Monthly Archives: January 2020

Property and Real Estate Investments – Financial Aspects

Property and real estate are not considered investment instruments that are truly liquid because individual or real estate properties cannot be exchanged. Therefore identifying the land or real estate where you invest can take quite a lot of time and effort and depends a lot on how familiar investors are with certain market segments that suit their interests. Real estate or land investors often use various valuation methods to make their lives a little easier, through price comparisons. Sources of information relating to prices can include: public auctions, private sales, public agents, market listings or real estate agents.

Real estate or land assets are much more expensive than bonds or stocks. Therefore investors most often avail themselves of a mortgage loan that can be collateralized by the land or real estate itself. Accordingly we usually use the terms *equity* or *leverage* with reference to the money paid by the investor as opposed to the amount lent by the bank. Their ratio is called Loan-to-Value (LTV) which is considered to represent the risk taken by the investor. Most banks regard 20% of the appraised value as a minimum equity requirement. Quite a number of pension funds and REITs, or Real Estate Investment Trusts, regularly purchase land or real estate with *zero* leverage thereby minimizing their risks, but capping their Return-On-Investment (ROI) as well.

If the purchase of the land or real estate is leveraged, the necessary monthly installments or “carry costs” might create a negative cash flow for the investor right away after purchase. In addition to possible positive cash flow elements such as those generated by depreciation, equity buildup and capital appreciation, investors might also partially or entirely offset the “carry costs” by means of the so-called Net Operating Income, or NOI. This technical term typically means *rents less expenses* and in countries other than the US it is often referred to as Net Cash Flow. The ratio *NOI/purchase price* is called the Capitalization Rate. It indirectly indicates in how many years the property or real estate will pay for itself in an interest-free financial environment.

About Hard Money Lenders

Many novice investors are curious about hard money lenders. There are many questions that arise like Who are they? What is that? How do I get it? Was this helpful? Let me share with you some basic principles about hard money lenders. First, let’s determine what the term “hard money” means. When money is discussed between investors, it is considered “soft” or “hard”.

Usually soft money is easier to qualify for and flexible requirements. Hard money, on the other hand, is just the opposite. That’s much tighter. Not that it’s more difficult to get, but the requirements are very specific and far more stringent. They must, because most of the hard money comes from private individuals with lots of money in hand. This is why hard money is also referred to as “personal money”. The money is used for investment purposes coming from people, just like you and me, not a typical lending institution. So their first priority is protecting their investment capital.

It is a good idea to know what the requirements are when dealing with hard money lending so you can find one that suits your needs. Usually they will only lend you up to 70% of the value of a decent home in repaired conditions. So if you find a house worth $ 45,000 in such conditions, and need $ 20,000 in repair work, and after repairing the current fair market value is worth $ 100,000, then they can usually lend you up to $ 70,000.

Another thing you will encounter is high interest rates. Interest rates vary from 12% – 20% every year and the period can last for 6 months to several years. This rate varies depending on your credit score and experience. In most cases, there will be closing costs or fees for using hard money. Hard money lenders will usually charge from 2-10 points. One point is equal to one percent of the mortgage amount. So charging 1 point with a $ 100,000 loan is $ 1000. These are all important things to consider when choosing a hard money lender.

Many hard money lenders today will also ask you to fill out credit applications that may require you a tax return, the latest payment deductions, and bank statements. Once again, it’s all about protecting their assets. However, some like the old fashion way where they only care about the deal so they drive or see the property physically.