September/October 2013 - Personal Real Estate Investor Magazine

HOW SMALL INVESTORS
SHOWED WALL ST. THE WAY
NEW SECTION: INVESTOR TECH
TOOLS THAT MATTER
MONEY GOES WHERE
IT’S TREATED BEST
• JOBS Act PROMISE MEETS REALITY
Why you should care
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• TRENDS IN PRIVATE LENDING
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September- October 2013 . Personal Real Estate Investor
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MASTER INVESTOR — Wally Charnoff — CEO & Founder, RentRange, LLC
www.PersonalRealEstateInvestorMag.com
FINANCING
KEEPING YOUR DEALS FLOWING
A brief snapshot of financing trends and resources
with high interest rates. Wholesalers
who know how to move (flip) a property to the next buyer use hard money
lihood of an investor with more cash, with cost of up to 22 percent because
less sense, a longer horizon or a differ- they will have a buyer in the near term
ent profit model outbidding you and at a profit that will accommodate their
winning the deal. This has been true cost of using this money. This highBy PREI Editors
in markets like Phoenix and Memphis, rate, high-wire act should not be tried
When Dolly Levy quoted her where well-heeled institutional buyers on your investment home unless you
late husband saying, “Money is like with plans to hold, rent, and then sell know exactly what you are doing.
manure, spread it around and every- over a five-year window are crowding “An unrealistic hard money borthing grows,” he was on to something. out small investors.
rower is someone we really try to
Money or liquidity is necessary to avoid,” says Gregg Reichman, cokeep the real estate investment busi- JUMP START YOUR DEAL
founder of Active Funding Group. “We
ness going -- both your individual WITH HARD MONEY
do not want to deal with the hassles of
investment and the industry at large.
One way small retail investors can delinquency, collection or recovering
But the question is where to find make a good deal work now is to use the asset.”
money that lets you buy property and short-term money that is lent on the A little-discussed fact is that hard
then allows an investor a reasonable basis of the value of the asset. This money lenders are in an enviable place.
profit. There are a number of tradi- may be offered at mezzanine rates They typically protect themselves by
tional and creative alternatives and at around 10 to 15 percent or more if only lending 50 percent to 65 percent
methods that enable a deal and make hard money is used. (Ultra short-term loan to cost, sometimes with repairs
a profit, but they all depend on under- transactional funding is another case but not at the finished retail value. If
standing three things: expertise, speed entirely that we will not discuss here.) the deal falls apart, they get the propand decent margins to begin with to Hard or mezzanine money only erty back at 50 cents to 65 cents on the
make the deal worthwhile.
works to get into the deal when more dollar. Assuming they appraised the
traditional investor finance is almost property before lending, they should
BUYING FOR CASH
certainly available at around 5 or 6 be able to recover their losses and
In this market during the finding percent to refinance after the property make a profit reselling the property to
and acquisition process, “cash is king.” is quickly fixed and rented up. This a more realistic investor.
You are in a better but not assured
strategy is not for the faint of heart as If you are a new investor who does
position when competing for a desir- sophistication, speed and agility are not have financing at closer traditional
able property if you are able to pay necessary to avoid the unfinished or rates available to you and are not ready
cash. Even then, there’s a strong likeunrented property eating itself alive for a “hard (money) ride,” you would
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September- October 2013 . Personal Real Estate Investor
www.PersonalRealEstateInvestorMag.com
TRENDS & RESOURCES
FINANCING
Autumn turns
to Spring
Over the last year, as property values have risen, few investor
lenders have raised their loan to
value fast enough to respond to
finance needy investors.
Autumnwood has.
Autumnwood Funding is not
just a lender, but also an investor
so the company knew what was
happening and responded.
“We have raised our loan to
value ratio (which was 65:35),”
says Chris Knopppe, Autumnwood
director. “Now prices are going up,
and there’s more competition. …
We’re watching customers having to bid up to 80 percent of After
Repaired Value. We are willing to
raise the threshold, but it hinges
on our confidence in the market
our customers are working. If a
deal makes sense, we’ll fund it.”
Knoppe says Autumnwood is
loosening its guidelines based on
narrower investor margins. This
is only possible as more people
become comfortable with the
improving market and start to buy
homes, pushing up prices.
“We have been through previous downturns, and we weathered the storms,” Knoppe says,
so Autumnwood has a good grasp
on what the market is doing and
where it is going.
Autumnwood lends in all 48
states in the continental U.S. “It’s
very hard to find a true private
lender who covers the entire continental U.S.,” says Knoppe. “We
are one of the few that do. We are
a direct lender and not a broker. If
your deal fits within our parameters (SFD) we can fund your deals
and continue to grow your business.”
be well advised to avoid this sort of
financing at all costs.
JOT BEFORE YOU JUMP
Jumping into any deal emotionally
and without investigating the opportunity, the financing and jotting down
real numbers can set you up for shortand long-term pain.
There is a gap, no chasm, that
occurs between short-term, high-cost,
asset-based investor financing and livable financing that assures real returns
on a rental property.
Chris Knoppe
Autumnwood Funding
www.FundingByAW.com
614-433-0570 ext. 101
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September- October 2013 . Personal Real Estate Investor
You cannot get rich on blue-collar
rental deals alone, especially if they
are financed at mezzanine (or hard
money) rates for any length of time.
Exceptions exist, but they are rare.
Much of the voodoo math and
spreadsheet lies pitched by aggressive rental investment salesmen have
a nasty habit of deemphasizing the
impact of higher-than-normal finance
rates. These are then made worse by
rosy income forecasts that do not happen on time or at the predicted rental
income.
financing for the big time
Many investors have built up hold- division has been reorganizing to soon be
ings of one to many single-family dwellings, able to serve operators with as few as five
often paying cash as the only way to buy to 10 SFD properties. JCOF has typically
these at competitive prices. Now you have focused on larger projects but left a smallchoices: cash out by selling to a fund and to medium-size real estate company withtake your profits; or buy, hold and refinance out adequate access to structure advice
a percentage of the portfolio so you capture and financing.
further appreciation and free up capital to JCOF advises and raises joint vengo on and buy more; or simply increase the ture equity, preferred equity, mezzanine
yield through further leveraging the cash debt and senior (secured and unsecured)
investment.
debt for opportunistic and value-added real
If you are an investment property man- estate transactions. JCOF specializes in
ager or even small fund operator, increasing ground-up development and infrastructure
yield through leverage is a way to increase financing, distressed acquisitions & recapithe value of the portfolio and further satis- talizations. It is an exclusive conduit to one
fy investors’ hunger for yield, especially if of the world’s largest private equity firms
these are single-family rental homes or mul- providing capital in the residential sector.
Johnson Capital began in 1987 and
tifamily properties.
has become one of the most successful real
estate advisory firms in the U.S., with more
OPPORTUNISTIC OPPORTUNITY
Johnson Capital is a source of leverage than $36 billion in transactions completed,
for property owners. “At Johnson Capital including more than $1.6 billion in 2012.
we always believe there is a better way of If you need to recapitalize or fund any
doing business,” says Dennis Cisterna III, sized portfolio, Dennis Cisterna of JCOF
senior vice president of Johnson Capital would love to talk to you. You can hear
Opportunistic Finance (JCOF.) “We strive him speak at Personal Real Estate Investor
to help real estate developers and inves- Magazine’s Investor Provider Leadership
tors access capital and make their capital Summit, Sept. 26-27,2013, in Phoenix.
investment go further. This is opportunistic
financing.”
Dennis Cisterna III
The goal is to add value to each trans- Johnson Capital Opportunistic Finance
action by helping a client better use capital. Division
JCOF provides structured investment bank- dcisterna@johnsoncapital.com
ing services to real estate operators. This 310-407-3245
www.PersonalRealEstateInvestorMag.com
FINANCING
dissipating DOOM & GLOOM
RESOURCES
Autumnwood Funding
www.FundingByAW.com
614-433-0570 ext. 101
Portland Funding
www.portlandfunding.com
888 285 1900
Active Funding Group - JVPros
www.activefundinggroup.com
602-252-1155 RealtyMogul
www.RealtyMogul.com
877-977-2776
Most lending news is all very “doom and
gloom,” says William Jennings, CEO of Pathway
Financial. “The perception is that there’s no money
to lend, the only way to get financing is to have to
have a rich uncle or be able to put 40% to 60%
down.”
Pathway has ways to get into real estate investing with no money out of pocket if you’re willing to
look outside the box.
“What we are doing is very outside the box and
nontraditional,” says Jennings. There are products
out there to help investors without requiring money
out of their pockets.
Money is out there, but you have to know
where to look.
Seven years ago Pathway Financial started as
a mortgage company that survived the mortgage
crisis. “I was personally doing some real estate
investing,” says Jennings. “I was finding it difficult
to get funding and developed and refined the program we’re doing now.”
ENLIGHTENED & Ethical LOAN LOGISTICS
As opposed to going to one bank to get a loan
for $100,000, Pathway has a network of lenders it
uses to get multiple smaller lines of financing for its
clients.
“We work directly with underwriters, know
where to look and how to match clients with the
appropriate lender. We leverage that knowledge to
get multiple sources of capital,” Jennings says.
A Pathway client can pay zero percent interest for the first six to 13 months of the loan with
Pathway handling everything from beginning to
end. The company specializes in business lending
with 75 percent of its clients being in the real estate
investment business.
“These techniques have been around a long
time and there are number of companies trying to
do what we do,” says Jennings. “Doing this legally
and ethically is the only way it works for all the parties; lender, broker, borrowers and investors.”
If your real estate investment business needs
money to maintain deal flow, Pathway Financial
could be your solution.
Pathway Financial
www.pathwayfinancial.org
877-723-8637 (877-72-FUNDS)
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September- October 2013 . Personal Real Estate Investor
SHORT TERM & LIVEABLE
FINANCING HYBRIDS
These one-close and transferable loans have existed for awhile.
But they did not make sense at
their higher rates when plentiful
investor loans were around. Now
the choice is simple: do a real estate
investment deal and pay a little
more, or remain on the sidelines.
One way to get or free up
capital for doing deals is through
joint ventures. AFG, JVPros and
Autumnwood Funding are some
examples where the property values and potential are more important than investor credit.
“Here is where we get creative,”
says Chris Knoppe, director at
Autumnwood and second-generation investor. “We offer varying
rates and profit-sharing joint ventures. We are not rigid on credit
score requirements; depending on
your finances, we may require a little more down or take more profits,
but we’re flexible. We don’t give an
automatic ‘no’ if your credit score
is below a specific threshold, as we
look at the common sense side of
things.”
Portland Funding offers similar
funding to professional investors,
especially turnkey providers. This
can be one-close financing that covers acquisition and renovation, says
a managing partner, Mike Hanks,
“then with correct paperwork, transition to a long-term hold, whether
the property remains with the first
investor or is sold to a third party.
This financing has been available
nationwide to investors and to a
number of partners in Mississippi,
Alabama, Indiana and other markets.”
Investors can apply for their
loans online at Active Funding
Group, Autumnwood Funding &
Portland Funding. AFG has gone
one step further and created a
mobile investor loan application so
financing can be set up from the
courthouse steps.
PROMISED CROWDFUNDING
The theory of crowdfunding
from homeowner down payments
to accumulating the capital for real
estate investment all sounds great
in theory, but is heavily dependent
on the final capital raising and
investment rules enabled by the
JOBS Act that are expected from
the U.S. Securities & Exchange
Commission before the end of 2013.
Jilliene Hellman, co-founder
& CEO of RealtyMogul, is out to
simplify real estate investing lending and make it more accessible for
investors. “Today we offer accredited investors participation in real
estate investments via Regulation D
Rule 506 SEC Code, but our goal is
to open up to a larger market when
JOBS Act regulations are available
in late 2013,” says Hellman. “We
do this by setting up single entities
and LLCs, where we pool investors
and then make investments. We
can fund multiple properties or singular as managing partner.”
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