of cash if they had average American savings amounts of $9,647 based upon a recent study from ConsumerAffairs.
Here’s the top 10 most expensive regions in the nation and the estimated time that it would take to run out of cash: Hawaii (62.5) California (64.4) Washington, D.C. (72.1 days) Massachusetts (73.6 days) New Jersey (74.8 days) Connecticut (76.3 days) Maryland (77.9 days) Washington (79 days) New York (79.9 days) Colorado (80.8 days)
Living Wages, Debt, and Wealth Creation
Another survey conducted by GOBankingRates that was published in July 2022 found that the median annual living wage, which is defined as the minimum income amount needed to cover expenses while saving for retirement, is $61,617 per U.S. household. However, the Top 14 most expensive states required much higher annual household income or living wages as listed below:
Nationally, the lowest required living wage income for households was $51,754 in Mississippi.
These Top 14 expensive living wage regions also share something in common in that they have some of the highest median-price home values in the nation, especially Hawaii, New York, and California. While the monthly living wages may be highest in these regions, the net worths for homeowners is probably much higher due to so many properties valued well over $1 million dollars.
Ideally, we should all focus on keeping our monthly expenses as low as possible while investing in prime real estate to boost our overall net worth. If so, you’re more likely to retire sooner rather than later while your money works hard for you (or rapidly increasing annual home value equity gains) instead of you working too hard for your money.
Rick Tobin
Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.
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