Hard Money Blog: Invest, Revitalize, Create, Prosper

How to Thrive in a Challenging Real Estate Market

May 6, 2024 by Kyle Sennott Leave a Comment

As I write this article, the Washington, DC, real estate market continues its solid footing. Prices are either stable or increasing—always a good sign for existing homeowners and real estate investors alike. But solid footing does not mean devoid of challenges, nor should it. In fact, challenges abound. If you are a first-time buyer trying to purchase a new home, you probably need to depend on your family’s financial help to afford it. If you are a seasoned homeowner trying to downgrade to a smaller place, higher rates on new mortgages make potential savings marginal at best. And if you are a real estate investor, the competition is tough, and you get outbid regularly. Do we need to order cheese with this whine, or can we rise to these challenges to learn and make money? Let’s have a reality check.

Challenges persist. But how we view them changes.

I’ve been in the mortgage business for almost thirty years. I’ve been a private lender since 2006. It seems that every year is more challenging than the other. Yet, we keep making money. Our borrowers keep making money. A new generation of investors gets into the business and starts making money. The old ways of getting properties become widely known and, as a result, stop yielding the profits they used to in the past. Yet, savvy real estate investors discover new ways of securing profitable deals. Old marketing strategies no longer work. Yet, agile companies develop new marketing approaches. The challenges create new opportunities for those who recognize them.

Henry Ford famously said, “Whether you think you can or you think you can’t, you’re right.” For each old investor who gets out of business because it’s too tough, we see a new investor come out of nowhere and start making money. It’s not easy for newbies, but many succeed. I imagine them growing old and regaling their grandkids with the stories of their successes and struggles. “Things were simpler then,” many would say. “It was easier to make money in the past.” Perhaps they would be right. But what you need to remember is that their past is your present now.

There were years when making money in real estate was easier. In retrospect. As real estate investors, we might fondly remember the years following the real estate market collapse of 2008-2010 because of the abundance of cheap properties. What we tend to forget is that we didn’t know then what the future would hold. We could not predict if the market would rebound and, if it did, when. Some rushed in too early and, as a result, saw the equity in their property deteriorate when the real estate market continued its downfall. Others were traumatized by their losses and swore off real estate for years to come. Those with some luck, financial resources, and nerves of steel rode the wave. It seems easy now, but trust me, it was nothing but.

So don’t let challenges stand between you and your goal. Work with them. Embrace them. Learn from them. Find a way to overcome them – by being extra creative, by working extra hard, by hustling more. Now. Today. Because the next year will be more challenging. Guaranteed.

Stand by the old real estate principles.

We’ve talked about how new challenges require new approaches to solving them. But one main fundamental truth about real estate has withheld the test of time: You make money when you buy. What it means is that you need to buy at a discount that is significant enough to generate profit in today’s market. You cannot count on future appreciation. You cannot hope to slash costs by minimizing renovations. You need to negotiate this price down when it can comfortably make you a profit – without relying on any Hail Mary passes.

To do so, remove emotions from your purchase decision. Face and deal with any red flags that might accompany your potential real estate investment. Please don’t take your real estate agent’s assessment of the transaction profitability at its face value. Learn how to run your own comps and come up with your own after-repair property value. Use a hard money loan calculator to confirm that the profit you will be making is worth your while. Above all, be prepared to walk away from a deal if it doesn’t meet your profit expectations or exceeds your risk tolerance.

Watch your renovation process like a hawk.

Once you put an investment property under contract at a sufficiently discounted price, a major way to mess it all up is to fail in your renovation process. Not diligently investigating the property’s condition prior to purchasing, working with an unreliable contractor, or not managing your contractor well will unavoidably result in delays and, worse yet, running out of the budget before completing the project.

Once you settle on your purchase, it’s all decks on hand. Make sure that your contractor is ready to go and that you have enough financial reserves to purchase the required materials. Avoid advancing significant sums of money to your contractor. Keep them motivated to make progress fast. Remember that each month your private hard money loan is outstanding, you are paying interest to the lender and reducing your profits. You are also paying real estate taxes, property insurance, and HOA fees. So be available. Be present and check on the progress and quality of work often. Because both the speed and quality of your renovation matter tremendously for your bottom line. This brings me to another point…

Develop an understanding and appreciation of modern design trends.

DMV real estate is expensive. The median after-repair value of the properties we finance is between $500K and $600K. Many sell close to or above a million dollars. Investing at this level requires money, experience, and grit. But it also requires something else: an understanding of current design preferences for the luxury real estate market.

If you are a real estate investor in the Washington, DC, area, it’s simply not enough to clean up the property, install stainless steel appliances, and install kitchen and bathroom cabinets just a notch above builder’s grade. You need to wow your potential buyer with design elements that are simultaneously classic and on-trend.

You cannot do that without becoming a student of contemporary residential design. I am not talking about getting a formal degree and a certification. I am talking about spending time on social media—Pinterest and Instagram—and visiting model homes to see what the expectations are for high-end properties. Do not count on your contractor to offer you ideas. You need to be at the helm of your renovation process, and the overall design is your responsibility.

Price your property right for a quick sale.

Of course, you want to sell for the highest price possible. I get it. But if you decide to put your property on the market for a price substantially higher than its original ARV, think twice. There might be reasons to increase it. If you held the property for more than a year, and the market has moved up, the increase might justify itself. Another reason to up the price is if you expand the scope and the breadth of your renovation process. We’ve recently had our very experienced borrower price and sell his property for almost $200K over the initial after-repair appraisal. However, after seeing the final pictures of the rehab and its spender, I suspect that he had spent almost twice his original budget on renovating it. Good for him, since he made more in profit this way.

Otherwise, overpricing your property is a recipe for delays and price reductions in the future. When it comes to MLS listing, the longer your property sits on the market and the more incremental price reductions it receives, the less chance it will sell for its true market value. The buyers and their agents are like vultures: they sense weakness and want to use it to their advantage. If you need to cut the price, do it quickly and decisively. Better yet, don’t be greedy. The best practice is to price your property right and sell it quickly to a strong buyer.

New Funding Resources is a private hard money lender that helps real estate investors in the DMV area build wealth in real estate. Our mission is to help you make money in an ethical, sustainable way that benefits all parties involved, including the communities these homes are in.

How to Make Money with Subdividable Lots

April 24, 2024 by Kyle Sennott Leave a Comment

Tree trunk coming alive on the lot of land. Making money by subdividing lots.

The holy grail of real estate investing is turning a single piece of real estate into multiple pieces. This is where the big bucks are and what larger real estate development firms typically do. However, it does not mean smaller mom-and-pop investors are entirely left on the sidelines. In fact, our borrowers have been making tons of money with one of the most popular strategies for turning a single piece of real estate into several pieces: condo conversion. Condo conversion expands a single-family detached house into several condos, each sold separately. Condo conversions are common in high-priced, densely populated areas such as Washington, DC.

Another major strategy is lot subdivision. While the opportunities to subdivide an existing lot of land into separate buildable lots do not come too often, they are out there. Because of their high profit potential, savvy real estate investors should be familiar with the benefits associated with lot subdivisions and be able to evaluate each opportunity effectively. In this article, we will focus on recognizing subdivision opportunities and the steps you need to take to complete the subdivision process legally and efficiently.

Land Subdivsion: Basic Real Estate Terminology

First, I suggest we familiarize ourselves with terms such as “lot” and “parcel.” The terms “lot” and “parcel” are often used interchangeably in real estate. Still, they can have slightly different meanings depending on the context.

A lot typically refers to a specific portion of land designated for a particular purpose, such as residential, commercial, or industrial use. Lots are often identified by lot numbers on subdivision plats and are usually associated with a specific address or location. If you buy a residential house, it will have at least one lot associated with it.

A parcel is a more general term that can refer to any portion of land, regardless of its size or intended use. Parcels are often used in legal descriptions of land. They can encompass one or more plots or a larger area of land that has not been subdivided. For example, a developer might buy a “parcel” of land – such as an old farm – subdivide it, and sell individual lots to construction companies or individual buyers to build homes on.

The critical difference is that while both terms are used to describe a portion of land, “lot” is more commonly used to describe a developed piece of land. At the same time “parcel” is a more general term that can refer to any portion of land, regardless of whether it has been subdivided. In other words, both lots and parcels can be sold and bought, but you need to turn your parcel (or a portion of your parcel) into a lot before you can start building on it.

Unless you are looking to purchase an undeveloped piece of land, aka a parcel, chances are any subdivision you will be involved in will be a lot of subdivision: a lot with an existing property that can or cannot be subdivided into two or more buildable lots.

Real Estate Investor Goals with Lot Subdivision: Buildable Lots

Subdivision aims to create buildable lots. The value of non-buildable lots is low, and dividing a lot with an existing home into one “buildable” lot and one “non-buildable” lot might hurt its overall value rather than enhance it.

A lot is typically considered “buildable” if it meets specific criteria and requirements set by local zoning regulations, building codes, and other relevant laws. Here are some common factors that determine whether a lot is buildable or not.

Zoning: The lot must be zoned for the type of development intended, whether residential, commercial, industrial, or mixed-use. Zoning regulations specify the allowable land uses, building sizes, setbacks, and other requirements.
Size and Shape: The lot must meet minimum size requirements and have a shape that allows for the proposed development while complying with setback requirements and other regulations.
Access to Utilities: The lot should have access to essential utilities such as water, sewer, electricity, and gas. If these utilities are not readily available, the cost of extending them to the lot may need to be considered.
Topography: The lot’s topography, including slope and drainage, should be suitable for the proposed development. Steep slopes or poor drainage can pose challenges for construction.
Environmental Considerations: The lot should not have environmental constraints, such as wetlands, floodplains, or endangered species habitats, that would restrict development or require special permits.
Infrastructure: The lot should be accessible by public roads or have legal access via an easement. Adequate infrastructure, such as roads, sidewalks, and drainage systems, should be installed or feasible.
Legal Requirements: The lot must comply with all legal requirements, such as easements, restrictions, and covenants, that may affect its use and development.

How to Know Whether You Can Subdivide Your Lot

Use online real estate listings and websites that allow you to search for properties based on specific criteria, such as lot size or zoning. Look for properties that have larger lots or are listed as potential for subdivision. Sometimes, the best way to find properties with subdividable lots is just to drive around the area and look for signs of potential. Look for larger properties with ample space or properties that are underutilized and could be subdivided.

Remember, to be “buildable”, a lot should be met the criteria discussed above and it will be your responsibility to make sure that it does. Here are the steps you should take.

Check local zoning regulations: Start by reviewing the local zoning regulations for your property. Zoning laws dictate how land can be used and subdivided in a particular area. Look for information on minimum lot sizes, setbacks, and other requirements for subdividing land.
Consult with Planning Department: Contact the local planning or zoning department to discuss your plans to subdivide the land. They can provide information on the specific requirements and procedures for subdividing land in your area.
Hire a professional: Consider hiring a professional, such as a land use attorney or land surveyor, to help you navigate the subdivision process. They can provide guidance on the feasibility of subdividing your land and help you understand the legal and technical requirements involved.

What are common challenges real estate investors experience while subdividing lots?

Lot subdivision is not a trivial task. You should expect to invest both capital and time to subdivide your lot successfully and maximize the value of each lot. Here are the common challenges you might experience.

Bureaucracy and Delays

The time it takes to subdivide a lot into buildable lots can vary widely depending on various factors, including the complexity of the subdivision, local regulations, and the efficiency of the approval process. The subdivision process can generally take anywhere from a few months to a year or longer. The process typically starts with conducting a feasibility study, hiring a surveyor to create a subdivision plan, and preparing the necessary documents to submit to local authorities. Once the subdivision plan is approved, you may need to meet certain conditions, such as installing infrastructure and obtaining additional permits. Only when you satisfy the final conditions, the subdivision will be recorded with the county or municipal land record.

Significant Costs

Subdividing a lot can be expensive, as it involves various costs such as surveying, engineering, legal fees, permit fees, infrastructure development, and utility connections. The total cost of subdividing a lot can vary widely depending on factors such as the size and location of the lot, the complexity of the subdivision, and local regulations and fees.

Subdividing a lot can be a costly endeavor, with expenses ranging from several thousand dollars to tens of thousands of dollars or more. It’s essential for real estate investors to budget meticulously for these costs and factor them into their profitability evaluations. By working with seasoned professionals and conducting thorough research, investors can gain a clearer understanding of these expenses and navigate the subdivision process more efficiently.

Lien Holder Objecting to Subdivision

If you have a mortgage or any other lien against the title of your property, the lien holder can object to subdividing a lot, especially if the subdivision negatively impacts their ability to collect on the lien. When a property is subdivided, it can affect the value and marketability of the original property and, consequently, the lien holder’s ability to recover the debt. If the subdivision reduces the size or value of the property that secures the lien, the lien holder may have concerns about their ability to recover the full amount owed and will not allow the subdivision.

In some cases, the lien holder may require the property owner to satisfy the lien or provide additional security before allowing the subdivision to proceed. It’s important for property owners considering subdividing a lot to communicate with their lien holder and address any concerns they may have to avoid potential legal issues.

Benefits of Working with a Private Lender While Subdividing the Property

At New Funding Resources, we financed many deals when our borrowers bought or inherited a property with a lot large enough to subdivide it into two. One part of the land had an existing structure, which was eventually renovated using our private funds. The second part was turned into a buildable lot sold as a piece of land ready for construction or, in some cases, actually “developed” by our borrower into a brand-new home.

Because hard money lenders typically base their loans on the future value of real estate, they have significantly more flexibility in financing transactions with potential lot subdivisions. If you own or about to purchase a property with a subdividable lot, reach out to us about how to best manange and finance such transactions.

Six Red Flags When Buying an Investment Property

March 26, 2024 by Kyle Sennott Leave a Comment

To be a real estate investor is to be an optimist. It’s to believe that your next deal is just around the corner. It’s not to give up when going gets tough. It’s to persevere and to have faith. But it’s also about embracing a set of entirely different traits, such as being analytical, cool-minded, and, yes, skeptical. Sometimes, it isn’t easy to harmonize them all, but finding the right balance is essential. Without that balance, we risk being either a naïve novice ready to fall into a trap or a perpetual nay-sayer with no ability to recognize an opportunity.

This is why I want to start this article about the red flags in real estate investing by encouraging you to find that balance. None of the flags we are about to discuss mean that you should walk away from the transaction. On the contrary, they might be why you are about to purchase the deal of a lifetime. The red flags are nothing more than potential issues that may or may not arise. If they do, you may solve them without negatively impacting your bottom line, or they might throw a wrench in your plans and blow a hole in your budget. It is important that you are aware of them and proceed with both caution and optimism.

Here are some common red flags that any rational investor must investigate before proceeding further.

The seller is another investor who cannot finish the renovation.

The whole point of a short-term real estate investment is to identify and purchase a property that presents a good profit potential. If you find such a property but now also discover that it is another investor who is selling it, it should give you pause. Why this investor is choosing to sell without first attempting to realize the profits themselves is a logical question.

First, how do you know that the seller is an investor himself? The most obvious answer is that the property title is held in the name of an LLC or another business entity. The second tell-tale sign is that the property was clearly in some stage of renovation before the owner decided to stop it and put it on the market. A listing agent would likely give you an innocent explanation for the situation: The owners had a better investment opportunity to pursue, or they ran out of cash, or they got sick. That might be the case. Or not. The concern is that this investor has discovered something that ultimately makes this investment unappealing, and now they are trying to conceal it.

How to mitigate: Approach the properties sold by another investor with extra caution. Mind you, by another investor, I mean an individual or an entity who actually assumed the title to the property, not a real estate wholesaler who just assigned the contact. Hire an inspector or bring a contractor you trust to inspect the property. Share your concerns and make sure there are no hidden issues that might increase the rehab budget.

Ask pointed questions about any title defects. Your title company will eventually discover them, but it’s always better to nip those issues in the bud. Are there any encumbrances, encroachments, or easements that might affect the value of your property? Last but not least, do research to find out whether the area where the property is located is undergoing any changes (major road development, fracking plans (if it’s a rural area)) that might have a negative impact in the long term.

The property is held in a trust.

When a property is owned by a trust, the legal title to the property is held by the trust rather than by an individual. In a trust arrangement, the property is managed and controlled by a trustee, who holds the property for the benefit of the trust beneficiaries. Holding property in a trust can offer flexibility, control, and potential tax benefits, but it also involves specific legal requirements and considerations. Purchasing a property held by a trust can introduce some unique considerations and possible concerns.

How to mitigate: Be prepared that your title company might take longer to process the file and that you will pay additional fees for the title or estate planning attorney to conduct a detailed review of the trust documents. You and your attorneys want to ensure that the transaction is legitimate, that the trustee has the legal authority to sell the property, and that the trust itself complies with the state laws governing it.

The value of the property is hard to evaluate

In life, we praise uniqueness. In real estate investing, it’s a different matter. What is unique is different; what is different is hard to estimate in terms of value. When the value is hard to calculate, it increases your risk as a real estate investor. When your risk is high, it becomes challenging to secure financing. It might take longer to sell the property. Last but not least, you might have to sell it for less than you hoped for.

What makes a property’s value hard to evaluate? The absence of good comps. When an appraiser estimates the value of the property, he or she relies on comps – other properties of the same style, size, vintage, and condition sold in the immediate neighborhood. If he cannot find such comps, an appraiser expands the search further from the property or uses other sales in the neighborhood that might differ from the subject. The further the appraiser must go to find comps or more adjustments he has to make to account for differences between the subject properties and the comps, the less accurate the value will be.

As a hard money lender in the DMV area, the most common challenges in evaluating the property value we encounter are: (1) the subject property has extensive acreage of unspecified value, (2) it’s rural or agricultural property with comps too remote to provide accurate assessment; (3) it’s a non-residential property (commercial, mixed-use, or multi-unit with few recent sales nearby; (4) the style of the property is unusual for the location (geodome, hexagon – they might be striking but don’t have a broad appeal).

How to mitigate: When the after-repair value price range is wider than usual, do not count on the best-case scenario. Ensure your number analysis shows a profit, even if you sell at a price on the lower side of your range. Once your renovated property hits the market, watch it carefully. Adjust your price quickly and decisively if your listing is not generating enough excitement and offers. To help you with calculations, you can use our maximum purchase price calculator, our nifty tool that enables you to calculate the highest price you want to pay for the property based on your minimum profit requirements.

The property is not on public water and/or sewer.

The further you go from Washington, DC, the higher the chances that the property will not be on public water or sewer. Of course, there are exceptions to that rule. For example, many homes in close suburbs such as Great Falls don’t have access to these public utilities. If you discover that your potential investment property does not have such access, don’t panic. All it means is that it relies on its own septic tank and well. The issue you need to be aware of is that the property’s tank and well might be approaching their lifespan and have problems. This is especially common for distressed homes that might not have been well-cared for by their owners. If a septic tank or well needs to be repaired or replaced, that might cost you a pretty penny.

The cost to replace a septic tank can vary widely depending on several factors, including the size of the tank, the accessibility of the site, the type of soil, and the local labor and material costs. On average, you can expect to pay $7,000 or more for a septic tank replacement.

The prices can be even higher with a well. The cost to replace a well for a residential property can vary depending on several factors, including the depth of the well, the type of well (drilled, dug, or driven), the local geology, and the accessibility of the site. On average, however, you can expect to pay $15,000 or more for a good replacement in Maryland, Washington, DC, or Virginia.

How to mitigate: Since a faulty well or septic can increase the costs of your rehab by tens of thousands of dollars, make sure that your contract has an inspection contingency. If such contingency is not possible, try to arrange at least a couple of days during which you can wiggle out of the contract if the potential costs of repairs erode your profit margins too much. Make sure you hire a professional who is thorough, fast, and reliable to do the inspection before you fully commit to buying that property.

The property has a swimming pool.

To a novice investor, a pool might appear to be a fantastic luxury add-on that increases the property value and marketability. Unfortunately, it’s rarely the case. First, it might limit the pool – no pun intended – of potential buyers, many of whom would not be interested in the time and expense of pool maintenance. Families with young children might steer away because of the safety concerns. Most importantly, as an investor buying a distressed property, you should be ready that the pool will be in much worse shape than the house itself. In such a case, you would need to decide whether to invest in renovating a pool or invest in draining and filling it in. One way or another, you would need to spend major cash dealing with it.

How to mitigate: In the DMV area, a pool generally does not add much to your after-repair price, but it does increase your renovation expenses. So, when evaluating a real estate investment opportunity, treat it as an obligation rather than an opportunity. Bring a pool repair expert to inspect the pool before purchasing a property. This way, you can adjust your purchase price accordingly. Also, please refer to our detailed article about swimming pools in investment properties.

The property is in violation of zoning regulations.

Our borrowers don’t run into zoning issues too often, but when they do, these issues are potential deal-breakers. Understanding the local zoning laws is crucial. Zoning laws dictate how a property can be used (residential, commercial, industrial, etc.), its density, building height, setbacks, and other factors. Violating these regulations can result in fines or the inability to renovate and use the property as intended. Of course, zoning is rarely a concern if you are buying a property in an established neighborhood and your renovation plan is limited to cosmetic repairs. However, if you plan to expand the property footprint or add a floor, you should be aware of zoning regulations.

A year ago, we had an investor trying to secure a hard money loan to purchase a property in Darnestown, MD. On paper, it was an incredible deal. The property was heavily distressed but retained its good bones. Even with a substantial renovation budget, our potential borrower was slated to make good money. Or so it appeared until I happened to drive by the property. The issue was clear: The house was situated so close to Route 28 that it would feel like you’re working in a drive-by restaurant if you lived in it. Clearly, the zoning laws would require it to be moved back during the renovation process. Even if it was possible, it would increase the budget substantially. With that added expense, one might wonder whether it will make sense to bulldoze the old house down and treat the whole transaction as a brand-new construction.

How to mitigate: Several common issues might affect your real estate investment. Among the most common are setbacks and lot coverage requirements. Zoning laws often stipulate the minimum distance a building must be from the property line (setbacks) and the maximum percentage of a lot that buildings can cover (lot coverage). As a real estate investor looking to expand the property, you must carefully study these regulations.

One way to deal with a non-compliant property is to seek a zoning variance. A variance is a request to deviate from the specific requirements of the local zoning ordinance. When a property owner or developer wants to use their property in a way that doesn’t comply with these regulations, they can apply for a variance. Variances are typically granted by a zoning board of appeals or a similar body. Bear in mind that obtaining a variance can be challenging and may involve public hearings and approvals.

The red flags are like red traffic lights on a busy street. You don’t necessarily have to change your course. But you must stop and wait until the green light. Stop and pause if you are a real estate investor purchasing a property with any of the issues above. Investigate the problem and contact experts to determine the next course of action. Feel free to contact New Funding Resources at 240-436-2340. We are here to help increase your profitability and minimize your risks.

Women in Real Estate Investing: Opportunities and Challenges

March 14, 2024 by Kyle Sennott Leave a Comment

Last week, we celebrated March 8^th—International Women Worker’s Day, a global day celebrating women’s social, economic, cultural, and political achievements. While I am grateful to all women in my life, today, I want to express my appreciation for hardworking, resourceful, insightful, persistent, and super intelligent women in real estate. Your dedication, perseverance, and leadership have transformed communities, shaped skylines, and inspired future generations.

While plenty of women found fantastic fortunes and fame in real estate, the women we work with every day – title agents, realtors, underwriters, mortgage brokers, appraisers –are the true movers and shakers. They are also perfectly positioned to succeed as real estate investors and many of them already do. Throughout the years, we worked with hundreds of women investors in the Washington, DC area who leverage their skills and talents in real estate to grow their income, diversify their portfolios and build their retirement nests. Yet, it remains that the majority of real estate investors are men.

Predictably, this disbalance can be attributed to various historical, societal, and economic factors. For example, legal restrictions have historically limited women’s access to property ownership and financial independence. To put it into perspective, while married women were allowed to own property in their own name by 1900, they had to ask their husband’s permission to apply for a mortgage until 1974, when the Equal Credit Opportunity Act prohibited discrimination for reasons related to sex, marital status, race, religion, and other reasons. In the U.S., 1974 is often cited as the year of women’s mortgage liberation. For this and many other historical and cultural reasons, men have traditionally had greater access to capital and financial resources, often necessary for real estate investments.

All these historical and cultural reasons aside, I am convinced that women are well-positioned and uniquely qualified to thrive in real estate investing today. Here are at least some of the reasons.

Advantages Women Have it Real Estate Investing

Women dominate real estate sales

In the United States, women comprise a significant portion of licensed real estate agents. According to the National Association of Realtors (NAR), 66% of Realtors in the U.S. were women. This percentage has been steadily increasing over the years, reflecting the growing presence of women in the real estate industry.

As the dominant force in real estate selling, women have unique access to:

Market Knowledge: Real estate agents have a deep understanding of the local real estate market, including trends, pricing, and investment opportunities. This knowledge can give them an advantage when identifying potential investment properties.
Access to Listings: Real estate agents have access to a wide range of property listings, including off-market opportunities and distressed properties, which can be ideal for investment purposes.
Understanding of the buying process: Real estate agents are familiar with the buying process, including the paperwork and legal requirements involved, which can make the investment process smoother and more efficient.
Negotiation Skills: Real estate agents are skilled negotiators, which can be beneficial when negotiating an investment property’s purchase price and terms.
Lower-Cost Basis: Hiring a real estate agent to find a potential deal and then selling it once the renovation is complete can cost a pretty penny. Unless, of course, you are a real estate agent who is doing it herself.
Time Flexibility: Being a real estate agent is practically being self-employed. That means you have more flexibility in managing your work hours as compared to someone who works for an employer with predetermined schedule. This flexibility allows to better balance the responsibilities of being a real estate agent with responsibilities of being a real estate investor.

Because of all these reasons, I strongly believe that though real estate investors don’t necessarily have to be agents, all agents should consider being real estate investors. Based on this logic, it’s only a matter of time before women will start pursuing investment opportunities more aggressively.

Women have plenty of networking opportunities

One of the reasons that is often cited for women being under represented in real estate investing is the lack of network opportunities. I disagree with it. First of all, as we’ve already discussed, women represent the larger portion of real estate agents, giving them plenty of opportunities to network within their immediate profession.

Women are also well-represented in other real estate-related industries such the home title industry and home insurance industry. According to the U.S. Bureau of Labor Statistics women comprise almost 40% of loan officers and 35% of all licensed appraisers. Based on these numbers, women the real estate investors cannot be held back due to the lack of exposure, networking opportunities, or the industry commeraderie.

Even further, when it comes to networking, women tend to have a leg up on men. They typically excel in building relatinships. They also have strong empathy and communication skills, which can be valuable in understanding the needs of tenants, clients, and other stakeholders in real estate transactions.

Women have an eye for design

Almost 70% of interior designers are women which proves that women tend to take a lead when it comes to style. And when it comes to selling the property fast and for the top dollar, style rules.

A well-designed and stylishly renovated property can attract more potential buyers, as it creates a positive first impression and makes the property more visually appealing. It also increases the perceived value of a property, leading buyers to believe that they are getting a high-quality, desirable home for their money. Last but not least, it sets the property apart and creates an emotional connection where buyers are more likely to imagine themsevles living in the property.

The power of style is so powerful, it’s the foundation and the major appeal of the TV shows such as HGTV’s “Fixer Upper“, “Flip or Flop“, and “Love It or List It“, all of which feature formidable and style-concious women-investors.

Challeges Facing Women Who Are Real Estate Investors

Steeper learning curve of the nuts-and-bolts construction process

A successful flipper excels in at least two areas. The first is to find a property with great investment potential and put it under contract at the right price. As we discussed, women are well positioned to thrive there. The second area is to effectively manage the renovation process. This where historically women have been placed at disadvantage.

According to various sources, women comprise about 10% of the construction workforce in the United States. This includes roles such as construction managers, tradespeople, and laborers. Culturally, the construction industry is perceived as a masculine trade, partially because it often relies on heavy labor requiring strength and endurance. While it’s still true, few of our gentlemen investors handle heavy lumber or climb up to replace the roofs. They typically prefer to supervise the crews rather than joining them – something a woman-investor could do as efficiently as a man.

Still, in general women face a steeper learning curve when managing the construction process. The lack of experience always increases the risk, and women are not immune to it. However, the fact is that managing a rehab is thankfully a not rocket science, and each renovation project has a plenty to teach. Pretty soon any first-time investor that is organized, driven, and have good communication skills, will learn the ropes.

Gender Bias

Gender biases can affect women in real estate at least in two ways. It can disadvantage them in negotiations, potentially leading to less favorable terms or outcomes compared to male investors. For example, I hear from my female colleagus that they often feel that they get quoted higher prices by contractors than their male counterparts. This is also a symptom of the second bias experienced by women in real estate: perceived lack of credibility. Some males in the industry apparently think that women would not recognize an inflated quote or won’t challenge you on poor quality job.

Women have been effectively combating these biases in many industries. They are well-positioned to successfully overcome them in the construction industry as well. And many of them do. Women are slowly but surely are filling the roles and positions almost exclusively reserved for men in the past. For example, two of the last inspectors our crew worked with were women. Yes, these women came to inspect and sign off on the jobs that all-male crews – plumbers and electricians – just completed. So much for the gender bias there.

Physical safety

Concerns about physical safety can have a impact on women in real estate. Women investors may face risks when visiting properties, meeting with clients or contractors, and managing properties, especially in unfamiliar or high-risk areas. They often work alone and visit properties in various neighborhoods and conditions, which can expose them to potential risks such as theft, assault, or harassment.

By taking proactive measures and staying aware of their surroundings, women real estate investors can help mitigate safety risks and continue to succeed in their investment endeavors. Scheduling appointments during daylight hours, bringing a companion when visiting properties, using technology for safety, such as mobile apps or GPS tracking devices can help eleviate the risks and improve safety.

At New Funding Resources, we want to do our part to help women embrace the opportunities that real estate investing offers. Almost a third of our borrowers are women and this number is growig. Our private funds are here to help them create financial independence, build wealth, and leave a lasting legacy.

How to Refinance a Residential Loan Held in an LLC’s name?

February 28, 2024 by Kyle Sennott Leave a Comment

We’ve written several detailed articles on why it’s important to invest in real estate using an LLC. Actually, it doesn’t matter much whether you are investing in the name of an LLC or any other type of business entity. What’s important is that you don’t invest in your personal name. Why? Investing in the business name protects your personal assets, helps manage your risk, protects your privacy, and might come with some tax benefits. Also, if you are working with a hard money lender, they usually prefer lending to businesses rather than individuals.

While all of us might be on the same page regarding why and how investing in an LLC’s name helps manage risk, those investors who purchased a property in the business name and want to keep it in their portfolio after their rehab is completed (buy-and-hold) might have fewer options for refinancing. This is why it’s important to know which lenders offer financing for properties held in the LLC’s name, where to find them, and how to shop for the best deal.

Why Many Lenders Steer Away from Financing Properties Owned by LLC’s?

Obtaining a residential loan in the name of an LLC is possible as long as you remember that not all lenders offer it. Simply put, traditional lenders want to lend to people, not legally protected companies. Those lenders may perceive financing properties owned by LLCs as riskier than those owned by individuals. This is because LLCs are more complex legal entities, and there may be concerns about the financial stability of the LLC and its members. This is why the Fannie Mae and Freddie Mac underwriting guidelines do not allow borrowing in an LLC’s name. Unfortunately, this renders their favorable-term financing unavailable for homes with titles vested in an LLC, making it a bitter pill for cost-conscious real estate investors. The good news is that there are plenty of other options available.

What Lenders Provide Financig to Properties Owned by LLC’s?

Despite these challenges, there are lenders who specialize in financing properties owned by LLCs and are willing to work with real estate investors to provide financing solutions. These include:

Portfolio Lenders: Portfolio lenders are financial institutions that originate and hold mortgages in their own investment portfolios rather than sell them on the secondary market. Some portfolio lenders may offer mortgages for LLC-owned residential properties. Among those portfolio lenders are:

Regional Banks: Regional banks may have more flexibility in their lending criteria compared to larger national banks and may offer financing for LLC-owned residential properties.
Community Banks: Local community banks may be more flexible in offering mortgages for LLC-owned properties, especially if the property is in the bank or credit union’s service area.
Credit Unions: Credit unions may also offer financing for LLC-owned residential properties, especially for credit union members.

Non-Bank Lenders: Non-bank lenders, such as mortgage lenders that operate online or through brokers, may also offer mortgages for LLC-owned residential properties.

Commercial Lenders: Some commercial lenders specialize in providing mortgages for residential properties held in an LLC’s name. These lenders may have specific requirements and terms tailored to LLC-owned properties.

Private or Hard Money Lenders: Private lenders, including individuals or private investment firms, may provide financing for LLC-owned residential properties, although the terms and requirements may vary widely. At New Funding Resources, we offer options to refinance the existing hard money loan into a new hard money loan with us. This process is called hard money refinance. However, bear in mind that our loans are short-term and not suitable to be held for more than a year.

How to Find Lenders Who Finance Residential Properties Held in LLC’s name?

Finding lenders who can finance a residential property held in an LLC’s name may require some research, as not all lenders offer this type of financing. Here are some steps you can take to find lenders who can finance a residential property held in an LLC’s name:

Ask for Referrals: Reach out to other real estate investors or professionals in your network and ask if they know of any lenders who specialize in financing LLC-owned residential properties. Talk to your real estate agent, as he or she regularly works with loan officers from different companies. Last but not least, ask your private lender.
Consult with Mortgage Brokers: Mortgage brokers often have access to a wide range of lenders and may be able to help you find a lender that offers financing for LLC-owned residential properties.
Check with Local Banks and Credit Unions: Some local banks and credit unions may offer financing for LLC-owned residential properties. Contact them directly to inquire about their lending programs.
Search Online: Use search engines to look for lenders that offer financing for residential properties held in an LLC’s name. Use keywords like “lender for LLC-owned residential properties” ,”LLC mortgage lender,” or “LLC mortgage loans.”

How to Identify the Best Long Term Financing Optione for an Investment Property Held in LLC’s Name?

Once you have identified a few potential lenders who lend to LLC’s, make sure your fit their underwrting requirements. Here is the list of questions your might want to ask:

Do they require personal guarantees from the members (most likely, they do)?
Do they have minimum credit score requirements for those personally guaranteeing the loan?
Do they verify the income of those personally guaranteeing the loan?
What is the maximum LTV?
Are they reserve requirements?
In case of a refinance, how long does your LLC need to own the property before refinancing is possible?

Once you know that you fit their underwriting requirements, it’s time to choose the best lender and loan for your investment property. As with any lender, the rates are important, but they are not the only criteria you should consider. Make sure you have a clear understanding of the following areas:

Is a lender a broker or a direct lender?
Is this lender local to your area?
What kind of customer service they offer? How responsive are their representatives and underwriters?
Is your rate going to be fixed for the duration of the loan, or is it an adjustable rate? If the rate is adjustible, is it a three-year ARM, five-year ARM, etc?
How long is the lender’s underwriting process? Ask them to be realistic. Bear in mind, that long-term loan undertwriting takes from 30 to 40 days on average.
What kind of fees this lender charges? Ask about BOTH points and all other fees.

Summary

You might pay a bit more to finance a property held in an LLC’s name, but that slight price increase is well worth it to avoid the risk you would have encountered by owning it in your personal name. Plenty of lenders offer financing to LLCs. As a real estate investor in Maryland, Virginia, and Washington, DC, you will find plenty of options to obtain reasonably-priced long-term financing for your rental portfolio.

Cross-Collateralization in Hard Money Lending

February 14, 2024 by Kyle Sennott Leave a Comment

Cross-Collateralized Properties in Hard Money Lending

Hard money lenders exist because they underwrite radically differently from conventional lenders. They take more risks, think outside the box, and finance the properties that conventional lenders cannot touch with a ten-foot pole. This flexibility allows private lenders to overcome obstacles that will leave a conventional loan dead in the water, including distressed collateral, low borrower credit scores, no verifiable income, and even certain title defects.

As an asset-based lender, hard money underwriters focus primarily on the collateral, which is real estate. Equity reigns supreme. The more equity is in the property, the less risk there is for the lender. For borrowers, the more equity there is, the more they can borrow. However, did you know that a hard money lender can lend on a property even if the equity in this particular property falls below its underwriting standards? Such transactions are called cross-collateralization, yet another creative financing type that differentiates a hard money lender from a conventional lender.

What is cross-collateralization?

Truth to be told, cross-collateralization can mean two diametrically opposing things. On one hand, it can mean multiple loans secured against the same property. If you have the first mortgage on your home and then decide to obtain a HELOC, you effectively cross-collateralize your home. Such cross-collateralization uses an asset that’s already collateral for one loan as collateral for the second loan.

When it comes to hard money lending, cross-collateralization means something very different. For private lenders, cross-collateralizing is a financing arrangement where multiple properties are used as collateral to secure a loan. In this arrangement, the lender has a claim on all of the properties or assets offered as collateral, rather than just one specific property.

Here’s how cross-collateralization works:

Securing Multiple Properties: Instead of using a single property as collateral for a loan, the borrower offers multiple properties as collateral.
Mitigating Risk for the Lender: Cross-collateralization allows lenders to mitigate their risk by diversifying the collateral base. If one property’s value declines or if the borrower defaults on the loan, the lender has recourse to other properties pledged as collateral, reducing the lender’s exposure to potential losses.
Higher Loan Amounts: By pledging multiple properties as collateral, borrowers are able to access higher loan amounts than they would with a single-property collateral arrangement. This can be advantageous for borrowers being strapped for cash or seeking larger financing for real estate investments or other business purposes. In other words, by pledging several properties as collateral, borrowers gain access to what they typically need the most – leverage.

What kind of properties can be used for cross-collateralization?

Typically, to cross-collateralize with a private lender, you need two properties. The first one is the initial project a borrower needs to acquire or renovate which might not be sufficient to serve as a collateral on its own. The second one will be used to provide the lender with that additional security and give the borrower access to leverage he or she needs. It’s important to remember that to cross-collateralize with a hard money lender both properties need to be:

Free of other mortgages or liens
Be an investment property held in an LLC’s name (in certain cases and jurisdictions, a free and clear primary residence may serve as a cross-collateral)
Residential, commercial, or mix-use properties can be cross-collateralized

What are the risks of cross-collateralization with hard money loans?

Cross-collateralization can be a helpful financing strategy for borrowers seeking to leverage multiple properties to secure a hard money loan. However, they should carefully consider the risks and benefits of this arrangement and seek advice from financial and legal professionals before entering into such agreements. Some of the complexities of cross-collateralization include:

Complexity and Risk for Borrowers: While cross-collateralization can offer significant benefits, it also comes with risks and complexities for borrowers. If the borrower defaults on the loan, the lender may have the right to foreclose on all of the properties pledged as collateral, not just the one in default.
Structuring the Loan: Lenders typically assess the value of each property offered as collateral. The loan terms, including interest rates, repayment schedules, and loan amounts, are negotiated based on this assessment. Most likely, your lender will require an appraisal for all properties pledged as collateral.
Legal and Documentation Requirements: Cross-collateralization arrangements require careful legal documentation. It also requires separate title work and separate title insurance to ensure that the titles of all properties are free of mortgages or any title defects. Borrowers should thoroughly review and understand the loan agreement terms before proceeding.

What are the examples of cross-collateralization in private lending?

A typical scenario involves a low-on-cash borrower who just ran into a great investment opportunity. The deal might be terrific, but she does not have enough money to meet the minimum borrower contribution her hard money lender requires. In such a case, equity from her other investment property can be used instead of that cash contribution. The lender will place liens on both properties. Both of these liens are removed once the borrower pays off the loan. The lender mitigates their risk by encumbering additional equity, while the borrower avoids missing a profit-making opportunity (or the hussle and the expense of getting a HELOC).

Another common scenario we encounter is a rehabber needing more funds to finish the job. They have a loan with another hard money lender coming due, but the renovation process still needs to be completed. By itself, the property has insufficient equity to refinance AND provide its owner with the much-needed funds. However, if that borrower has another investment property she can offer as additional collateral, cross-collateralization is the answer both the lender and the borrower have been searching for!

New Funding Resources is a hard money lender that offers creative financing solutions to real estate investors in Maryland, Virginia, and Washington, DC. Whether you own multiple properties in the DMV area or are just starting out your real estate journey, we are to help. Apply today or call 240-436-2340.