Private Lender by AAPL by American Association of Private Lenders

PL PRIVATE LENDER

THE OFFICIAL EZINE OF AAPL MARCH/ARPIL 2015

BENEFITS OF SEARCHING FOR LOCAL PRIVATE LENDERS

SMART FINANCING MATURING COMMERCIAL LOANS AN OPPORTUNITY FOR CROWDFUNDING

CONFORMING VS. NON-COMFORMING

Making Property Lending Decisions

RAISE AND MANAGE MONEY LEGALLY

CARLOS NODARSE LENDER LIMELIGHT  2015 MARKETING DOS  IMPORTANCE OF AN & DON’TS EXECUTIVE SUMMARY

 INVESTING IN ASSISTED LIVING CARE FACILITIES

Private Lender March/April 2015

CONTENTS 4

Private Lender Contributors

Lender Limelight Carlos Nodarse

How to Write an Executive Summary By: Bruce McClanahan

The Benefits of Searching Locally for a Private Lender By: Ken Meyer

Maturing Commercial Loans Opportunity for Crowdfunding? By: Lawrence Fassler

Conforming vs. Non-Conforming Making your Property Lending Decision By: Dan Harkey

7 Marketing Dos and Don’ts for the rest of 2015 By: Elizabeth Morales

Raising and Managing Money as a Private Lender How do do iit Legally By Kevin Kim

How “Smart Financing” Accelerates Rental Property Income and Profit. By: Bob Burozski

•••CORNER OFFICE•••

Matt Benson, Executive Director April 11th marks the 47th anniversary of the passing of the Fair Housing Act (Title VIII of the Civil Rights Act of 1968) which provides equal housing opportunities regardless of race, religion, gender, disability, and families with children. In light of today’s political debates regarding the Religious Freedom Restoration Act, I think it is fair to broadly ask ourselves: Are We Fair Enough? Many lenders believe that the Fair Housing Act doesn’t necessarily apply to what they do. That became evident from the feedback we received as we approached many lenders, investors and other professionals to write articles about the Fair Housing Act and the impact on their businesses. We read many e-mail replies simply stating, “That doesn’t apply to me.” The Housing and Civil Enforcement Section of the Civil Rights Division is responsible for the Departments’ enforcement of the Fair Housing Act (FHA), along with the Equal Credit Opportunity Act, the Servicemembers Civil Relief Act (SCRA), the land use provisions of the Religious Land Use and Institutionalized Persons Act (RLUIPA) and Title II of the Civil Rights Act of 1964, which prohibits discrimination in public accommodations. On August 7, 2014, a complaint was filed that alleged a mortage company violated the Fair Housing Act and Equal Credit Opportunity Act by requiring recipients of disability income to provide a letter from a doctor to substantiage their income. The court entered into a consent order of over $1.5 million to compensate the victim who had been asked for the documentation. The National Fair Housing Alliance says that, while practioners understand their obligations under the Fair Housing Act, some choose to put themselves and their companies at risk by failing to comply with the law. My fear from our experience is that brokers and lenders don’t understand. Therefore, I ask everyone to recommit to setting a tone of equal professional service in their offices. I call on sales associates to recognize that their assumptions about buyers’ needs- and personal biases - must be checked at the door. Allowing ignorance and biases to influence our actions is bad for all of us.

PRIVATE LENDER March/April 2015 Production Manager/ Chrissey Breault CEO Michael Wrenn Art & Design Executive Director/ Matt Benson Advertising and Sales Linda Hyde Editor-in-Chief David Lang Private Lender is published semi-bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers. For Subscriptions: Visit www.facebook.com/aaplonline or email info@aaplonline.com. For Back Issues: Visit www.issuu.com, email info@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail info@ aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is expressly prohibited. Copyright © 2015 American Association of Private Lenders. All rights reserved.

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PRIVATE LENDER CONTRIBUTORS •••••MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE.••••• BOB BUROZSKI Bob is the President of Palm Beach Homebuyers, Inc. A former engineer and stock broker, Bob has spent the last 25 years buying and selling homes and small apartments in Florida. He also actively cohosts two REI groups in Volusia County, Florida.

LAWRENCE FASSLER Lawrence is the General Counsel of Realty Mogul responsible for legal and securities compliance. Previously he ran a real estate construction firm, and before that he worked for over 15 years as an attorney with prominent New York and Silicon Valley law firms (Shearman & Sterling and Cooley) and a medical device company that was ultimately acquired for over $4 billion. Lawrence holds Series 7 and 66 licenses, and has a BS in Mechanical Engineering from UC Berkeley and a joint JD/MBA from Columbia University.

GENE GUARINO, CFP Gene is a Certified Financial Planner in the US and in Australia. He is the President of the ALF Training Academy and he owns and operates Assisted Living Facilities in Phoenix and Scottsdale Arizona. Gene has been a real estate investor for over 30 years, has owned and operated 16 businesses and has been an angel investor in numerous others. Gene has written four books, hosted two radio shows, and has spoken to over 250,000 people in four countries about business and investing. Today Gene is focused on just one thing, Assisted Living Facilities. Gene’s goal is to help those people and to train others to help them as well. To “Do Good and to Do Well.” DAN HARKEY Dan Harkey is President and CEO at CalComm Capital, Inc. and National Financial Lending Inc. He has been active in the real estate and financial services industry since 1972. He has taught private money lending and underwriting of commercial/industrial properties at over 350 educational seminars. Dan has also authored a 250 page underwriting booklet which will be available on line. You may call him at (949) 521-7115, e-mail him at djharkey@calcommcap.com or join him on LinkedIn. KEVIN KIM Kevin Kim is an experienced corporate and securities law attorney with the Geraci Law Firm, a law firm dedicated to providing reliable and innovative legal solutions. Mr. Kim has an extensive background in complex corporate transactions, private placement, and cross border transactions. Mr. Kim has worked with major multi-national corporations, advising them on matters such as structuring strategic business acquisitions and private equity financing. Currently, Mr. Kim focuses his practice on real estate matters, specializing in private placements and other alternative investments for private lenders, real estate developers and other real estate entrepreneurs.

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PRIVATE LENDER CONTRIBUTORS BRUCE MCCLANAHAN Bruce McClanahan is a business loan broker and referral agent residing in Shell Beach, CA. He started his financial services career in March of 1993, with a California Life/Health insurance license, which he continues to hold. He added Property/Casualty Insurance and General Securities Series 7 and Investment Advisor Representative 66 licenses along the way

KEN MEYER Ken Meyer, President/CEO of Trust Deed Capital, Inc. has been in the financial services and lending industry for nearly 30 years. He graduated from the University of San Francisco with a Bachelor of Science in Business Management and went on to obtain his designation as a Certified Financial Planner. He worked in the lending and investment advisor capacity for PaineWebber, Bank of America, and Wells Fargo before becoming President of the Mortgage Division for Pacific Mercantile Bank. From there he opened and managed his own Mortgage Banking Company where he funded and sold over 2 billion dollars in agency loans. Anticipating the looming real estate market correction in 2006, he chose to close his mortgage banking company and soon after formed Trust Deed Capital, Inc.

ELIZABETH MORALES Elizabeth Morales is the Business Development Director for Applied Business Software, creators of The Mortgage Office and The Loan Office, loan servicing software. She has a B.A in Spanish Literature and a Masters in Business Administration. She has extensive experience in leadership and a diverse background in public, corporate and creative fields. She can be reached at Elizabeth@absnetwork.com

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“.. you’re not always going to make everyone happy but in the end as long as you can look in the mirror and know you did your best, and you are happy with yourself, then so be it.” 8

Private Lender

Carlos Nodarse C

arlos Nodarse is the Chief Operating Officer of Applied Business Software (ABS), who makes loan servicing and mortgage pooling software called The Mortgage Office. Most of the private lenders in the US use their system to manage their loan portfolios and mortgage funds. They’ve been around a long time - they celebrated their 36th anniversary last year. As COO, Carlos oversees development and enhancements of the product, as well as manage the Technical Support Department. That team is what makes ABS so successful. Their development team has over 80 years of development experience. They do not use any outside development firms. All products are built inhouse by the same original developers. The support staff consists of team members that do what it takes to make sure customers get the help they need to successfully and efficiently use the software to run their businesses. It is definitely a team effort. Carlos’ colleague, Elizabeth Morales, was able to help Private Lender interview Carlos for the “Limelight.” EM: What projects are you currently working on, Carlos? CN: That’s top secret! But in all seriousness, we are constantly evolving. ABS is fortunate to have a great group of highly motivated professionals who simply love what they do. I love the team we have in place, and this is part of what keeps us on the forefront of our industry. One of our recent newsworthy events was the release of The Loan Office, which is geared toward the smaller lender. The demand for this product has been phenomenal – we even had to hire more staff (sales, support) because of it. EM: Why do you think you were you chosen? CN: That’s a good question - I think people are fascinated with technology, and always will be. We often have people

that want to meet the developers behind the product, and every week we’ll have someone from somewhere visit our offices. I think people are also intrigued by our story, and how we’ve always been at the forefront of the lending industry, dating back to the late 1970s EM: What was it like for you when you first started at ABS? CN: I actually started here as a Junior in High School. Boy, I sure feel old saying that! Back then my only responsibility was writing the documentation/printed manuals for the software. I did a little programming here and there while attending college. I received my bachelor’s degree in Computer Science and Engineering from Loyola Marymount University here in Los Angeles. After that, I came on board full time and have been here since. It’s been a long time but feels like just yesterday. EM: Does that mean that you chose programming or did programming choose you. Is this what you wanted to do growing up? CN: It chose me for sure. When I was a senior in St. Bernard High School, in Playa del Rey, CA., they brought in a bunch of Radio Shack TRS-80s and essentially created the first computer programming class for our school. I was instantly intrigued and signed up for the class. That was my first introduction to programming. My second, and the thing that got me hooked, was running into someone who was developing software and who was very successful at it. The rest, as they say, is history. EM: Did you ever have a job outside of ABS or real estate based? CN: I have worked at ABS my entire adult life. My non industry related jobs all took place in high school. I did all kinds of things; worked in the filing department of a hospital; sold shoes at the mall; a teller at a bank. What a variety!

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•••LENDER LIMELIGHT••• EM: What you would do differently if you could do it again? CN: I really love listening and dancing to music. I wish I would have learned to play a musical instrument. I love the sound of the piano. Thankfully, my daughter loves to play the piano and is very good at it. I love to listen to her play; I hope she sticks with it. EM: Ok, If you could sing one song on The Voice, what would it be? CN: Assuming I could sing -which I can’t- I would sing something from the 70s era, maybe a Marvin Gaye song. But if forced to pick one right this second, the one song that comes to mind is ‘Thinking Out Loud’ by Ed Sheeran. I really like that song. Beautiful lyrics. EM: So what influences or motivates you? CN: My big motivational factor is the satisfaction I get from building products that people love, enjoy, and use to help run their businesses. It’s that creativity and problem solving that I like about programming. EM: What do you ever complain about? CN: You’d have to ask my wife… I think she keeps track of that! Seriously though, the traffic here in California can sometimes get to me. I guess it’s the price we pay for living in such a great place. EM: Quick. What’s one word to describe your work environment? CN: I’m going to need three… Focused, hardworking, and fun. We are a very focused company, with very hard working people who balance out the hard work with a little fun. I think it is a winning combination. We have lunch every day together in the office. It is a great opportunity to bond and relax while discussing any pressing issues. The lunch conversations can get interesting. EM: What advise do you have to a ‘New Carlos’ ....to a young software developer/programmer? CN: ABS is a great company to work for with great opportunities. You certainly won’t have things given to you but you will have the opportunity to earn them. We are a small company but we are very lean, creative and successful. You will have the opportunity to get involved

10 Private Lender

in as many aspects of the software industry as possible; you won’t get bored. Take advantage of your youth. As you grow older, life demands more of your time. Now is the time to really push yourself. EM: How do you unwind from a busy day? CN: Family time, for sure. Going home, seeing the wife and kids, having dinner, seeing how their day went; just having that family time is utopia to me. EM: One moment in your life you would want to replay or even relive? CN: This one is easy. It would have to be my wedding day and the births of my three children. My wedding day, because I had so much fun. We had over 400 guests, eating, drinking and dancing with family. One of the best days of my life. And without a doubt, I would love to relive the days my children were born. I love them immensely and would love to relive the moment I first held them in my arms. EM: What is your dream job? If you were not at ABS, what would you be doing? CN: Oddly enough I wish I could do more programming. I wear many hats here, and inevitably I get involved in tasks and support, which is fine, but in the end I am a programmer at heart and I wish I could do more of that. If I wasn’t programming loan servicing software, I think I would be involved in computer animation. Maybe Disney’s next animated film! EM: Thanks for putting on the “interviewee hat” for us today! One last question: What is the best advice you have ever received? CN: It came from my father. He has always told me “Go through your day, work hard, but work for yourself.” Meaning, you’re not always going to make everyone happy but in the end as long as you can look in the mirror and know you did your best, and you are happy with yourself, then so be it. I share that same advice with my kids too.

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•••BUSINESS STRATEGY•••

HOW TO WRITE AN EXECUTIVE SUMMARY FOR A LOAN BY: BRUCE MCCLANAHAN

hen you are a heading off to find a lender to ask for funding, one of the most documents the lender typically asks for is the executive summary. If you have not written a decent executive summary, your attempt to get finding could immediately be derailed. A workable summary illustrates that you have structured your thoughts and gone through the process of thinking the loan out.

Where is your project located?

It’s a good idea to have more than one location scoped out for the project, if applicable. Otherwise have the lease/terms gathered in advance. These don’t all need to be listed in detail in the summary, but make note that you’ve explored alternate location possibilities within the document.

First, and absolutely most important, is When do you wish to start? If you haven’t written a length. Your summary shouldn’t be over two pages, including short biographies If it’s a construction, mining, or energy decent summary, your about the principals. For a project of project; are permits ready, have attempt for funding could more than $1.5 billion, a summary can environmental concerns been met, fit on one page when including the short be derailed... etc.? Have a time-line prepared. In biographies of an incredible Board of most initial conversations the borrower Directors on a second page. Squeezing asks,”How long will this take to get the biographies on a single page can be harder than funding?” The timing depends very much on you. summarizing the project, if there are major players from differing sectors on a Board. How is this going to be accomplished?

“

”

You can write a summary simply and quickly if you gather your information and assemble it in a logical manner. Use the basic high school journalism style of summary: the who, what, where, when, how, and why of the matter.

Who are you? One would be surprised by how many summaries make no mention of who the borrower is. It may be your lifelong passion, hopes, and dreams, but if the reader can’t define who you are then they have no one to connect with the project. Tell them ‘Who is in’ the project is just as important as ‘the project’ itself to your audience. They not only want to know is the project viable, but are you capable of handling their money.

What are you trying to accomplish? And, exactly how much do you need to get the job done? Please write this in plain English. DO NOT use industry lingo or acronyms. Your reader may or may not be an engineer, or an accountant so use terms that anyone would understand.

12 Private Lender

If you want to get your project funded as quickly as possible have a brief summary ready to go. A paragraph or two in an email will not suffice. Have a five year proforma of financial projections going forward. Rarely will you meet these projections, but at least have a goal and some financial guidelines, in writing. If it’s an existing business, have a previous year, and current year to date, operating statement. Have a business plan, in writing! This is where you can dazzle them with a 10, or 20, or 100 page document or even a PowerPoint presentation! Just kidding! No one wants to read 100 pages about anything. Always have ready (on demand); current financial statements, bank statements, tax returns, and resumes, for both existing businesses and all principles.

Why should they give their hard earned money to you? This is what the lender is thinking when he is reading your summary. What industry experience/expertise do you have? Name your strengths and the weaknesses of your competitors or the market place in general.

•••BUSINESS STRATEGY••• You only have a moment to catch the attention of your potential investors. Use it wisely and maximize your opportunity.

SIMPLE DO’S AND DON’TS • Do be brief. If necessary, re-write it clearly and concisely. • Do state exactly how much you need, and how and when you plan to pay it back. • Don’t use charts, graphs, or industry jargon. • Do have it in Word or PDF form. • No PowerPoints.

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• No slide shows. • Do have supporting documents at the ready upon request. • Do have a true project, not an idea. • Do have a solid group. The expertise of the principals is extremely important. • Do have due diligence fees. Site visits, legal etc., costs thousands of dollars. Be prepared to pay a reputable lender. • Do have fun. This is your life. Live it!

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•••BUSINESS STRATEGY•••

THE BENEFITS OF SEARCHING LOCALLY FOR PRIVATE LENDERS BY: KEN MEYER

f you are considering whether you should search locally for your private money-lender, you most likely know that local lenders are often viewed positively because of their personal attention they provide you with. Larger national banks tend to not have the same type of face to face opportunities. However in addition to creating a trustworthy relationship with your lender, local lenders are able to provide faster loan processing, a greater chance of loan approval and less of a risk on defaulting.

success. These benefits of local private lenders in the real estate market can’t be stressed enough. Time and efficiency are critical for property flips and refinancing. By dealing directly with a local private lender, you know you are working with an experienced team who is just as invested in your success as you are.

Faster Processing and Greater Chance of Approval Local private money lenders have the benefit of allowing you to deal directly with the source of your loan. Compared to national banks with multiple branches, a local lender can avoid lengthy communications and approvals. A nearby private lender can process your loan quickly and efficiently. This is due to their knowledge of the market you are interested in, and their ability to grant loans based off of requirements other than a credit score, such as job stability and experience in real estate. As a result, a local lender makes it easier to have your loan approved and processed. In the real estate market, this efficiency is important.

Less of a Risk on Investments In addition, local lenders’ clients have also been proven to have less of a risk of defaulting on their investments. This is due to the amount of effort local lenders provide when assessing and appraising real estate investment properties. Since they would be familiar with the market you are interested in, their experience would prove to be extremely beneficial in determining the risk and return of your investment. Bigger national banks do not have this familiarity that has proven to be so beneficial for borrowers.

Local Lenders Know Your Market Moreover, non-local lenders would not have the same good track record of working in your community nor would they have the same concern for your local market’s

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•••BUSINESS STRATEGY•••

MATURING COMMERCIAL LOANS: OPPORTUNITY FOR CROWDFUNDING? BY: LAWRENCE FASSLER

significant portion of outstanding commercial and multifamily mortgages held by non-bank lenders and investors are set to mature in 2015, a prospect that is of concern to many industry observers. Online lenders may, be well positioned to provide competitive bridge financings to refinance maturing loans. At the beginning of 2014, an estimated $1.4 trillion in commercial mortgages looked due to mature between 2014 and 2017. The amount is significant; some estimates placed the commercial mortgage-backed securities (CMBS) issuances that make up much of the commercial real estate debt portion of that sum to be as much as 2-1/2 times higher than the CMBS amount that matured from 2012 to 2014. A recent Trepp report showed the incoming “wave:”

18 Private Lender

Loans from Challenges

the

“Bubble”

Present

The worries about the effect of all these loans coming to market for refinancing arise from a number of concerns: Pre-Recession Loans Were Over-Leveraged. Most of this wave of maturing consists of loans originated in 2005-2007, when CMBS loans in particular were very aggressively underwritten, with high loan-to-value (LTV) and debt service coverage (DSC) ratios. The terms of most of those loans would likely fall short of current market underwriting parameters. Current CMBS Market Capacity May be Limited. CMBS issuances in 2014 were nearly $100 billion, but

•••BUSINESS STRATEGY••• that may not be enough to take on the anticipated 20% step-up in volume that may be required annually over the next few years. Banks May be Somewhat Hamstrung. The DoddFrank and Basel III banking regulations enacted in the wake of the Great Recession make it somewhat more costly, in terms of required minimum capital reserves and liquidity, for banks to hold CRE loans. Banks may thus have somewhat constricted capacity to refinance commercial mortgages. Interest Rates May Rise, Perhaps Decreasing Valuations. Commercial real estate valuations have rebounded, and some observers worry that a “top” may be near. If interest rates also rise, this too may translate to higher cap rates and thus lower valuations.

But There’s Some Optimism… At the recent Commercial Real Estate Finance Conference held by the Mortgage Bankers Association, economist Jamie Woodwell said that, of the commercial and multi-family loans that were set to mature in 2015, approximately one-quarter have already been refinanced.

in the current commercial real estate market. Some analysts, too, remain positive on the overall outlook, at least in the near term – delinquencies should continue to decline in 2015, according to a recent Morningstar report. To the extent that markets face capacity constraints, there may also be a solid opportunity for lenders of “bridge” loans to help prevent maturity defaults. Online lenders may be well positioned to provide competitive bridge financing to refinance a maturing loan. These loans may be able to provide borrowers with new capital and the “runway” to re-stabilize a property. If the supply-anddemand fundamentals remain favorable to lenders, then they should be able to extract a sufficient risk premium that reflects the limited supply of capital as compared to the underlying property risk. The next few years could, in fact, turn out to be a great time to be a lender. Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals? Contact Chrissey at cbreault@aaplonline.com to learn how!

“The fourth quarter set record quarterly origination volumes for life-insurance companies, for Fannie Mae and Freddie Mac and for multifamily lending,” said Woodwell. “With low interest rates, rising property values and improving property fundamentals — and in spite of a significant drop in the volume of loans maturing during the year — the preliminary numbers show every major investor group increased commercial and multifamily lending in 2014.” Other analysts also say that it’s too early to say that the sky is falling. A recent Trepp report said that, even assuming the current stricter lending standards, 82% of loans maturing between 2015 and 2017 would be eligible for refinance at current income levels. I predicts that office properties will have the most difficult time, and that 2017 will be the toughest year for all property types.

Going Forward This wave of maturing commercial real estate loans from the pre-recession years is a source of some worry for some existing CMBS bondholders. A mini-wave of maturities of 5-yr loans done in 2007 sent 2012 delinquency rates to an all-time high – and volume was only 40% of what’s expected in 2016 and 2017. The upcoming wave also, however, presents opportunity for commercial loan originators. Increasing property values and low interest rates are positive factors at play

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•••BUSINESS STRATEGY•••

WHAT IS AN ASSISTED LIVING CARE HOME ? IS IT SAFE TO SECURE A LOAN ON THEM? BY: GENE GUARINO, CFP

The home will be In a residential neighborhood and is a typical single-family home. It may have more bathrooms or bedrooms than a typical home as well as grab bars installed in the bathrooms. The exterior of the property will be no different than any other home with a ramp or two at the doorways potentially. In fact you may be living right next-door to an assisted living care home and you wouldn’t even know it. The interior will typically have hard First, let’s make sure we understand what the business floor surfaces such as tile, hardwood, really is and what it isn’t. Have you vinyl etc. Carpets are not as common ever seen the TV show from the 80’s because they can create a slip or fall called, “The Golden Girls” ? It’s not If someone does not hazard. Sometimes the bath tubs have that. Have you ever seen a nursing been removed and a shower may have understand the nuances, home? Well, it’s not that either. An been installed to replace them. Assisted Living Care home is between they’ll assume it’s a business The doorways do not need to be wider those two. or it’s a private residence but then a 36 inch standard door. 36 inch The term Assisted Living facility truly it’s a mixture... Doors would be the widest doorway is the most common term you will for residential homes and would be hear nationwide but you will also appropriate for a care home. hear, Assisted Living Care Home, Even if there are 36 inch wide doors and every door Residential Care Home, Board and Care or in California going to every bedroom that would not create any type they are called, RCFEs which is an acronym for Residential of evaluation of the real estate itself. If the home has Care For the Elderly. additional bathrooms specifically half bathrooms, that The common denominator in all of these is they are would not be a detriment to the home itself. If larger residential homes for a group of elderly people that need bedrooms are cut into two smaller bedrooms that can help with their Activities of Daily Living also known as easily be converted back to a larger bedroom. Many ADLs. There may be as few as FOUR people in a home times the bathrooms will have grab bars installed. That and as many as 20 depending on the state they are in. is actually a good safety feature for homes for people of The size of the home and the safety features such as any age. If the home is to be converted to a single-family fire suppression and hard wired smoke detectors will residence after uses a care home that would be one of the determine the capacity of the home. areas that you can decide to remove not expensive to do Because of the fair housing act this type of group home in and of itself. can be run in a residential neighborhood. The service that Lending on assisted living care homes. As a private is being provided is a group home for the elderly with 24 lender you have many opportunities to lend your money hour care provided by certified caregivers or CNAs or and secured with a hard ass it is real estate. And assisted Certified Nurses Assistants. This is not a medical facility living care home is one of those choices that you have. To and there does not need to be a doctor or a nurse on staff start I will explain to you what a care home is and what it at all times in most states. Some state will required that is not so that you can make a better informed decision for a nurse be on call and available on an as needed basis. As a private lender you may be approached by someone that has a single-family home that they would like to use as an assisted living care home and they’re looking to secure a loan against it. If approached for this type of a loan, it will be important for you to understand what the business is and what it is not and how that might affect the security of a loan.

“

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•••BUSINESS STRATEGY••• your private lending. In addition if you decide that you want to operate this business you may find it a higher and better use for your just in real estate so also explain the aspect as a real estate investor as well as the business owner. If you want to own the real estate and lease to an assisted living care home there are some definite dues and don’ts and I’ll leave those up for you here as well. And assisted living care home is typically a singlefamily home in a residential area. The better the location the more success the business will have. An assisted living care home typically will have more bedrooms and bathrooms than a typical home. It may also have some converted space such as the garage. In addition many times bathrooms are configured to be more accessible a typical bathroom conversion might include taking out the bathtub and putting in a walk in or roll in shower. That conversion in itself one affect the value of the home is matter fact he may make it much more desirable for an elderly buyer. In this day and age of showers preferred over a bathtub but it is important to have a least one bathtub in the home. If you decide to lend to someone secured with a home that is now being used as a residential care home converting it back to a bathtub versus a shower is not that complex. The reconversion from a shower into a bathtub shower might be $1000 total the other main element of the care home is the smoothness of the floors -hard surfaces are preferable over carpet. Again, if you decide to change the home back, make considerations that are easy enough to fix. With the new rules regarding private lending - or lending of any kind - it’ll be much easier to secure the loan on a non-owner occupied property. In a residential care home typically a business is releasing the home from the real estate owner many times that is the same person using two different business entities. That gives some liability protection as well as a lease opportunity for the nonowner occupied business owner.

22 Private Lender

As a business in assisted living care home can be quite the cash flow machine. The average single room private room is being leased for $3,500 per month per person. Each home has a license and a capacity limit. Depending on the area of the country that it’s in its limit could be as low as six people or could be as high as 20 people. If it has a limit of six people. The rent per person will typically be higher and if it has up to 20 people the rent might be lower. Nationwide the average is $3,500 per person for a private room I shared room would be a little bit less in a room with a shared bath would be a little bit more private room with a private bath would be a little more and that a room that has unique features axis to the outdoors or garden, etc. would be even more. In Phoenix Arizona where I have homes the homes range from 4,000 sq.ft. to 6,500 sq.ft. As smart as few as six bathrooms and as many as 11 bathrooms in the zones. The rents will go for 2,504 shared room no bath on the low-end to a size $10,000 for master bedroom. The expenses for a business like this include not only the rent payment but also caregivers managers food provided for the residents entertainment utilities etc. if the home is grossing 35,000 that would be 10×3500 and it has expenses of $20,000 a month the net operating income would be $15,000 if the lease payment on the home is 5000 that would leave net profit of 10,000 per month. That is why operating a assisted living care home can be a very lucrative opportunity. If someone does not understand the nuances they’ll assume it’s a business or it’s a private residence but truly it’s a mixture. A residential lender will typically say, “Well it is a single-family home in a residential neighborhood but it’s being operated as a business so we’re not interested.” A private lender can make their own decisions when they understand the value of this asset. When it comes to the valuation of the home it will typically be a residential appraisal. In most cases the loan does not include the business, value of the business, or any encumbrances on the business Let’s talk insurance. It’s important for any residential home

•••BUSINESS STRATEGY•••

to have a fire insurance policy with some liability attached. In this case the business itself will have its own separate liability policy it will mean the lien holder as an additional insured that is very important because you do want to make sure that you do have proper protection. One of the reasons why private lenders might shy away from this type of a loan is that it does have a higher liability-type business attached to it. As long as you have the proper insurance in place and everything is fully disclosed, this is not any more of an issue than it is in any type of rental property. As an investor in real estate, if you are considering leasing out your home to an assisted living home operator you’ll want to understand what the business is all about as well. They can be very good long-term, low impact tenants for you. They also may be new business operators with little or no business experience. Getting a personal guarantee would always be a good idea. In addition, the business itself will have value and you can put a lien against it for additional security as well.

After reading this article some of you may decide to actually operate the business once you understand the income potential they provide. Conversely, some business owners decide on the real estate once they understand the value of owning real estate for the long-term. As a private lender you need to understand both of the sides so that you have a secure loan.

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24 Private Lender

•••BUSINESS STRATEGY•••

CONFORMING VS. NON-CONFORMING MAKING YOUR PROPERTY LENDING DECISIONS BY: DAN HARKEY

s the subject property conforming, legal nonconforming, or illegal nonconforming? As a lender it is absolutely necessary to determine the property’s conforming status.

Conforming Use A conforming use is one where the subject property is in compliance with local zoning laws and the use of the property is legally permitted. Conformity is a byproduct of zoning laws and municipal ordinances which may change over a period of time.

Legal Nonconforming “A legal nonconforming use is a use of lands or structure which was legally established according to the applicable zoning and municipal building laws at the time, but which does not meet current zoning and building regulations. A use or structure can become legal nonconforming due to rezoning, annexation, or revisions to the Zoning Code.”* As long as a nonconforming property’s use status does not change, its legal nonconforming designation may be protected by municipality or regulatory agency. A legal nonconforming designation usually requires the property to be in continuous use. If it is vacant for a period of time, its legal nonconforming status may be lost. In some communities special or conditional use permits, variances, or site development permits may be obtained to extend or even modify legal nonconforming use. Communities vary in the way they treat legal nonconforming properties which are destroyed. Most will allow the rebuilding of the property to its prior condition only if 50% or less of the structure is destroyed. If, however, the entire structure is destroyed, most often the owner would be required to rebuild to current zoning standards. A lender in such a case may experience a serious loss in collateral value but may be able to mitigate such a risk by obtaining the correct property and casualty insurance coverage. Endorsements to hazard

policies may be available that would allow insurance proceeds to be used to build a different structure as a result of changes to building laws and ordinances. For example, a retail strip center situated on a small lot may not have enough parking spaces to comply with current zoning requirements. If zoning changes regarding parking requirements have increased from requiring 3 spaces per thousand square feet of building to 4 spaces per thousand, the owner may be required to reconfigure the retail center’s footprint. The owner should seek knowledgeable insurance counsel to obtain this special protection. The lender should verify the type of coverage and require that they be named as mortgagee and loss payee as well as an additional insured.

Illegal Nonconforming Lenders are most at risk with a property which is nonconforming and has been illegally modified or is operating without proper conditional use permits. For economic reasons, owners may elect to illegally modify a property to a use that falls outside current zoning standards or the use permit framework. For example, a 4 unit building of 2 bedroom/2 baths units is converted into an 8 unit building of 1 bedroom/1 bath units. If done covertly, without approvals or permits, it becomes illegal- nonconforming. This process is sometimes called bootlegging. This example of bootlegging may be perceived as subjecting the surrounding community to unnecessary burdens. Negative impacts could include traffic, ingress and egress, inadequate parking, more transient occupancy, and a lack of approved (and possibly dangerous) electrical, plumbing and general construction.

Conditional Use Permits The issuance of a conditional use permit must be in adherence to, and consistent with, the hierarchy of land use laws. The use permit is a result of zoning laws

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•••BUSINESS STRATEGY••• not be granted. Building code variances may include exceptions to height restrictions, setbacks, or moving demising walls, etc. As with the conditional use permit, an applicant for a variance must submit a set of plans and a statement of purpose to the proper municipal authorities. Once granted, the variance runs with the land, may be transferred, and is not subject to revocation.

State Licensing

which must comply with an adopted general plan which in turn must comply with state laws. “A Conditional Use Permit (CUP) allows a city or county to consider special uses which may be essential or desirable to a particular community, but which are not allowed as a matter of right within a zoning district, through a public hearing process. A conditional use permit can provide flexibility within a zoning ordinance. Another traditional purpose of the conditional use permit is to enable a municipality to control certain uses which could have detrimental effects on the community”** A CUP is generally required for certain land uses which are an exception to a community’s general plan. Land suitability, environmental impacts, project design, traffic and noise impact, and availability of public services are some of the conditions which may call for a CUP. Mobile Home Parks, “granny” units and second dwellings on single family lots are typical cases where a CUP might be required. Conditional use permits run with the land, not the applicant, and may be passed on to future owners of the property, however, they may also be revoked for a number of reasons. Relying on a CUP as the major factor in a credit decision could result in reduction of value should the permit be revoked.

Variances The intent of zoning variances is to provide a form of equitable relief when the owner or representative of a property can demonstrate that the variance would not conflict with the public interest and that undue hardship or loss of financial return would occur should the variance

26 Private Lender

Some properties, such as a senior care facility in an R1 single family, zoned neighborhood, may require both a state license for the operator and a use permit by the municipality in order to run the facility. The state licensing of the operator may be required for special training and competency. If the property is sold or a lender is underwriting the property in order to make a loan there will be four concerns of, property conformity; permitting; licensing of the operator; and the impact on a going concern. It may be problematic when doing a cap rate analysis if there is a deviation that makes a property significantly different from other comparable properties. The assumption of an increased value may be fraudulent or false at best. As a lender, or agent of the lender, it is absolutely necessary to determine which of these classifications the subject property falls under. Each lender will have a different standard of tolerance and/or requirements for legal nonconforming properties, but would most likely not want to be in a position of loaning on a bootlegged property. While an appraisal might pick up this fact, it should not be depended upon nor should the representations of the realtor who might be involved in the transaction be depended upon. Lenders can be sued by a multitude of parties for failing to identify the true legal conformity of the property. Calling or visiting the city planning departments to verify zoning, and conforming vs. nonconforming status is highly recommended. Verifying the terms and conditions of a conditional use permit and under what circumstances it may be revoked is also recommended. If possible, get a copy of the approved permits or variances from the city or answers from the governing authority in writing. If a loan has been secured by an illegal nonconforming property or on a property with a revoked permit, getting paid back may be at risk. *www.sanjoseca.gov/document center/ home/view/333 ** Neighborhood Action Group v. County of Calaveras (1984) 156 Cal.App.3d 1176

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•••MANAGE & LEAD•••

7 MARKETING ‘DO’S’ FOR THE REST OF 2015 BY: ELIZABETH MORALES

Have email presence

Send your contacts emails they find valuable. Educational, one-minute videos are a trend that continues to grow quickly. If you know your audience and what type of information they are thirsty for, your emails will become a valuable go-to tool. Make the subject line catchy. Examples: “What every private lender has to know.” No one wants to feel left out, so chances are they will click on it and read. “Three things to keep in mind when doing fractionalized loans:” If your reader is doing them, contemplating doing them or has just heard about them, he will click on your email.

Avoid the old “call us now” cliché line

If you want to sell, your best bet is to allow your customers to do it for you. Remember hearing those commercials on the radio where the phone number gets repeated four times and before the fourth time you changed it to a different station? Call us now! Call us now! Call us NOW!! That sounds a bit desperate. You don’t need to know the statistics on how many companies that campaign worked for, but you do know you don’t hear it as much these days. If people are going to call you, they already did their homework; went to your website and perhaps looked for you on social media.

Is Social Media one big question mark? Start with Facebook

Why? Isn’t that just to communicate with friends and family? It can be. Sure. However, you can build a business page (only when you have a personal page), and start promoting. You may then ask all those friends and family to ‘like’ your page and to help you promote it. The idea is to drive traffic to your site. Always link your Facebook page to

28 Private Lender

your webpage. You want people to find you! After you get acquainted with Facebook, open up a profile in LinkedIn. This is your professional networking site. In other words, this is where you never post pictures of you in the Bahamas in a swimsuit. Once acquainted with how it works, and you are actually interacting with people on your business page, think about advertising. Studies continuously show that Facebook is the future of advertising. Invest a little to see what you get. Try $25 per day and make pick your targeted audience carefully.

Before ‘you’ and after ‘you’ testimonials:

How was your client’s life before and after he purchased your product or received your services? Client testimonials are very powerful, because you let them do the talking. They are simply stating what your product or service does, and people trust that. Yes, this is the era where people trust complete strangers! Have you shopped at Amazon lately? Then you read the comments from past purchasers, and if you only saw one yellow star rating, you did not buy the item. Who doesn’t love those five star ratings; even four will still work when doing the prepurchase research.

•••MANAGE & LEAD•••

Blog or Vlog

If you don’t blog, start now. It will do a few things for you: (1) it will drive more traffic to your site improving your SEO, (2) It will peg you as an industry connoisseur, (3) it will allow you to interact with your readers, (4) it will give you a clear view of who your audience is and, of course, all that put together summarizes into one word: sales. And, just exactly what is a VLOG? It is a video blog. Most people are visual learners so they love videos. Make them short and educational.

6. Church Yes. Sometimes churches have Finance Workshops where you can educate the local goers. Speak with the priest or pastor to conduct one. Have business cards handy. You are giving back to the community, educating people, feeling great, and you are also spreading the word about your

business or service. Besides, people tend to listen to what is said in church. ‘Stay for coffee, donuts and John who will be talking about the most common mistakes to avoid when planning your retirement.

Stay with the times

Would this article have made sense 10 years ago? No. Are you still thinking about marketing the way you did 10 years ago? There’s your answer. Enjoy marketing. What you plant today will grow some day. Start planting!

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals? Contact Chrissey at cbreault@aaplonline.com to learn how!

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•••LEGAL•••

RAISING AND MANAGING MONEY AS A PRIVATE LENDER HOW TO DO IT LEGALLY BY: KEVIN KIM

the individualized sale of whole notes or fractionalized interests in notes. A Fund does not require individual loans to be matched with investors, and it does not require communication and coordination with multiple lenders like in a direct participation investment model. Since all of the assets are pooled into one entity, all loans are originated and serviced by the Fund and/or its manager. This approach decreases wasted time, overhead and allows for increased cash flow and improved deal timing. On the other hand, the Fund model does present increased formation and administration costs as compared to other models of raising and deploying capital. Furthermore, a Fund model imposes an increased time commitment and fiduciary duty on the Fund manager, as the manger (or general partner) of a Fund typically owes the Fund

This article will discuss how to determine if a Mortgage Pool Fund (“Fund”) is right for your lending business, and if so, how to choose the right Fund structure and how to launch a Fund in compliance with state and federal law. A Fund is a simple and effective structure to raise capital for your private lending business. Private lenders have been using this model (or some variation of it) for many years. A Fund is an entity, typically a limited liability company or limited partnership, which offers equity securities for capital investment; the capital is then utilized to fund loans brokered usually by the Fund’s manager or general partner. Generally, a periodic return on investment is distributed amongst the investors from interest income while the Fund and its manager (or XYZ Fund general partner) shares the points Manager, Inc and management fees on the loans.

XYZ Fund Manager Fund I, LLC

Points, management fees & profit split

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RO I





pit

y iar uc

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Mortgage Pool Funds grant a flexible, straightforward and profitable means of raising capital. Other models, such as direct sale of whole notes and/or fractional notes, can also be used in certain cases. By using a Fund approach, assets are pooled into one entity, and the Fund presents an opportunity to invest in larger projects, which can mean increased origination fees, and loan payments. Profitability is also increased because a Fund model can be more efficient than

Brokered loans to fund 

ost private lenders are always looking for new ways to make deals, fund loans, and raise more capital. The fast-paced, results-oriented standards of the private money finance world demands answers to the important question: How do I raise and manage money legally?

Fund Members

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•••LEGAL••• a fiduciary duty. Although increased startup costs and fiduciary obligations may seem prohibitive at first, these burdens can be mitigated by establishing best practices protocols, including providing ample disclosures and detailed documentation.

Choosing an Offering for the Fund As discussed above, Funds typically raise capital by selling equity securities in exchange for capital investment. To legally sell these equity securities to investors, the issuer of the securities (i.e. the Fund) must either register the securities with State and/or Federal authorities or find an exemption from securities registration. Fortunately, there are a variety of different securities exemptions available. To choose the right offering structure for your business, there are typically three key considerations that are important: (1) location of investments and investors; (2) the need to advertise and (3) the type of investors. Based on these factors, a Fund can decide to use one of a different number of securities exemptions to make the offering.

Interstate Offerings Interstate offerings are those in which the Fund intends to sell securities to investors that reside in multiple states. The most popular and widely used securities exemption amongst private lenders is Rule 506 of Regulation D (“Reg D”) set forth under Section 4(2) of the Securities Act of 1933. The flexibility, simplicity and limited restrictions imposed by Rule 506 have made it a favorite amongst private lenders of all sizes. Rule 506 allows lenders to raise an unlimited amount of capital throughout the United States. There are two versions of Rule 506 offerings: Rule 506(b) and Rule 506(c). Rule 506(b) allows Funds to raise an unlimited amount of capital throughout the United States as long as the Fund (1) only sells securities that are restricted from transfer for at least one year (“restricted securities”), (2) limits the total number of unaccredited investors to thirty-five investors (each of whom are financially sophisticated), and (3) refrains from general solicitation and/or advertising to gather investors. Funds are free to accept an unlimited amount of accredited investors . Rule 506(c) allows advertising and general solicitation but restricts Funds to accept only accredited investors, whose accredited investor status must be verified via reasonable means, such as bank statements, tax returns or other financial documents. Rule 506(c) is a new approach, and was only recently approved for use by the

32 Private Lender

SEC in late 2013. Under both Rule 506 forms, the Fund is required to file an annual notice filing with the Securities and Exchange Commission (“SEC”) known as Form D. The Fund is also required to file a copy of the Form D with most state jurisdiction in which a Fund’s investors reside.

Intrastate Offerings If a Fund seeks to raise capital in primarily one state then it must comply with that state’s securities regulations. Often referred to as “Blue Sky Laws”, each state has its own specific securities registration requirements, exemptions and procedures. For example, in California, the two representative securities offerings for private lenders are the California Corporations Code Section 25102(f) Offering Exemption (“25102(f)”) and the California Securities Permit set forth under California Corporations Code Section 25113, (“DBO Permit Offering”). The DBO Permit Offering is useful for those Funds who seek to conduct a broad securities offering primarily within California. The Fund must be a California entity which maintains its principal place of business in California; and it must maintain eighty (80%) or more of its assets, revenue and expenditures within or from California. The reason why a DBO Permit Offering is useful is because it allows Funds to raise unlimited amounts of capital with unlimited advertising or solicitation in California. Furthermore, the investor suitability standards under a DBO Permit Offering are substantially less restrictive than that of Rule 506. In exchange for this flexibility, California requires a detailed application which must be renewed annually with the California Department of Business Oversight. The other California securities exemption is 25102(f). Often referred to as the “Friends and Family” offering, those using the offering must be observe the following: there must be no advertising or general solicitation. 25012(f) permits a maximum of 35 unaccredited investors and allows unlimited accredited investors. In exchange for these restrictions, California only requires a one-time notice filing online known as LOEN filing.

Choosing a Fund Structure In addition to selecting a type of securities offering to raise capital, a Fund must also determine the Fund’s compensation structure, capital structure, distribution plan, and investor rules. Each of these areas should be given careful thought and consideration, and we discuss a couple of the important areas and illustrative examples below.

•••LEGAL••• With respect to Fund compensation, the key sources of income for Fund managers include, but are not limited to, the points on the loans it originates, the servicing fees for loan servicing, management fees, REO management fees, and sales commissions. A common waterfall for profit splits is as follows: Fund manager receives all points and fees earned on the loans it originates; investors receive a

return on capital investment and a preferred periodic return typically between eight percent (8%) and twelve percent (12%). The remaining profits, if any, of the Fund are split between the Fund manager and the investors. Selecting a capital structure is also very important. A Fund can choose to have one class of membership interests or multiple classes. If a Fund chooses to have multiple classes, distributions are typically as follows: Class A will receive their share of profits as set forth by the profit split waterfall; Class B will receive a stated return on capital investment. Class B will often receive a priority distribution before Class A but in turn will not receive a share in any upside income beyond its stated return on investment.

Creation and Launch: Get Your Fund Up and Running How a Fund is launched will often determine the likelihood of its success in the future. Furthermore, proper execution will mitigate liability and reduce legal risks. The two key steps in launching a Fund are: (1) creating the Fund entity and (2) launching the Fund by drafting the Offering documents. First, an entity must be formed, typically a limited liability company or limited partnership. The operating agreement or limited partnership agreement are drafted. Second, the Offering documents are put together and serve as the launching platform for a Fund. There are two key pieces to the Offering documents package: the Private Placement Memorandum (“PPM”) (or “Offering Circular” for many Intrastate Offerings) and the Subscription Agreement. The PPM discloses material facts regarding the Offering, and is designed to comply with securities laws. The Subscription Agreement is the contract which commits the investors to the Fund. The PPM and Subscription Agreement must be drafted together to include key facts about the Fund and the offering including, but not limited to, a detailed biography on the Fund manager’s officers and directors, the risk factors about investment and the Fund’s lending activities, and the compensation and profit split between the Fund and the investors. An important aspect to launching a Fund is gathering investors. How a Fund manager

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•••LEGAL••• gathers investors is dependent upon the type of offering being used. For example, offerings conducted under Rule 506(b) explicitly prohibit general solicitation and advertising, while offerings under Rule 506(c) permit it. In offerings that prohibit general solicitation like Rule 506(b) (or other private offerings), a substantial pre-existing relationship between the investor and the Fund manager must usually exist before any offering documents are distributed to the investor. In offerings that permit general solicitation and advertising, like Rule 506(c) (or certain State offerings), investor suitability must still be verified.

Formation 1. Entity Formation – Form the Fund Entity (Operating Agreement, Limited Partnership Agreement); Create Offering Documents (PPM/Offering Circular/ Subscription Agreements) ;

 Gather Investors Gather Investors – Advertising (Rule 506C); Networking; Seminars, Conferences, Luncheons. 3. Distribute Offering Documents (When Permitted) ;

 Accept Investors

Fund Administration and Beyond Once a Fund is launched, proper administration is key. Regular communication with investors, including periodic outreach, newsletters and webinars are recommended. Furthermore, many securities exemptions require annual renewals or applications to continuously conduct the offering and raise capital. For example, Rule 506(b) and 506(c) require annual renewals of the Form D notice filing; and the DBO Permit Offering requires the permit application be renewed every year. Finally, a Fund manager must ensure that its accounting is in order. Oftentimes a Fund may be audited by a government agency such as the SEC, and proper accounting and records are of paramount importance. A Fund model, if properly executed, launched, and administered, can be an effective, long term means of raising and managing capital in conjunction with a private lending business. Although a Fund has increased startup and administrative costs, it allows lenders to raise substantial capital, thereby increasing the scale of deals available to the lender and increasing profitability. Furthermore, over the medium and longer term, the decreased overhead and simplicity of management in a Fund offset the initial startup expenses and administrative costs in forming and launching a Fund. It is essential that the Fund maintain compliance with SEC / State securities regulations. To avoid any legal issues, you should speak to a securities attorney to help ensure your Fund is compliant with the applicable securities laws.

4. Evaluate Investor Eligibility – Accredited Investor / Qualified Investor / Etc.; 5. Deposit $$; Issue Interests; Maintain Accounting

 Manage the Fund 6. Maintain Securities Compliance (Form D, State Filing, DBO Permits); Investor Communication 7. Accounting: Distributions, Manager Compensation, Re-Investment, Withdrawals;

 Close the Fund 8. Some states require fund closure notice filing 9. Accounting: Final distributions, Returns, Etc.

Federal securities law defines an accredited investor as a bank, insurance company, registered investment company, business development company, or small business investment company; an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; a charitable organization, corporation, or partnership with assets exceeding $5 million; a director, executive officer, or general partner of the company selling the securities; a business in which all the equity owners are accredited investors; a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. Regulation D, Rule 501, Securities Act of 1933.

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B2R has helped us grow the rental investment business. They step up where banks will not.

Kurt Carlton

CEO, Sherman Bridge Lending

To grow your business, you have to find effective ways to attract new clients. At B2R Finance, we help you capture your share of more than 8 million investors with Single Family Rental property in America by offering products designed for them.

“My experience with B2R has been exceptional. They want to make loans for rentals.” - Kurt Carlton

As a referring broker, you can help landlords free up equity from their existing properties, improve their cash flow, and build their rental portfolios. In the process, you’ll open up a new source of commissions for yourself. It all adds up to easier access to financing for investors – and more business for you. To find out how you can become a referring broker, contact B2R today.

844.435.5622

Nationwide Financing Up to 75% LTV Recourse & Non-Recourse Acquisition Line Available Up to 30-Year Amortization ........................ PROPERTY TYPES Single-Family Residences 2-4 Family Units • Condos Townhomes • Apartments Mixed-Use

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B2R Finance L.P., NMLS ID # 1133465, 4201 Congress Street, Suite 475, Charlotte, NC 28209. B2R Finance L.P. is not a residential mortgage lender. B2R Finance L.P. only makes loans with a commercial purpose and is not currently authorized to make such loans in all jurisdictions. Your specific facts and circumstances will determine whether B2R Finance L.P. has the authority to approve loans in your specific jurisdiction. B2R Finance L.P. operates out of several locations, but not all locations conduct business in all jurisdictions. Arizona Mortgage Banker License BK#0926974. Minnesota: This is not an offer to enter into an agreement. Any such offer may only be made in accordance with the requirements of Minn. Stat. §47.206(3), (4). Oregon Mortgage Lender #ML-5283.

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•••FINANCE•••

HOW “SMART FINANCING” ACCELERATES RENTAL PROPERTY INCOME AND PROFITS BY: BOB BUROZSKI

recent article in a newsletter advocated owning free-and-clear properties in order to lower one’s investment risk. For some investors this makes sense, retired folks at the end of their career or people who are generating income very quickly and have a long investment horizon and they can afford to park (and potentially freeze) their equity for long periods. Let’s compare the free-and-clear strategy with some leverage to multiply your money much faster (with comparably low risk) by optimizing portfolio cash flow and appreciation, using what I like to call “smart financing.” “But, what about the risk of having a mortgage on a property?” Let’s address that issue by quoting one of the most famous investors of all time,

Warren Buffet: “Risk means not knowing what you are doing”. To explain how this all works, most rental homes in central Florida earn somewhere in the range of 5-10% (known as the “cap rate”) if you pay cash. An average rental home with a 7.5% cap rate, when conservatively financed at 5% interest, at 65% loan-to-value (LTV), will give you a 12.14% cash-on-cash return. Positive leverage (when your borrowing rate is less than your cap rate) like this is considered “good debt,” and when used wisely, it will help you amplify and maximize your rate of return. So, how much debt should you use? That’s a personal

decision investors will have to make on each property they invest in, but up to 70% is usually considered a safe limit. I personally like about 60%-65% for myself. One measure of risk to keep your eye on is the incometo-debt ratio, which is called the “debt coverage ratio” (DCR). To calculate the DCR, divide the net income by the mortgage payment. Many commercial lenders require a DCR as low as 1.1-1.2. For residential properties, the DCR should be in the 1.31.5 range. In the example above, we end up with a strong 1.9 for DCR, meaning it carries considerably lower risk.

Comparative Example: $100,000 in Capital to Invest A: One free-and-clear house, worth $100k, rents for $1,100 per month: Net income of $8,000 + $4,000 appreciation = total profit $12,000 B) Three rental homes, worth $100k each, rent for $1,100 per month each: Financed at 65% LTV, 5% mortgage, payments of $349 per month each Net income of $11,200 + $12000 appreciation + $2800 principle pay down = total profit of $26,000

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•••FINANCE••• More than double your total profit, and with 75% more income! And don’t forget the various other concerns with owning free-and-clear properties:

1. No liquidity, which means that when you need cash fast, you can’t get it.

2. Free-and-clear owners can become a target for lawsuits.

3. Your “dead equity” earns a zero rate of return for all that perceived safety.

As an example of what can go wrong with a free and clear property, we just bought six units from a free-andclear owner for 50 cents on the dollar. Why? Because the property needed repairs, he had tenant problems, the utilities were getting turned off, and he was out of cash. The owner was self-employed with bad credit and had no way to tap into his equity when he needed the cash. Is “free and clear” really the safest way to own property? So what do you do when your properties do pay off? One strategy is to package them together and get a blanket commercial line of credit on them. Then, when one of your borrowers needs cash to do a deal, all you have to do is write them a check and make some extra money on that “dead equity.”

Don’t miss your chance to hear from specialists in rehabbing, wholesaling, REO properties, note-buying, multi-family investments, finance, insurance, legal matters, accounting and more! Whether you’re just getting started or have investing experience, The REI Expo is a great resource for all of your investment needs.

EXPERT?

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals? Contact Chrissey at cbreault@aaplonline.com to learn how! (It’s so easy!)

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The American Association of Private Lenders reaches the most tightly targeted audience of Lenders, Fund Managers, Brokers, Investors, Property Managers, and Service Providers in the peer-to-peer lending community. It is the voice of the private lending industry. As such, advertising with the American Association of Private Lenders is an excellent investment and the ideal medium to reach anyone in the private lending industry. Contact us today for more information!

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