National Private Real Estate Lender to Host Real Estate Investor Forum

A national private lender based in South Windsor announced that Daren Blomquist, Vice President of RealtyTrac www.RealtyTrac.com, a recognized authority on residential real estate foreclosure data and trends across the United States, will present the keynote address at its semi-annual Northeast Real Estate Investors' Networking Forum on October 23.

The event is the second of its kind to be hosted by RCN Capital; its May 8th forum attracted over 170 attendees, and the October 23rd event is expected to bring together as many as 300 real estate professionals, including investors, mortgage professionals, realtors, developers and contractors.
RealtyTrac® is a leading provider of housing data and analytics for the real estate and financial services industries, publishing a variety of reports, including its monthly U.S. Foreclosure Market Report, data. Wielding this data, RealtyTrac has been quoted on The CBS Evening News, ABC World News, NBC Nightly News, FOX News, CNN, CNBC and MSNBC, as well as in The Wall Street Journal, Los Angeles Times, Chicago Tribune, San Francisco Chronicle, The Denver Post and dozens of other print and online news outlets.

Mr. Jeffrey Tesch, the Managing Director of RCN Capital, states that "we are very excited to have Daren Blomquist as our keynote speaker as I am sure that many of our attendees have seen him on such national shows such as CNBC, Fox Business and Bloomberg, and he is quoted frequently in business publications such as WSJ, USA Today, and Bloomberg News."

RCN Capital is a nationwide, direct private lender providing short-term commercial loans from $50k to $2.5M+ to real estate investors, developers, and small business owners. RCN Capital is affiliated with TicketNetwork® through common ownership. Since 2010 RCN Capital has made over 800 loans totaling in excess of $180 million throughout 40 states, and financing the purchase and renovation of non-owner occupied residential and commercial properties. RCN estimates that approximately $100M of its loans have been made to borrowers in the Northeast.

The Northeast Real Estate Investors' Networking Forum will be held at RCN Capital's 9,000 square foot dining complex at 75 Gerber Road East, South Windsor, CT, and is free to attendees. Attendance is limited, go to www.RealEstateForum.ezevent.com to learn more and register.

Connecticut Portfolio Lenders List

Local investors always ask if I know of any Connecticut Community Banks (Portfolio Lenders). Here's my list with Names, phone numbers, fax numbers and email addresses.

Bankers' Bank Northeast
Susan W. Salecky - SVP, Service & Sales Manager
43 Western Boulevard
Glastonbury, CT 06033-4338
(860) 633-5525
Fax:(860) 633-5877
sws@bankersbanknortheast.com

Berkshire Bank/CBT Region
Sheryl Mcquade - SVP, Commercial Regional Leader
58 State House Square
Hartford, CT 06103
(860) 748-4225
Fax:(860) 722-9983
smcquade@berkshirebank.com

Chelsea Groton Bank
B. Michael Rauh, Jr. - President and CEO
904 Poquonnock Road
Groton, CT 06340
(860) 448-4104
Fax: (860) 448-4119
mrauh@chelseagroton.com

Collinsville Savings Society
Gary Roman - President
277 Albany Turnpike
Canton, CT 06019
(860) 693-5986
Fax:(860) 636-7612
roman@collinsvillesavings.com

Dime Bank
Nicholas Caplanson - President & CEO
290 Salem Turnpike
Norwich, CT 06360
(860) 859-4350
Fax:(860) 885-1487
ncaplanson@dime-bank.com

Eastern Savings Bank
Kenneth C. Dyer - President & CEO
257 Main Street, P O Box 709
Norwich, CT 06360-0709
(860) 425-0134
Fax:860-859-4489
kdyer@eastern-savings.com

Essex Savings Bank
Gregory R. Shook - President & CEO
35 Plains Road, PO Box 950
Essex, CT 06426-0950
(860) 767-4414
Fax:(860) 767-4411
gshook@essexsavings.com

Fairfield County Bank
William DeMichiel - SVP Sales Management
150 Danbury Road, PO Box 2050
Ridgefield, CT 06877-0950
(203) 431-7591
bill.demichiel@fairfieldcountybank.com

Farmington Bank
John J. Patrick, Jr. - Chairman, President & CEO
One Farm Glen Boulevard
Farmington, CT 06032
(860) 284-4110
Fax:(860) 409-3079
jpatrick@farmingtonbankct.com

Ion Bank
Bruce Noe - Senior Vice President
251 Church Street
Naugatuck, CT 06770
203-720-5377
Fax:203-720-4100
bnoe@ionbank.com

Liberty Bank
Thomas Pastorello - Executive Vice President and Chief Financial Officer
315 Main Street, PO Box 2700
Middletown, CT 06457
860 344-7286
Fax:860 344- 7389
TPastorello@liberty-bank.com

Litchfield Bancorp
Thomas J. Villanova - President & CEO
P.O. Box 997
Litchfield, CT 06759
(860) 393-9149
Fax:(860) 567-5872
villanova@litchfieldbancorp.com

Naugatuck Valley Savings & Loan
William C. Calderara - President & CEO
333 Church Street, PO Box 599
Naugatuck, CT 06770-0599
(203) 720-5000
Fax:(203) 723-5428
bcalderara@nvsl.com

Newtown Savings Bank
Linda DeLaurentis - Executive Secretary
39 Main Street
Newtown, CT 06470-0497
(203) 426-4440
Fax:(203) 426-4510
ldelaurentis@nsbonline.com

Northwest Community Bank
Stephen Reilly - President & CEO
86 Main Street, PO Box 1019
Winsted, CT 06098
(860) 379-7561
Fax:(860) 379-2651
reilly@nwcommunitybank.com

Patriot National Bank
Joe Greco - Chief Administrative Officer
1177 Summer Street
Stamford, CT 06905
203-252-5937
 Jgreco@pnbk.com

Prime Bank
Jasper P. Jaser - President
7 Old Tavern Road, PO Box 696
Orange, CT 06477-0696
(203) 799-1299
jjaser@primebankct.com

Putnam Bank
Thomas A. Borner - Chairman/CEO
40 Main Street, PO Box 151
Putnam, CT 06260
(860) 928-6501
Fax:(860) 928-7539
tborner@putnambank.com

Putnam Bank
Robert Halloran - President & CFO
40 Main St.
Putnam, CT 06260
860-928-6501 x3025
Bhalloran@putnambank.com

Quinnipiac Bank and Trust Co.
Mark A Candido - President & CEO
2704 Dixwell Avenue
Hamden, CT 06518
(203) 407-0756
Fax:203-407-0759
mcandido@quinnipiacbank.com

Salisbury Bank & Trust Company
Richard J. Cantele, Jr. - President and CEO
5 Bissell St., PO Box 1868
Lakeville, CT 06039-1868
(860) 435-9801 ext. 1001
Fax:(860) 435-0631
rcantele@salisburybank.com

Savings Bank of Danbury
Kathleen Romagnano - President & CEO
220 Main Street
Danbury, CT 06810-0830
(203) 741-3151
Kromagnano@sbdanbury.com

Savings Institute
Rheo Brouillard - President & CEO
803 Main Street, PO Box 95
Willimantic, CT 06226-0095
(203) 456-6540
Rheo_Brouillard@banksi.com

Simsbury Bank
Martin Geitz - President & CEO
760 Hopmeadow Street
Simsbury, CT 06070
(860) 651-2088
Fax:(860) 408-4679
mgeitz@simsburybank.com

The First Bank of Greenwich
John Howland - President & CEO
444 E. Putnam Avenue
Cos Cob, CT 06807
(203) 302-4382
Fax:(203) 629-8400
john@greenwichfirst.com

The First National Bank of Suffield
Nancy Viggiano - President & CEO
30 Bridge Street, P O Box 96
Suffield, CT 06078-0096
(860) 668-3950
Fax:(860) 668-3954
NancyV@fnbanksuffield.com

The Guilford Savings Bank
Timothy P. Geelan - President & CEO
Box 369
Guilford, CT 06437-0369
(203) 458-5466
Fax:(203) 458-5457
tgeelan@gsbyourbank.com

The Milford Bank
Robert Macklin - President & CEO
33 Broad Street
Milford, CT 06460-3349
(203) 783-5788
Fax:(203) 783-5778
bob@milfordbank.com

Thomaston Savings Bank
Stephen Lewis - CEO/President
203 Main Street, P.O. Box 907
Thomaston, CT 06787
860-283-3401
Fax:860-283-2529
slewis@thomastonsavingsbank.com

Torrington Savings Bank
John Janco - President & COO
129 Main Street, PO Box 478
Torrington, CT 06790
(860) 496-2152 x 3014
jjanco@torringtonsavings.com

Union Savings Bank
Francis G. Dattalo - President & CEO
PO Box 647
Danbury, CT 06813-0647
(203) 830-4200
Fax:(203) 792-1169
fdattalo@unionsavings.com

United Bank
William Crawford - CEO
45 Glastonbury Boulevard
Glastonbury, CT 06033, CT 06066-0660
(860) 291-3650
Fax:(860) 657-8930
bcrawford@rockvillebank.com

Windsor Federal Savings & Loan
George W. Hermann - President & CEO
250 Broad Street, PO Box 250
Windsor, CT 06095
(860) 298-1444
Fax:(860) 298-6164
ghermann@windsorfederal.com

What is Cash on Cash Return (CCR, COC, IIR)?

Post by  Ben Leybovich

The most easily understood metric of investment return in real estate is Cash on Cash Return, usually abbreviated either CCR or COC.  The concept is rather simple – CCR juxtaposes the cash investment that has been made to the Cash Flow (Income minus Expenses) being received.

For example, let’s say you invest $100,000 cash to buy a 4-plex which generates $2,000/month of Gross Income which results in $1,200/month of Cash Flow.  Since CCR is usually thought of in terms of annual return, we must multiply all of the monthly numbers by 12.  Thus, this $100,000 4-plex is generating $14,400 of Annual Cash Flow.

Now, CCR is simply the answer to the question – if I invest $100,000 in this 4-plex, how quickly, or at what rate, would I recover my cash?

Framed in this way, all we basically aim to find out is what percentage of $100,000 does $14,400 represent.  In mathematical terms, if $100,000 is 100%, then $14,400 is x – at which point we solve for x:

X (CCR) = $14,400 / $100,000 = 14.4%

 

Thus, having paid $100,000 and received $1,200/month of Cash Flow, our achieved CCR is 14.4%.
Let’s just say that in lieu of paying $100,000 cash for this 4-plex, you instead make a down-payment of 25% ($25,000) and finance the rest.

In this case, the presence of a note for $75,000 would require a monthly payment – let’s just say $450/month.  This extra expense would have the effect of lowering your Cash Flow from $1,200/month to $750, or $9,000 per annum.  But, what does this look like in terms of the CCR?
Well – the thing to remember is that while the cost of your investment is still $100,000, the actual cash investment to you is only $25,000 in this case.  Thus, what percentage of $25,000 is $9,000?
CCR = $9,000 / $25,000 = 36%

Infinity ROI

Indeed – the less money you have in the deal, the higher the Cash on Cash Return.
And if we follow this path of thought far enough, we would realize that any return on investment of $0, no matter how small, is actually infinity ROI.  Yes – it’s true; if you managed to purchase this 4-plex with 100% financing, without putting any money into the deal, then even if you were only earning $100/month of cash flow, it is still a return on investment of zero – infinity.
This is the neighborhood where I’ve lived for the past decade and how I’ve bought everything that I own.
Having said this, I must warn you to please not go out and buy a fully financed 4-plex if the extent of your cash flow will be $100; doing so will put you one leaky faucet away from not having the money to keep afloat.  However, it is indeed possible to buy with no money down and this represents the single greatest advantage of real estate as an investment vehicle.  But I’ve strayed, so let’s get to the IRR…

Limitations of CCR Which Are Corrected With IRR

CCR has some inherent to it limitations which render it inaccurate for the very sophisticated investors.  When very sophisticated investors evaluate investment opportunities, they must assign value to things like time value of money and opportunity cast, not to mention that any movement of cash in or out of the transaction significantly impacts the returns, this can not be addressed by simply considering the IRR.  Let’s talk about these one at a time:

Time Value of Money

Time Value of money is simply the reality that money is more valuable today than at any time in the future.

There are many economic reasons for why this is true, but it all comes down to the concept of buying power and erosion thereof over time due to inflation of the currency supply and the resulting price inflation.  Currency held today does indeed store more buying power that it will in the future – this statement is almost always true.
With this in mind, the sophisticated investors have to price this erosion of value into their return.  Let’s say that over a set period of time a given investment produces Cash on Cash Return of 12%.
But, in the same period the inflation clocks in at 3%.  On the day the money was vested, it had buying power equal to 100%, but on the day the return was dispersed the buying power is only 97%.  This has to be accounted for, and the IRR formula does exactly that, while CCR does not.

Opportunity Cost

As they say, there’s a right place and the right time to do everything.
So, if you invest the money now and lock it in for a set period of time, what other, and perhaps better, opportunities might come along that you will not be able to take action upon because your money is locked in…?
For sophisticated investors this is an ongoing problem.  For example, I bring to them my syndicated apartment building.  It looks good today, but what if someone else brings them a deal tomorrow that’s better?  What is the premium ROI that they expect to receive with me today in order to be willing to tie-up funds for a period of time…?
IRR formula addresses this as well.

Movement of Money

Finally, having weighted the opportunity for time value of money and the opportunity cost, IRR also is able to track movement of cash in and out of investment by tagging each movement with a date.
For instance, having purchased an asset, you might receive cash flow for two years, and then you might choose to refinance the building, which would constitute a large waterfall event.
Later, however, you realize that you were too aggressive on your refinance, leaving your DSCR too low, which result in your cash flow being unable to support the CapEx.  Now you have to dip into your pocket to pay for the repairs, which naturally adversely impacts your IRR.
Once this happens, you decide to sell the building.  And, since there are so many idiots chasing yield in the marketplace, you actually manage to sell a money-loosing asset at a profit – so you add that profit into the IRR.

Conclusion

The formula for IRR is rather complex, and I’ll let the mathematicians worry about why it works and how.  I simply use an excel spreadsheet to line-up and time-tag all of the in-flows and out-flows, and the formula calculates the return.
Perhaps some visuals or even a little video would be useful here.  But, I’m busy – may be next time.  I’ll simply tell you that to an individual investor buying long-term hold a 10% – 12% IRR might be quite respectable.  In terms of syndications, however, we shoot for mid-teens to make opportunities attractive to the partners.

Creative Approach to FREE Property Management

I met an investor that has a unique approach to RE investing. He has very little headache with renters because of this win-win philosophy. He looks for people in his community that have a down payment and want to buy a home but cannot qualify for a loan . He offers them a 25% stake in a multi-family that he buys. He puts in his own money for the rest and moves them into one unit in the building. They pay whatever rent is the standard for that unit. They get their share (25%) of revenue from the building later. This way, the building gets taken care of automatically. Since they live in a building they own, they keep an eye on the other renters, no surprises, no trashing. One unit (that they occupy) is permanently rented, no need to pay a property manager. Everyone is happy. This person has several such units he co-owns. Never paid a penny for property management.

I see a few flaws in this concept. But overall, I think it's brilliant. This is why I love real estate investing. There's so much room for creativity!

What is Gross Rent Multiplier

Gross Rent Multiplier is a simple calculation but because income plays no role in the formula, it provides limited insight into the apartment’s investment viability. Gross Rent Multiplier (GRM) is also easy to calculate but unlike Price Per Unit, GRM does incorporate the property’s income.

Gross Rent Multiplier = Price / Gross Scheduled Income (annual)

Gross Scheduled Income is the potential income a property would generate if it was 100% occupied. You can think of GRM as the number of years it would eventually take for the property’s gross income to total the price.

Example: A 10-unit apartment building is offered for sale at $1 million. Each unit is 2Bd/2Ba and is renting for $1,000. What is the Gross Rent Multiplier?

Gross Rent Multiplier = $1,000,000 / (10 x 1,000 x 12) = 8.33 GRM

As long as you can get your hands on the rent roll, then the Gross Rent Multiplier measurement is preferred over Price Per Unit. Generally speaking, properties in prime locations have higher GRMs versus properties in less desirable locations.

Advantage – It’s More Useful and Reliable than Price Per Unit
Pop quiz, what are you buying when acquiring an apartment? You’re buying income stream. Given the fact that GRM accounts for income into its formula automatically makes it a more reliable method for evaluating investment properties compared to Price Per Unit. Additionally, by taking into account income, property features are automatically factored into your evaluation. It’s reasonable to assume that rents reflect unit size, amenities, location, and even external factors such as general market conditions that may add to or deduct from its price level. Rents are market driven – you can only charge as much as a tenant is willing and able to pay. By factoring in a market-driven data point (income), GRM is more reliable as a measurement for comparing properties. In areas where operating costs can be expected to be uniform across properties, GRM is especially useful for comparing and selecting investment properties for further analysis.

Limitation – Ignores Vacancy & Operating Expenses
Gross Rent Multiplier serves to indicate what the market is paying as a multiplier of the gross income. As explained above, gross income is generally a good data point because its market driven and accounts for enhancements and deficiencies of the property as well as general rental demand. But because it is gross instead of net income, GRM fails to differentiate properties with lower or higher operating expenses and vacancies. Tenants may pay for some, all, or none of the operating expense. For example, a landlord may pay for all utilities because the building is master metered. This will result in higher rents compared to an identical property where those costs are directly passed to tenants. If you were estimating the price between the master-metered versus the individual-metered property using the same GRM number, then this would result in a very questionable value.
As with Price Per Unit, it’s important to understand the reason to use Gross Rent Multiplier. Always keep in mind the above limitations and remember that its purpose is to get a quick feel for the potential market value of the apartment.

Is "Price Per Unit" really important?

If you’re evaluating many apartment investment deals, oftentimes you need a quick way to determine ones that warrant more detailed analysis. After all, your time is valuable and any time spent analyzing deals that don’t make sense from the very beginning may result in other lost opportunities. What you need are techniques to act as filter mechanisms and help you quickly decide if the investment deal will really work.

Price per Unit is often used because it’s simple and quick to calculate.

Price per Unit = Price ÷ Number of Rental Units.

 

What makes it popular is that it’s easy to gather the necessary information to run the calculation. All that’s needed is the asking price and the total number of units.
Example: A 10-unit apartment building is offered for sale at $1 million. The property has a total of 20 bedrooms and 20 baths. What is the Price per Unit?

$1,000,000 ÷ 10 units = $100,000 per Unit.

If the general price per unit rate is $50k per unit, and the property is offered at $100k per unit, then red flags should be raised immediately. If evaluating multiple deals, this might be one you choose to set aside.

Precaution #1 – Neglecting to Factor in Property Features
What if the general rate in the area was $75,000 per unit? Will you still be quick to discount the property? One precaution to take with Price per Unit is that it doesn’t take into account property features such as amenities, location, or floor plans. Each of these can add or subtract to the Price per Unit value. Let’s say the 10-unit subject property’s 2bd/2ba units are generous in size at 1400 sq ft each. Other surrounding properties have outdated floor plans with only 2bd/1ba models and average 800sq ft each going at the general rate of $75k per unit. The higher price per unit of the 10-unit apartment would then be warranted because of its more modern features and larger floor plans. If you were strictly comparing price per unit rates, then you may have dismissed this opportunity by thinking the property was overpriced.

Precaution #2 – Ignoring the Investment Feasibility
Since Price per Unit is based on the physical feature of the property, it’s really a physical measure, not a true financial measure. Because the income is never reflected in the formula, price per unit provides little insight towards financial feasibility of the investment property. You can’t derive from it whether the investment property will provide a suitable return or not. A property could be offered at a low price per unit but still turn out to be a horrible investment because of negative factors such as bad location or problems due to deferred maintenance. Alternatively, a high price per unit doesn’t necessarily mean it’s a bad deal as illustrated in the section above.
Price per Unit is easy to calculate so it’s often a good initial measure to use. However, keep in mind that Price per Unit only looks at the number of units; it completely ignores everything else about the property including its features, location, and income and is limited in its usefulness. Therefore, if the deal passes the Price per Unit test, then move on to the GRM test or the Cap Rate test.

What is a Cap Rate? (Capitalization Rate)

What is Capitalization Rate?

I'll give you the short answer and the more descriptive answer... The short answer is that the Capitalization Rate is the rate of return that you would expect if you were to purchase a property using all cash (no financing). It's just that simple. But I'll dig a little deeper so you fully understand what it is and why it's so important.

The Capitalization Rate, often referred as Cap Rate or just Cap. It is similar to GRM but can be more precise because it considers vacancy loss and operating expenses.

 

Cap Rate = Net Operating Income / Price

Net Operating Income (NOI) is the sum of all potential income less vacancy and operating expenses. NOI does not consider debt payments, depreciation, or capital improvements.

Calculating Cap Rate: An Example

A 10-unit apartment building is offered for sale at $1 million. Its annualized rent roll is $100,000 with operating expenses totaling $40,000. What’s the Cap Rate if average vacancy rate in the area is 5%?
Capitalization Rate = ($100,000 – ($100,000 x 5%) – $40,000) / $1,000,000 = 5.5% Cap
If you know the going Cap Rate for the area, then you can also derive the property value from the NOI.
Cap Rate addresses the limitations of Price Per Unit and Gross Rent Multiplier by including income, vacancy loss, and expenses in its calculation. However by doing so, other problems are introduced.

Precaution #1: Is the Cap Rate Distorted?

Capitalization Rate isn’t flawed, per se. The problem is with Net Operating Income. More often than not, NOI may be inaccurate, which distorts Cap Rate and consequently, misrepresents the estimate of value.
The inaccuracies stem from three primary reasons:

1. Misrepresented expenses
2. Excluded expenses
3. Improper expenses factored into the calculation

Common expenses include insurance, property management, real estate taxes, business fees, maintenance, trash removal, electricity, gas, and water. While reviewing each expense item, confirm the validity of each number. Try and obtain the actual amounts rather than estimates. Are items inappropriately labeled as operating expenses? Remember that depreciation, capital improvements, and mortgage payments are excluded.
Ensuring that expenses are complete and valid will enable you to estimate a more credible value.

Precaution #2 – Is the cap rate calculation based on current or pro forma numbers?

Sometimes sellers or brokers will base their asking price against the future income of the property. This future income is almost always higher resulting in a higher Cap Rate. This tactic is used to lure the unaware investor.
While it’s important to understand the potential upside in rents, projected numbers shouldn’t act as your baseline for estimating value. When estimating value, use current income and expenses. Then evaluate how much premium you’re willing to pay based on projected increases.

Precaution #3 – Financing is not considered.

Investors often use Cap Rate to gauge the potential return of a given investment property during the first year of ownership. Generally, a 10% Cap would indicate a 10% return on investment. Based on expected return, the investor then determines how much they are willing to pay. For investors who pay all cash, Cap Rate enables them to quickly do this.
Since NOI does not consider debt payments, Cap Rate ignores the impact of financing. Cap Rate stays the same whether a property is leveraged or all paid off. If financing is planned, then Cap Rate cannot be used as an estimate of value. Additional methods (ie. cash-on-cash or IRR) are required to assist in that task. However, Cap Rate is still useful as a comparison tool even with financing involved.

3 Commonly Overlooked Property Expenses

I’ve seen many different spreadsheets and pro-formas over the years, calculating potential return on investment for a given rental real estate investment. It’s not uncommon to find wholesalers inflating returns by eliminating all sorts of typical expenses (ie. vacancy, property management, insurance, etc). While this may trip up a newbie investor, most folks know to build in the usual expense categories when developing a pro-forma. Even so, I find it interesting how infrequently I’ll see the following three categories in a typical ROI calculation:

Turnover

What is turn-over expense? It’s money spent on a property when a tenant moves out to get the property ready for the next tenant. Inevitably, when a tenant moves out of a property there is some level of work needed to get the property in marketable condition. Most investors will touch up walls and paint (if not completely re-paint), clean and replace flooring as needed, take care of minor handyman items, etc. All of this can easily add up to over $1,000 (and sometimes much more) depending on the size of the property and the condition that it was left in.

While most investors have a line item for maintenance in the pro-forma, I find that it’s rarely enough to include turn-over expenses as well. Maintenance is really an ongoing budget item as repairs will inevitably be needed over the life of the property. Turn-over expense is really associated with the moving in and moving out of tenants.

Bookkeeping/Tax Prep

Another budget item that may or may not belong on a specific property proforma, but should be calculated nonetheless is bookkeeping and tax preparation. For the small investor who doesn’t mind tracking expenses and doing his own taxes, this may not be an issue. However, for the investor with multiple properties and an operation more like a business with properties in multiple LLC’s, it’s likely that there are costs associated with bookkeeping and tax prep. It’s important to include these figures when evaluating new properties for acquisition.

CAPEX

CAPEX stands for Capital Expenditures and pertains to big ticket expenditures that increase the useful life of the property. I think the most obvious CAPEX type expenditures on residential properties are items like the roof, HVAC, water heater, etc. I consider this slightly different than maintenance because they are higher cost items.

It’s very common for investors to buy a property with an old roof or an old HVAC and not budget for future replacement. For example, if you determine that you only have 5 years left on an old roof and you determine that a new roof will cost around $5,000 to replace … don’t you think you should budget $1,000 per year for the next 5 years to cover this expense? It seems obvious, but I almost never see investors doing this.

Understanding the true cost of an investment is one of the most critical elements to successful investing. It’s important that investors use accurate numbers and budget for all appropriate expenses associated with a potential acquisition.

Creative Strategies on Selling Properties in a Down Market (Q&A)

 

Click Here to email me your real estate investing question

Question: Cameron thank you so much for this (Q&A) segment of your blog. You have some really good advice in which is why I'm coming to you with this question... I live in West Hartford now but I have two houses in Puerto Rico that I can't think of no exit for the next 5 to 10 years. One I own free and clear but it is located in a non desired area. On top of this, the way it is constructed makes it hard to get conventional financing so it can only be sold to a cash buyer. I have rented it in the past but it has been vacant for the last 5 months.
The other is a condo that it is located near a medical and law school. It's currently rented and I don't owe much more on it. I would love to find a creative way to get rid of both of this properties. What makes the exit hard, is the current economic situation of Puerto Rico, Government Bonds were classified as Junk bonds and most of the people in the Puerto Rico are employed by the Government. The current trend is a sharp decrease in population and unemployment well above the double digits. There are hundreds of vacant homes and rents are at all time low. I have offered seller financing, made attempts to swap my house for a house, land or even an RV in the US but no luck. I can not even take the equity out by re financing since no bank in the US will make the loan. I have offered Agents $5,000 bonus on top of the commission for the sale, attempt to rent it as a vacation home, etc..  My current strategy is to buy more houses to make up for the negative ROI but it really sucks to have two properties making you no money.
I need a brilliant idea to turn this around since I have run out of them.

Answer: Wow Luis that really is a crazy situation. I think that you've been pretty innovative in trying to come up with different solutions but here are a few more that you can try out. First is to check the price. I don't know what your asking price is but often times if you just bring it down a few thousand, you might be able to pull in a buyer, even if it's just on the property that you own free & clear. Then you can use the proceeds to pay off or pay down the condo and then sell it at a discounted rate as well. Another option is to do an Absolute Auction on the free & clear property. Again, use the proceeds to pay off or pay down the condo. You could also find other landlords in the neighborhood by searching public records. Contact them to see if they are interested in purchasing both condos as a package deal. Another option for the condo is to market it to students and their parents at the college. Stress how close it is and how it makes sense for a student/parent and can even have roommates help pay the mortgage. The college might have a housing office or a campus newspaper to advertise the condo. I hope this helps. If I think about any other options I'll email/call you.  

Click Here to email me your real estate investing question

If you have a different opinion or just something that you'd like to add, please feel free to leave a comment below.
This is not legal advice. Please contact an attorney for professional legal advice.




How To Use A 401k to Invest In Real Estate (Q&A)

 Click Here to email me your real estate investing question

Question: I currently have a primary residence, a vacation home/rental and a rental property, and have a loan on each of these three properties. Would like to buy another rental property but debt/income ratio is too high and was told that I could not qualify for another loan. Have a combined of approximate $140K equity in three properties, and $70K in 401K. Also had $25k in saving account for down payment. I'd like to know how to leverage the 401K balance to qualify for a loan to buy a $100K rental property. Will appreciate any suggestions you can offer.

Answer: Hi Pei, there are a few options that you may have available. First I'd recommend that you totally exhaust your banking options. Try 10-15 banks to see if they'll give you the $75k loan. If that doesn't work out, find out if you can barrow against your 401k. As you may know (based on the way that you phrased your question), many plans allow you to barrow up to 50% or $50,000 which ever is less. That would give you access to $60,000 (including your $25k in savings). If the bank won't loan you the remaining $40k, you may be able to find a seller that is willing to carry it back by way of owner financing. Another option is to partner-up. Maybe a friend, family member or a colleague will be willing to invest with you. You can structure it anyway that you want but if you're looking to buy a property for $100k then maybe you can own 60% of the property and your partner can own 40%. Also, having 2 years of rental income and equity buildup may put your Debt to Income Ratio in an acceptable range, so you could use a short term loan until you have the second year of rental income,but make sure that will bring your DTI to an acceptable level before you try this or you could end up with a high interest loan and no way out.

Click Here to email me your real estate investing question

If you have a different opinion or just something that you'd like to add, please feel free to leave a comment below.

This is not legal advice. Please contact an attorney for professional legal advice.


Using Other People's Money to Invest In Real Estate (Q&A)

 

Click Here to email me your real estate investing question

Question: Cameron I continue to hear and read about real estate investors leveraging other people's money (OPM) to purchase real estate investments. My question is why don't people use their own money if they have it and where do they invest their money if they don't invest it in real estate.

Answer: Hi Jon, I'll be honest with you... In my opinion, most real estate investing gurus preach OPM because that is what sells books & courses. Many people don't have the 25%-30% down payment that most banks make you pay when barrowing money for investment property. With that said, don't assume that just because someone uses OPM that they're not also investing their own money in real estate as well.  The main reason for using OPM, is that there is far more of it available than people have themselves. For instance, if you only have 50k yourself, that greatly limits what you can do. However, bring in 3 others with 50k, and you can really do a ton more. Again, the assumption that people that tend to use OPM and don't put in their own, is flawed. With that being said, using BANK money is also OPM. Banks get deposit money.. and only are required to have X% of that capitalized. So where do you think it goes? Yep, loaned out or invested. So banks use OPM, investors use Banks and OPM (both of which are OPM). As for your 2nd question, there are many investment options out there outside of real estate. Stock, Bonds, Mutual Funds etc. It really depends on the investor. Personally I invest in real estate, individual stocks and my IRA.

 

Click Here to email me your real estate investing question

If you have a different opinion or just something that you'd like to add, please feel free to leave a comment below.

This is not legal advice. Please contact an attorney for professional legal advice.

How I REALLY Feel About "Subject To's"

I'M NOT A FAN!! I’ve never used it personally and I don’t use it with my clients however, it’s very popular with those so called gurus on late night infomercials and people always ask me about it so I figure that I’d at explain what it is and why I don't like it. In all fairness, I’ll say that the subject-to method is a great way to finance a real estate investment quickly, though it will be a short-term solution. The name "subject-to" comes from the phrase "subject to existing financing." This means that you buy the property on the condition that the existing financing stays in place. The title is transferred, but the loan will stay in the seller's name, and the buyer will make the payments. The reason why this is a short-term fix is because seller's aren't going to be very comfortable leaving the loan in their name for an extended period of time. Some investors will use this method when they don't want to come up with a down payment, knowing they can refinance in six months and get the loan put in their name. This method is commonly used when buying pre-foreclosure properties. The investor gets into the property with zero down or by just paying the mortgage arrearages and the seller is willing because they have to get rid of the property immediately.
But here are a few of the reasons that I don’t like this strategy;

1. In order to do it "right", you must place the property in a land trust in order to hide the fact that you assumed the mortgage from the bank. If the bank finds out, they could call the mortgage due in full putting the seller back in the same position as they were before.
2. It’s unethical. As a real estate professional, I have built my reputation on Trust. The fact that I have to try to hide the assumption from the bank just makes me uncomfortable. I know that banks are big institutions and its not like I’m hurting anyone but I just feel like my integrity would come into question and I’m just not comfortable with that.
3. It’s not as easy as the “gurus” make it seem. Just imagine Joe Investor coming into your home to make his purchase offer. He sits down on your couch and tells you that you have to sign the deed to your home over to him (giving him ownership) but the mortgage stays in Your name (and if he defaults on the loan, there’s no penalty for him but you’ll end up with the foreclosure on your credit). Oh yeah, and make sure you don’t tell the bank or anyone else about this deal. I understand that it happens all the time, but it’s very hard to find a seller that’s willing to do something like that.

Again, I don’t use this strategy in my personally investing or with my clients. However, If you use this method to finance a real estate investment, just make sure you uphold your end and make the payments on time.

The Mortgage Expo Returns to Foxwoods

The New England Mortgage Expo is returning to the region Jan. 17, 2014 at MGM Grand at Foxwoods Resort Casino.

 

The largest mortgage expo in New England, it is sponsored by The Warren Group, which publishes The Commercial Record and keeps on top of industry trends such as home sales and foreclosures. On tap will be dozens of exhibitors, top industry speakers, live podcasting and networking opportunities.

The event, which covers both residential and commercial real estate issues, includes a buffet breakfast and lunch.

 

For information, visit www.nemortgageexpo.com or contact The Warren Group at (617) 896-5344 or via email at nemortgageexpo@thewarrengroup.com.

Connecticut State & Municipal Employees Can Borrow Against Retirement Accounts to Invest In Real Estate

If you’re a Connecticut state employee or an employee of a Municipality and want to invest in real estate but don’t think that you have the funds, I’ve got great news for you! If you have money in your Deferred Compensation 457 account, you may be able to use it toward your RE Investment. This is a great option but there are a few things that you must consider.

 

The Rules:

You can generally borrow up to 50% of your account balance or $50,000, whichever is less. You usually have up to five years to repay the loan, unless you are borrowing for the purchase or renovation of your primary residence, which allows a longer payback. Participants are permitted to take one or two loans at a time and a one-time set up fee may apply. Now, let’s go through the pros and cons of borrowing from your deferred compensation plan account.

Pros:
1. There is no credit check. You don’t have to apply for the loan, and you can make plans knowing that you will get the loan.

2. There is a reasonable interest rate. You pay the rate set by the plan; as of this post, CT state employees pay 5.55%.

3. It provides a reasonable return. Since you pay yourself the interest, it looks like a good deal.

4. The interest is tax-sheltered. You don’t have to pay taxes on the interest until retirement, when you take money out of the plan.

5. It’s convenient. You can apply online or make one quick phone call. Loan repayments (principal and interest), are generally payroll deducted on a biweekly basis.

Cons:

1. You pay more taxes. Since you repay the loan with after tax dollars the interest is double taxed, significantly increasing the cost of borrowing.

2. There may be consequences if you leave your job. If you leave your job the loan is due and payable or it will become taxable income in that year. (Any rolled over assets from non-governmental plans remain subject to the IRS 10% premature withdrawal penalty tax if withdrawals are taken prior to age 59 1⁄2.)

3. The loan isn’t tax deductible. Unlike a traditional mortgage, this is considered a consumer loan, so there is no tax advantage.

4. What are the consequences for defaulting on the loan? The borrower understands that if the loan is in default, the outstanding balance plus accrued interest (the “Defaulted Amount”) will be reported to the IRS for the year the default occurred. Interest will continue to accrue but will not be reported to the IRS until the loan is repaid or offset with a distribution. In the event of a loan default, the participant is not permitted to initiate another loan until the defaulted loan is repaid.

So as you see, there are a few things that you should consider before making this move. Everyone’s situation is different, but in general, I think that it's a great option when considering how to fund your next investment.

 

For more rules & regulations on investing in Real Estate with your 457 (Deferred Comp Plan) Contact me here!



 

 

 

 



The FHA "Back To Work" Program Is Official

The FHA has waived its 3-year foreclosure waiting period.

 

Effective immediately, the FHA is waiving the 3 year waiting period after a foreclosure and the 2 year period after a bankruptcy for people who can show that they have recovered from a negative financial event and that have a good payment history for the past 12 months. This could help some people hurt by the recent financial mess be able to buy a house again.

This applies to FHA Case Numbers assigned on, or after, August 15, 2013, borrowers with a recent history of bankruptcy, foreclosure, judgment, short sale, loan modification or deed-in-lieu can apply and get FHA-approved for an FHA-insured mortgage.

 

The FHA "Back To Work" Program Is Official.

FHA mortgage insurance is available for any loan which meets the following two conditions:

1.The loan must be made by an approved FHA lender
2.The loan must meet the minimum standards of the "FHA Mortgage Guidelines" 

The minimum standards of the FHA mortgage guidelines are straight-forward. Some of the more well-known rules require mortgage applicants to show a minimum credit score of 500; to make a downpayment of at least 3.5% on a purchase; and, to verify income via W-2 or federal tax returns.
The guidelines also include such arcane topics as U.S. citizenship requirements for borrowers; relocation rules for trailing homes and income; and, minimum standards for condominiums and co-ops.
Loans failing to meet FHA mortgage guidelines do not get insured and the Federal Housing Administration has been steadily tightening its requirements since last decade's housing downturn.

On August 15, 2013, though, the Federal Housing Administration moved to relax its guidelines for borrowers who "experienced periods of financial difficulty due to extenuating circumstances".
Dubbed the "Back To Work - Extenuating Circumstances Program", the FHA removed the familiar waiting periods that typically followed a derogatory credit event.

If you've experienced any of the following financial difficulties, you may be program-eligible :
•Pre-foreclosure sales
•Short sales
•Deed-in-lieu
•Foreclosure
•Chapter 7 bankruptcy
•Chapter 13 bankruptcy
•Loan modification
•Forbearance agreements

The FHA realizes that, sometimes, credit events may be beyond your control, and that credit histories don't always reflect a person's true ability or willingness to pay on a mortgage.

If you're a Real Estate agent, an investor, or a seller, this news can help you to get your listings/property sold. Visit www.Hud.gov for more info

Connecticut's Best Real Estate Deals are in.....

I'm often asked "Where are the best deals in Connecticut right now?". My answer is "Right between your nose and your hairline!" (Ok so maybe I don't say it quite like that but you get the picture.)

The best real estate deals are not seen with the eyes, they're seen with the mind. That being said, you can find great deals in every city, in every state, at anytime. All it takes is a little ingenuity and some education on creative investing strategies.

Notice that I didn't say "creative real estate investing strategies". That's because this concept transcends beyond just real estate.

When I was a kid, I had a friend that was upset that the candy in the vending machine at school was much more than it was in the store. Seeing this as an opportunity, he then took a trip to the local wholesale club with his mom and bought that candy by the bulk and sold it at school for much less than the candy in the vending machine. He made a ton of money and he's a successful entrepreneur today.

Bringing it back to real estate, let's say that you have a deal on the table whereas the owner is over-leveraged (owing more than the house is worth). At first glance, it may look like there's no money to be made there. But instead of walking away from the deal, you rack your brain and come up with 3 different options.

Option 1 - Short Sale: If the seller is behind on his mortgage, you can negotiate directly with the bank (or hire a short sale specialist to negotiate for you) and end up purchasing the property for less than market value.

Option 2 - Sandwich Lease Option: I wouldn't recommend this if the seller is behind on mortgage payments. But this type of deal would allow you to have control of the property (without purchasing it) and rent it out to a secondary tenant. The secondary tenant stays in place until the mortgage is paid down enough to go forward with the sale. In short, you're paid to be the middle man.

Option 3 - Subject-To: Before I go into this one, I must say that I don't personally participate in assisting buyers or sellers with Subject-to deals. The reason is that it's a very slippery slope and I can face a lot of ethical issues if the deal goes south. That being said, It's still an option for you in a private transaction. A subject-to deal would allow you to assume ownership of the property while the seller maintains responsibility for the mortgage. In a perfect world, you would find a tenant for the property to pay down the mortgage, and then either sell the property for a profit, refinance it, or keep it for cashflow once the mortgage is paid off.

So as you see, just about any property for sale out there is a potential "deal" if you know how to properly structure the transaction. Education is key! I highly recommend that investors continue to educate themselves in all areas of real estate. You never know it all!

For more information on Short Sales, Sandwich Lease Options & Subject-To's, visit my website at www.MyInvestingAgent.com

How to find "Free & Clear" properties

Many investors ask me to send them properties in a specified area that are owned free & clear (no mortgage). Generally, the reason for this is that they are looking to purchase the properties using 100% owner financing.  

As a realtor, I have access to the Multiple Listing Service (MLS). The MLS is a tool that realtors use to find properties with specific characteristics in a particular area, but unfortunately, it doesn’t allow me to search for “free & clear properties”.

Although the MLS doesn’t allow realtors to search for free& clear properties, it’s still not very hard to find them. Here’s how you can do it: Email me to let me know exactly what property characteristics you’re looking for and in what towns (provided you’ve already filled out the Investor Questionnaire). Once I email you that list of properties, Go to the Town’s Assessor website (Google it) and type in the properties addresses. This will give you the property card. The property card gives you a lot of information about the property including when the seller bought the property, how much they paid and how much they took out in loans. If there’s no loan information, or if the last loan was made over 30 years ago, odds are that they own that property free & clear.

So there you have it, It’s just that easy. If you’re interested in purchasing properties for the purpose of investment, please click here to fill out my Investor Questionnaire.

5 Ways To Finance A Real Estate Investment

Now is a great time to be looking for deals in real estate. The biggest profits can be made by buying in a down market. That being said, if you don’t have substantial liquid assets available or a great credit rating as a safety net, buying real estate with the current credit market could prove to be more of a pitfall for you than a springboard to prosperity. Assuming that you do have a stellar credit rating and feel financially secure, these forthcoming financing methods may be a great way for you to grow your net worth. Whether you're looking to upgrade your current home, buy your first home or start buying rental properties, you're going to need to be savvy when it comes to financing. Here are five ways to finance a real estate investment.

Traditional

The traditional route taken through banks, credit unions and other home mortgage companies is a great way right now to finance a real estate investment. Rates are currently pretty good but expect to be asked for full documentation of income and debts to be qualified. For those that qualify, most lending scenarios require at least a 3.5% down payment for an owner occupied property and about 20%-30% for an investment property. If you are able to get approval, now is the time to lock in a great rate.

This way to finance a real estate investment really is the most traditional, safe and well-known method. So, I'm going to take you through a number of ways to finance a real estate investment you may not have heard of before.

Owner Financing / Seller Financing / Seller carry back

There are a few different names, but the same principals apply. Whenever you hear someone talking about buying "on terms," they are speaking of creative financing. Creative financing refers to any method of financing besides the traditional method. Knowing these methods is essential to savvy investing because they allow you to buy properties using the much-talked-about OPM (Other People’s Money). Investors often try to use as little of their own money as possible so it will stretch further. The first creative-financing method you’ll need to be aware of is a “Owner Financing.”  In this method, the seller agrees to carry the note for your purchase. This will happen when you find a seller that owns his/her property free and clear. They don’t want the property anymore, but they don’t mind receiving a monthly payment on it. Most of the time, however, the seller will place a time limit for when the note must be paid in full -- typically, between one and five years. This is a great way to finance a real estate investment as long as you realize you’ll need to refinance later. Remember: It's generally easier to qualify for a refinance loan than a purchase loan.

Subject-to

This subject-to method is a great way to finance a real estate investment quickly, though it will be a short-term solution. The name "subject-to" comes from the phrase "subject to existing financing." This means that you buy the property on the condition that the existing financing stay in place. The title is transferred, but the loan will stay in the seller's name, and the buyer will make the payments. The reason why this is a short-term fix is because seller's aren't going to be very comfortable leaving the loan in their name for an extended period of time. Savvy buyers will use this method when they don't want to come up with a down payment, knowing they can refinance in six months and get the loan put in their name. This method is commonly used when buying pre-foreclosure properties. The buyer gets into the property with zero down, and the seller is willing because they have to get rid of the property immediately. If you use this method to finance a real estate investment, just make sure you uphold your end and make the payments on time.

Seller second

This way to finance a real estate investment is extremely useful and used often. The "seller second" means that the seller provides a second mortgage. Typically, the second will be just large enough to cover most, or all, of a required down payment. For instance, if you know you're pre-qualified for a loan that will require a 20% down payment, you should make an offer contingent on the seller carrying a note for 20%. This way, you will get into the property without using any of your money and the seller gets the bulk of his equity and makes the deal. One caveat: Make sure the loan you are qualified for will allow this type of transaction. Some will, and some won't.

Lease option

Finally, if you can’t find a way to finance a real estate investment, you can do a lease option. The lease option allows you to get into the house for little to no money down, and it gives you the right to buy the property down the road -- typically, in two or three years. This time period will give you ample opportunity to procure financing. Also, often you can arrange it so a portion of the monthly lease payment will go toward the balance of the home.

property purchase planning

There are actually many more ways to finance a real estate investment creatively, but you are now acquainted with some of the most popular. The bottom line is: If you're determined to buy a property, you will find a way.

5 Things Private Lenders Want to Know Before Investing With You

If you’ve been investing in real estate for a while, chances are you have considered using private money lenders (investors) to grow your business. Most people fail when reaching out to potential investors because they don’t answer the five critical questions that every private lender must have answered before investing with you (even if they don’t ask them). If you can answer these five questions, you will dramatically increase your fundraising ability. By putting yourself in the shoes of the potential investors and knowing what they are asking when you approach them, you will help to position your offering in a way that greatly increases your odds of acquiring private money to grow your business.

5 Questions You Better Be Able to Answer Before Private Money Lenders will Invest in You and Your Real Estate Deals

Am I going to get my money back?

This is the number one question that private lenders want to know when approached. If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do. Investors invest with people they know, like, and trust. Potential investors have all heard the horror stories; at this point they are judging your ability to deliver, and they will not likely give you money until they deem that you’re trustworthy.

What’s in it for me?

If you have established trust, the next thing potential investors want to know is how they will benefit. Many people approach potential lenders with the wrong mindset, and tell them all about what the lender’s money will do to help their business. However, investors are concerned about what is in it for them, and you must address that up front.

What are my risks?

Every investment has risks and private lenders want to know, if things go badly what is their downside? Will they lose all the money they invested, or just part of it? Is there a chance they could risk even more than they put into that investment? A realistic investor knows that there are things that could affect any real estate investment’s outcome.They want to know if you understand them and are prepared, and that you have done everything you can to limit their risks. They want to know that you are realistic with your projections, and that they aren’t going to get hung out to dry when you encounter difficulties.

How is my investment secured?

If you are investing in single-family homes, is the investment secured by a first position on the mortgage, title insurance, and hazard insurance? If it is an equity partnership, how is it secured? Is it protected by the cash flow it generates, by hazard insurance, etc.?

Do you have a plan and is it realistic?

Before potential investors will invest with you, they want to know if you have a plan, if you’ve done this before, and have you thought it through or are you flying by the seat of your pants with their money? You must have a plan and it must be written down. You might think this is a “no-brainer” and that everyone has a plan before they approach potential lenders. However, I’ve seen it over and over again: people approach potential investors and they have a vision, but lack a step by step plan for achieving their investment goals.They want to know if you’ve done this type of investment before or if they are going to be a part of a new experiment. This can be one of the biggest hurdles for new investors to overcome. But if you can show experience on your team (notice I didn’t say it had to be you alone) and have a written down, well thought out plan, you will greatly increase your odds of them investing with you.

If you do not answer these five essential questions when talking to a potential investor, they will not invest with you. However, knowing their concerns and answering them up front will greatly increase your odds of acquiring them as an investment partner, thus growing your business faster. The key to raising great amounts of private money lies in addressing potential investor questions before they are asked, having a realistic plan, doing what you say you will, and being amiable.