It’s no secret that real estate prices have been on the rise, and it appears that trend will continue into 2022. When coupled with an undersupplied market, the result is fierce competition. For real estate investors, this means you must sharpen your keen eye for a good deal and have quick access to cash to stay competitive.
The real estate market is booming these days as a result is a shortage in good housing inventory for buyers to choose from. With limited stock available, especially of move-in ready homes, investors are jumping in and improving existing properties and selling them for a profit. Competition is cutthroat, especially among real estate investors who have the ability to make cash offers. Fix-and-flip financing is one solution that can help you stay competitive and take advantage of the current real estate market.
Housing Stock Expansion Through Renovation
With sales prices going up and inventory going down, home renovations will be critical for expanding the housing stock. Although new home construction will also contribute to building inventory, it takes longer and costs more, especially with the current labor shortage and high price of materials. New construction also requires a larger variety of materials because you’re starting from scratch. When renovating, you might just need lumber, drywall, paint, and other finish materials, but a new home needs plumbing, electrical, and more.
Whether you do some of the work yourself or outsource it to qualified contractors, renovating a distressed property is often more cost-effective than building a new home. When done right, it also offers the potential to make a nice profit. Although it’s true that profit margins on renovations may not be as lucrative as new construction, with increasing labor and materials costs, they are definitely less risky.
Renovations also have some built-in risk mitigation that many other types of investments don’t have. If the market shifts during the renovation process, you can always hang on to the property as a rental to generate income until prices go back up.
Most people don’t have the cash on hand required to invest in renovations, so they have to borrow it. In many cases, a conventional mortgage is not an option, either because of the borrower’s finances or because of the condition of the property. Trust deeds are designed to cover a portion of the purchase price of the home and the renovation costs. They are typically short-term loans because the intention is to sell the home within a certain time frame. However, if you decide to keep the home as a rental or you need more time to renovate, you may be able to get a traditional mortgage with better rates and longer terms.
Coastal Capital is a trust deed lender that offers fix-and-flip loans to real estate investors with a broad range of experience levels. Whether you’re a seasoned investor or are just starting out, our team can help you get the financing you need to achieve your investment goals. We offer loans throughout the country, and our personalized services allow us to build long-term relationships with borrowers, so you know we’ll be here for your next project.
To finance your first or fifteenth fix-and-flip, give us a call: (310) 280-9173
To succeed as a real estate investor, you NEED to be able to analyze potential investments. So, where should you start with an investment property analysis? What are the real estate numbers that you must be aware of? In this blog post, we’ll go over the 7 real estate numbers you need for analyzing investments.
There is a lot of real estate data that you’ll need to collect and analyze before making an investment. However, the following 7 are some of the most important:
1. Property Price
The first thing to think about is property price. You probably have a budget set, and even then, you’ll be on the hunt for a good deal that will save you money. Property price is also driving many other important metrics, such as fair market value and appreciation, as well as other important numbers in this blog.
2. Rental Income
The profit you earn from real estate investing will depend heavily on your rental income. As you likely know, gross rental income is simply the rent payments you receive from tenants. The time of payments is based on both the lease agreement and rental property type. Traditional long-term rentals earn rent on a monthly basis. Short-term rentals, such as for an Airbnb, usually mandates nightly or weekly payments. The amount will depend on the real estate market where the rental property is located, demand for rentals, the property type and strategy, rent control laws (if they apply), as well as general economic trends.
3. Price to Rent Ratio
The next of the real estate numbers is price to rent ratio, also known as P/R. As you can tell from its name, this metric is calculated using the property price and rental income data:
The price to rent ratio indicates whether it’s more affordable to buy or rent property in a specific location:
- A low price to rent ratio (1 to 15) means it is more financially sound to buy a property than to rent one.
- When P/R is moderate (16 to 20), it is usually more affordable to rent a property rather than to purchase one.
- A high price to rent ratio (above 21) means it is much better to rent than to purchase a property.
The ranges are obviously relevant to the average resident of a housing market. They are, however, also significant to real estate investors. Areas with moderate to high price to rent ratios, for instance, will enjoy higher rental demand and are thus better places to invest in. At the same time, these markets do come with very high property prices and will make for great investment locations specifically for investors with deep pockets (or the ability to leverage real estate).
4. Rental Property Cash Flow
While rental income is a beneficial metric, it doesn’t give the full picture of rental property profitability. Gross rental income doesn’t, for example, take rental expenses into account. Luckily, there is a metric that does just that called cash flow. Here is how rental property cash flow is calculated:
As the difference between rental income and rental expenses (not operating expenses, which exclude financing costs), cash flow can be calculated on a weekly, monthly, or yearly basis.
5. Cap Rate
While rental property cash flow paints a more accurate picture of profit than rental income, it shouldn’t be used in isolation. The cash flow’s main limitation is that it does not showcase profit relative to the property’s price or value. To do that, we use what is known as return on investment (ROI) metrics. One of the most essential real estate numbers of this kind is the cap rate. Short for capitalization rate, it is calculated as:
The cap rate depends on two variables, as seen in the formula. First is the net operating income & the second is fair market value or the current value of an investment property for sale. The cap rate measures ROI regardless of property financing. As a result, this rental property ratio is an excellent way to quickly compare multiple properties during an investment property analysis.
6. Cash on Cash Return
Similar to cap rate, cash-on-cash is also one of the most useful real estates that represent ROI. The main difference between the two is that the cash-on-cash return includes financing costs in its profitability estimation. It’s mainly used to measure the current performance of a rented property. Here’s how it is calculated:
The first number needed to calculate the cash-on-cash return is the annual pre-tax cash flow. Annual pre-tax cash flow is, as the name implies, yearly cash flow before taxes. It is the difference between the property’s net operating income and debt service. Debt service refers to financing costs, such as mortgage principal and interest payments. If debt service is set at zero, cash on cash return and cap rate will be the same value.
7. Airbnb Occupancy Rate
The last of the important real estate numbers is the Airbnb occupancy rate. This number is important if you’re looking to invest in short-term rentals. It is the ratio of the time a short-term rental property is occupied to the time it is available for rent. Airbnb occupancy rate depends on location, seasonal trends, and available nights.
While real estate prices are at record highs, many of Coastal Capital’s borrowers are successful real estate investor that are reporting great deals in the market that cash flow. Yes prices are high but rents are skyrocketing make the hefty price tag seem like a bargain in the long run To finance your first or fifteenth real estate investment property just give us a call: (310) 280-9173
As the Covid-19 pandemic continues in California we want to take a deep dive into how its effected where Californians live.
Since the start of the pandemic, it’s been reported that Californians abandoning their usual way of life for greener (and cheaper) pastures. There are the San Franciscans who weathered lockdown orders in Lake Tahoe, and the Los Angelenos with new desert cabins in Joshua Tree. Tales abound of Silicon Valley types moving home to Miami and Seattle; or renting acres of land in Idaho.
1. How The Real California Story Goes
The story goes like this: The coronavirus and the ability to work remotely have fundamentally reshaped where we want to live — and large California cities, particularly Los Angeles and San Francisco, are not on the list. But is any of that true? Let’s start with the short answer. There hasn’t been an exodus from California, but pandemic forces have shifted where people reside within the state. Those patterns of relocation mirror what we were already seeing before Covid-19, but on overdrive.
California’s population dropped slightly in 2020 but nowhere near what the media pushes of a mass migration to other states. The drop was just 0.46% according to Cal Matters. The main drivers being coronavirus deaths, a lower birthrate and fewer international arrivals.
In fact, 82 percent of Californians who moved last year stayed in the state, according to a report from the California Policy Lab. That figure has been basically stable over the past five years.
State forecasters stress that the factors that contributed to this population dip are unique to this period — and therefore temporary. In 2020 roughly 51,000 Californians died of COVID-19. Travel restrictions and fear of contagion also dramatically tamped down the number of new arrivals from abroad, the main source of the state’s population growth over the last decade.
2. What To Expect In The Future For Californians?
Californians who moved last year stayed in the state 82% of the time, according to a report from the California Policy Lab. That figure has been basically stable over the past five years.
“A lot more people are moving around within the state than they are out of the state,” Eric McGhee, a senior fellow with the Public Policy Institute of California. “That movement tends to be within a certain metropolitan area, and a lot of that is people moving to suburbs and exurbs.”
Californians are likely to move from Los Angeles to the Inland Empire or from San Francisco to the fringes of the Bay Area or the Sacramento region, McGhee said. That’s because they want cheaper housing but don’t want to end up so far away that they need to change jobs. These were the largest county-to-county net migrations in California between 2015 and 2019, according to census data:
- Los Angeles to San Bernardino (20,809 people)
- Los Angeles to Riverside (13,949)
- Los Angeles to Orange (11,879)
- Alameda to Contra Costa (9,246)
- Orange to Riverside (8,282)
- Los Angeles to Kern (6,032)
- San Diego to Riverside (5,892)
- San Francisco to Alameda (5,469)
- San Francisco to San Mateo (4,239)
The Inland Empire tied Phoenix in 2020 for the biggest gain in households from migration nationwide. The flow of humanity into Riverside and San Bernardino Counties increased by 50 percent compared with the previous year. This reflects Californians’ desire to escape the exorbitant home prices of more coastal regions. In Riverside County, the median single-family home price in August was $570,000, compared with $830,070 in Los Angeles County and $1.85 million in San Francisco.
The overall numbers of Californians coming and going mask much larger changes within the state. The more dramatic “exodus” has not been from California to Florida, but from the Bay Area to the Central Valley and from Los Angeles to the Inland Empire. As financers of Trust Deeds throughout California we keep a close eye on growth trends. While it may seem prudent to push up loan-to-value ranges in growing areas, we still remember 2008 & 2009. We will working our winning formula that maximizes capital preservation while returning above average returns. There’s a reason why long-term California real estate investors consider Coastal Capital their financing partner of choice.
When the seller’s market is so hot that homes are going under contract in under two weeks on average, a real estate investor’s best bet is to find off-market deals. Off-market properties are simply properties that aren’t listed for sale. Once a property hits the market, buyers flood the listing, and the competition is immediately fierce. But if you can find off-market deals, you might be able to snag them without any competition.
Let’s count down the top five ways real estate investors are finding off-market deals.
Wholesalers are investors who get a property under contract, then sell the contract to a new buyer. Wholesalers are essentially middlemen who agree to purchase a property at a price below market value, then sell the right to purchase to the eventual buyer at market value and pocket the difference.
Wholesalers are typically well-connected and often find off-market properties through their networks. And technically, once they get the property under contract, it’s no longer active on the market, so it is an off-market deal at that point.
In many states, off-market properties can be purchased through auctions, the most common of which is a property tax auction. These properties are auctioned off to recover back property taxes owed by the homeowner.
Counties in tax deed states, like California and about 30 others will publish notices of upcoming tax auctions. Anyone is welcome to attend and bid on the property. But be prepared to bid against lots of seasoned real estate investors. And be prepared to invest a fair amount of money in renovating the property before it will be ready to rent or re-sell.
3. Network With Attorneys
Attorneys often learn of potential real estate listings, so networking with attorneys can give you a connection to sellers before they list their homes on the market. Divorce attorneys, for example, might be able to tell you when a couple is planning to sell the home as part of their division of assets. And an estate attorney can tell you if a family will need to sell the home of a deceased relative.
For empathetic investors, this can be an opportunity to help families in need of quick sales. Divorced couples and grieving families might appreciate a no-hassle sale with a short escrow period so they can pay their bills and start the next chapter of their lives.
4. Real Estate Databases
In the age of Big Data, you can subscribe to real estate databases that contain clues to potentially motivated off-market sellers. PropStream, for example, cross-references databases to help you find distressed properties with owners who might be willing to sell quickly. The database includes divorce filings, bankruptcy filings, and pre-foreclosure notices, as well as county property records and MLS data. Databases are great for generating targeted lists of homeowners that might be receptive to a direct mail campaign. Many of the databases even include skip-tracing to help you find the owner’s contact information.
5. Real Estate Agents
No one has their finger on the pulse of the housing market like real estate agents. Real estate agents are typically the first to learn of upcoming listings because potential sellers contact agents to get more information about the selling process weeks, or even months, before listing. So if you have a relationship with a real estate agent, you get on the inside track to be notified of motivated sellers.
Not only that, but agents talk to the other agents in their brokerage. When one agent gets word of a potential listing, that agent will let the others know so they can start lining up potential buyers.
While it’s still a seller’s market with fewer off-market listings our borrowers are still scooping them up. It always comes down to connections and being able to perform. Many of them count on Coastal Capital to provide financing in days to get these deals closed fast.\There’s a reason why long-term California real estate invesotrs consider Coastal Capital their financing partner of choice.
A private money loan is simply a short-term loan secured by real property and funded by a private investor or investors that allows the borrower free use of the cash proceeds to solve their real-world problems.
How Much Are Home Prices Going To Appreciate?
Should You Buy Now, Or Wait?
Here at Coastal Capital we help borrowers throughout California with business purpose loans. For more info or give us a call: (310) 280-9173.
Renovate The Property
Make Tenant Improvements
If you own a commercial property, make the types of tenant improvements that will make it easier to rent to the types of tenants you are seeking. Some examples of tenant improvements include painting; installing lighting, flooring, and drop ceilings; and adding walled offices, a break room and kitchen, additional bathrooms, and conference rooms.
Most conventional lenders won’t provide loans for commercial properties that aren’t occupied. Ideally, rent out the space to make it more viable for a conventional loan. This might require you to make certain improvements after the space is occupied so you can get a rental agreement in place before refinancing.
Improve Your Credit
The minimum credit score requirement for a conventional loan is 620. If your score doesn’t meet the criteria, work on improving it so you can refinance. Some strategies you can use include:
- Get a free copy of your credit report to see where you need to improve.
- Build a history of on-time bill payments.
- Keep credit card balances at 30 percent or below your credit limit, ideally as low as 10 percent.
- Ask for a credit limit increase to get your balance percentage down.
- Avoiding applying for new credit because inquiries from new creditors can temporarily lower your credit score.
- Setup a prepaid credit card if you don’t qualify for a regular card
- Keep old credit cards open, even if you don’t use them.
- Consider debt consolidation.
- Monitor your credit score so you know how you’re doing.
- Avoid large purchases (vehicles, boats, timeshares, etc.) before applying that add debt to your report.
Consider working with a credit repair company to help you knock off items that have the largest impact on your credit. Getting guidance from a professional can help you prioritize your efforts to refinance out of a hard money loan so you can qualify for a traditional loan more quickly.
File Your Taxes
Conventional lenders base decisions on your tax returns, so if you need to get caught up on filing, now is the time. Gather the tax documents you have to see what’s missing. You might need to request missing documentation from an employer or the IRS to fill in the gaps. Work with a professional tax preparer to ensure accuracy and completeness. Be prepared to pay penalties and interest charges for any late payments or filings. If the cost of amending your taxes to correct your underreported income is minimal, that might be enough to get you above the debt-to-income hump, so it’s worth the effort if you’re trying to refinance out of a hard money loan.
Don’t forget to inquire all fees ahead of time before signing your loan docs including prepayment penalties. If you would like to learn more about hard money loans and how you can use them for flipping homes and a broad range of other real estate investments, leave us a message here give us a call.
Open the Door to Modern Real Estate Investment
What Is a Trust-Deed Investment?
The Benefits of Trust Deed Investment
Trust Deed Investments with a Self-Directed IRA
Traditional retirement plans, however, do not allow the additions of alternative assets like trust deeds. The solution is to use a self-directed IRA or Solo 401k and other similar retirement accounts, which give account owners virtually unlimited investment choices. Unlike conventional retirement accounts that tend to limit investment options to stocks, self-directed ones can invest in nontraditional assets such as commercial and residential real estate, precious metals, trust deeds and much more. Here at Coastal Capital, we partner with The Entrust Group one of the largest and most trusted self-directed IRA management companies. If you need assistance in transferring funds from your current IRA we can help facilitate.