Financing rates are higher and more volatile than any time in recent memory, and the outlook on the housing market is more uncertain than it has been in a decade. This state of affairs seems likely to continue for the next 6 to 12 months, if not longer. 

Borrowers are understandably worried about adjusting to this mix of conditions. The current environment has caused many active real estate investors to pause and take stock, leading to a natural slowdown in new transaction activity on investment properties. More importantly, borrowers looking to sell or refinance their renovated properties are increasingly concerned about the exit potential of their current loans against the twin headwinds of rising rates and a slower pace of home purchases.   

The better understanding you have of real estate investment terms, the easier it will be for you to succeed in the purchasing, building, renovating, selling, and renting of real estate for profit.

Basic introduction

Whether you know these terms or not, it never hurts to refresh or expand your real estate knowledge. This short compendium serves to help investors navigate their way through a business deal, talk with lenders, and in the end get the best return on investment.

• Loan-To-Cost (LTC) Ratio. This is a measure used by real estate professionals to compare the amount of a loan against the cost of a real estate investment. These costs include, but are not limited to, the cost to acquire and renovate an investment property. To calculate the LTC ratio, the loan amount is divided by the total cost as defined earlier. For example, let’s assume a $80,000 loan against a purchase of a $90,000 property that requires $10,000 of renovation. The LTC ratio would be 80%. Real estate lenders study the LTC ratio to determine risk, and a higher LTC indicates increased risk. In general, lenders finance up to 90% of a project, and ideally want borrowers to have some equity at stake, which encourages them to see the project through to completion.
• Loan-To-Value (LTV) Ratio. The LTV ratio compares the total loan for the project against the value of the project after completion, or its current market value. In regard to an existing home, the LTV ratio is calculated by dividing the borrowed amount by the appraised value of the property, expressed in a percentage. For example, if a home is appraised at $100,000 and a $10,000 down payment is made, the amount borrowed is $90,000; the LTV ratio is 90% (90,000/100,000).
• As-Is Loan-To-Value (AILTV) & After-Repair Loan-To-Value (ARLTV). When a property is a fix-and-flip, a lender may ask for two appraisal values: the current as-is value and the future after-repair value. These will be used to determine the AILTV and ARLTV ratios, which are used to calculate both risk and potential for profit. In the real estate flipping business, the after-repair value is the property’s value when renovations are completed and the property is ready to sell. It takes into account the total cost of repairs and the estimated value of the home.
• Interest Rate. Interest rate can be simply defined as the cost of borrowing money. It’s the amount a lender charges on the amount of a loan. Lenders consider several factors when determining interest rates, such as the real estate property’s value, borrower’s credit history, type of loan, length of loan and other factors.
• Debt Service Coverage Ratio (DSCR). This is a measure of an investment property’s cash flow and its ability to pay annual debt and expense obligations. It answers the question whether an investment property can generate enough revenue to repay current debt, including principal, interest, and expenses such as annual taxes and insurance. It’s also used as a measure of a borrower’s income against debt service.
• Equity. In real estate, equity is the difference between the current market value of a property less any debts owed. If a property is worth $400,000 on the market and its outstanding mortgage or loan is $150,000, the equity is $350,000.
• Bridge Loan. This short-term loan is often used to stabilize or acquire real estate until an investor’s planned exit strategy is achieved. Investors use it to swiftly close on an investment property that needs to be stabilized (either through renovations or placing tenants) before a planned exit strategy is met (which can be either a sale of the renovated property or refinance of the now cash-flowing property with a long-term loan). Bridge loans are generally between 12-24 months and carry interest-only payment where a balloon payment of the principal is due at maturity.

Ready, set, go!

With these terms under your belt, it will be easier to work your way through real estate transactions and build your portfolio of real estate investments. If you’re an investor looking for a transparent and fair loan that allows you to quickly acquire property, connect with the Haus Lending team at hello@hauslending.com or call us at 1-877-GO-4-HAUS to discuss your project and find the right loan.

The effects of the pandemic continue to reverberate

Many of the rental market trends in 2021, as well as those expected in 2022, have been molded by the uncertain circumstances brought on by the COVID-19 pandemic. 

From the time that the pandemic took hold in early 2020, governments took actions at federal and local levels to ensure that renters were protected in these unprecedented times. These actions included eviction moratoriums, rent freezes, and low interest rates. Landlords and real estate investors have had to factor in government actions into their investment strategies.  

As the pandemic compelled most Americans to work remotely, it also gave many the choice to decide where they want to call home. Many renters, along with their families on lockdown, fled the big cities in exchange for more spacious and affordable rental options in suburban areas and smaller towns. This resulted in creating a seller’s market and a boom in rentals in areas including Phoenix, Austin, Salt Lake City, Charlotte, Portland, and others.

Popular rental property trends

It seems likely that some of the pandemic-induced effects on the rental property market will continue well into 2022.

• A seller’s market fueled by a low inventory

Currently, the high demand for properties is being met by a low inventory for investors to choose from, which is creating competition between buyers, resulting in higher selling prices. These higher selling prices have the potential to cut into an investor’s returns.

• Possible foreclosures and evictions

As previously mentioned, the COVID-19 pandemic has created wide-ranging uncertainty due to government regulations surrounding moratoriums on evictions and rent freezes. However, at some point, outstanding rental and mortgage payments will need to be satisfied. This can lead to roadblocks for investors who need to deal with eviction proceedings for possible property investments.

• An urban exodus

The shift to working from home emerged in the pandemic and has given more people the freedom to move out of urban cities in exchange for more spacious suburban life. The result has strengthened the housing market in suburban areas as the new demand has dovetailed with very low interest rates.

• Fix up and rent strategy

While it’s unclear if we might see a wave of foreclosures in the near future, investors are still preparing for a large influx of foreclosed properties. Zeroing in on the right property quickly may be challenging, but home buyers willing to invest in renovations and repairs for a fixer-upper may see the best returns, especially in high-demand areas such as the suburbs.

Things to keep in mind when investing in rental property

• New construction is in high demand

Low inventory has also driven up the demand for new construction as well as the cost of labor and materials. 

• Renters could continue to fall behind in their payments

Owning rental properties has traditionally been an excellent way to generate residual income for property owners. However, the pandemic has caused many renters to fall behind in their payments which have in turn caused property owners to miss mortgage payments, property taxes, and other related costs. Government stimulus has provided some economic relief, but the future of such assistance remains in question. 

• Growth in rentals in the suburbs and smaller towns

Even in the fourth quarter of 2021, when this article was written, many offices continue to let employees work remotely. This trend is likely to continue well into 2022. Many renters working from home and seeking more space have decided to leave the high cost of living in urban areas for the suburbs and smaller towns, increasing the demand for residential rental properties in those locations. 

How Haus Lending can help you as an investor in rental property

Haus Lending offers a full suite of products for all rental property financing needs. Our rental property loan products are flexible to meet the needs of different rental property investors, allowing you to access long-term financing at a fixed rate for one property or many. With the widest selection of property types, extensive financing options, nationwide funding (including multi-state portfolios), and a wide range of rental property loan programs, we look at the full picture. Call us at 1-877-GO-4-HAUS or apply for a loan now.

By Aaron Burcell, Managing Director, Growth & Digital Marketing, Roc360.com

No matter where you are in your real estate investing journey, one simple fact will always remain true: finding the right loan to launch each project is essential to realizing your ultimate portfolio performance and value goals.

However, the lending market doesn’t do you any favors. Complexity is a massive barrier to making the best loan decision: comparing lenders, loan products, rates, terms, eligibility and down payment requirements is a grueling exercise that can consume precious time and energy.

If you want to get the most return on your real estate investments, there’s no way around it: becoming informed about the variety and performance characteristics of available real estate loans is a mission-critical task. Following is an overview of common loan types that is helpful to have handy whether this is your first rodeo, or you’re a seasoned real estate investor.

How to Build a Real Estate Portfolio

First, let’s be clear about what we’re talking about. If you only buy a home to live in, it’s likely to grow in value: that feels good, but it’s not a viable pathway to financial freedom. It’s not real estate investing and you’re not building a real estate portfolio.

A real estate portfolio is something larger and more purpose-driven. It’s a collection of property assets that can include:

• Individual investment properties or rehab projects
• Rental properties
• Real estate investment trusts

No two real estate portfolios look alike, however they all share a function: to help investors move closer toward achieving investment goals or total financial freedom. Portfolio growth is the best way to make those goals happen.

So how do you build the value of your real estate portfolio? With your goals in mind, whether it’s total financial freedom or something more limited like creating a monthly income or funding your kids’ college education, you create an investment plan that allows you to buy more properties and grow your portfolio.

And that’s where understanding how to choose the right real estate loan comes into play. To buy more properties and grow your portfolio, you’re going to need access to financing. By being informed and making the best decisions about how to finance your real estate purchases, you support optimal real estate portfolio performance and growth.

Which Types of Loans Are Available

There are numerous options available for investment property financing, each with different criteria and advantages. Choosing the right type of loan is essential to investment success, so it’s critical to understand the requirements and performance characteristics of each.

Conventional Bank Loans

A conventional bank loan is the most common solution for real estate financing. Guidelines are set by Freddie Mac or Fannie Mae and include a down payment of 20-30% of the purchase price. Your credit score and credit history are used to determine your eligibility and the applicable interest rate, and you’ll need to demonstrate the ability to afford any previously existing mortgages and the new one.

There’s a limit on the number of Freddie Mac or Fannie Mae loans you can have at one time, usually somewhere between six and ten. This means that there’s an eventual cap to using these loans to grow your real estate portfolio. They are also not broadly suited to the wide variety of project types in a diversified investment portfolio. However, if you have ample cash on hand, good credit and prioritize stability over asset growth for your real estate portfolio, a conventional bank loan is a solid choice.

Fix & Flip Loans

If your project involves a distressed property and its quick renovation, improvement and sale, a fix & flip loan is ideal for your purpose. The advantages of these loans are:

• Fast approval times match the need for quick cash to get a project moving; traditional home loans can take a month or longer to process and deliver, while a fix & flip loan can usually begin delivering cash within a week.
• Short term duration is ideal for a project that’s intended for a quick resolution; instead of the 15-30 year term for a traditional home loan, a fix & flip loan typically has a term of under two years.
• Less risk is involved because a fix & flip loan is guaranteed by the property itself, not your personal credit or property; if the project doesn’t work out, your losses are limited.

Simplicity is often an additional benefit for fix & flip loans: loan origination and construction draws are often managed by a single lender, which makes management easier and more convenient, with a single point-of-contact throughout the loan process. That allows you to focus on your project, rather than manage complicated financing details.

A short term means you’re going to be paying more in interest for a fix & flip loan, which makes this a poor match for a long-term project. However, there’s also some flexibility available if the market changes or the project drags on and a different financing solution is required. You can convert to a conventional bank or home equity loan if keeping the property is the better plan or add a bridge loan to get you past a difficult funding challenge.

Whether your project just needs minor renovations, or is a complete reconstruction, a fix & flip loan is the ideal short term lending solution to help your project deliver maximum returns.

Home Equity Loans

If you have equity built up in a property, you can use a home equity loan (sometimes called a “second mortgage”) to access that money for new real estate investments. Home equity loans are simple to understand and very predictable: you apply for the amount you want to borrow, and when approved receive the full amount in a lump sum. The interest rate is fixed, as is the schedule of repayments for the loan term

A home equity loan is an attractive source of financing for investments to grow your real estate portfolio because, 1) the interest rate is lower compared to many other types of financing, 2) it provides a large cash infusion without diverting from other investments, and 3) it provides an easy way to tap into value that is otherwise difficult to utilize. Depending on the size of the loan, interest payments may also be tax deductible.

Ground Up/New Construction Loans

Ground up or new construction financing exists as a distinct real estate loan type and is purpose-built to meet specific needs. Whether you’re building to sell or building to rent, it’s a streamlined financing solution that helps real estate investors lock in bigger profits for projects that are ready to begin construction:

• Shovel-ready lots
• Tear-down projects
• Spec houses or model homes
• Infill developments

A ground up loan is an ideal fit if you’re an active real estate investor and you want to get started on your next project without waiting through a long-term lending process. It’s also perfect if the project is shovel-ready and everything is in place except for the financing. A new construction loan is also suitable as an alternative to a fix & flip loan for projects that require more substantial work, e.g. vertical additions or significant horizontal additions that fall outside the usual scope of a fix.

The underwriting process is much less involved than with a traditional home loan, since only the risk of the project itself is relevant. That makes approvals fast – usually under two weeks – for a short term that’s typically 6-36 months. A 70-75% loan to ARV ratio is usual for this class of loan.

If the market changes and a sale following construction is not the best path forward, you can refinance into a permanent mortgage, so you have a financing solution that better matches your investment goals.

Ground up/new construction loan programs help your real estate portfolio grow with a solution that closes quickly, while enjoying the support of a reliable and experienced financing partner.

Bridge Loans

Sometimes the right permanent financing is temporarily out of reach, or you need quick cash to meet an unresolved debt obligation. Typically, this is caused by some challenge that requires time to remediate:

• New construction/upgrades are needed to boost your investment property’s value
• Current occupancy is low and needs improvement
• Rental rates are unfavorable and await an upward swing
• Permanent loan approval process is extending past your comfort level
• Transition time between selling one property and buying another leaves you short

For whatever reason, circumstances are not ideal, and you need time to stabilize within a short transitional period before better permanent lending options will become available. This is the ideal time to consider a bridge loan, which can provide immediate cash flow to help you get your ducks in a row.

When all you need is a little extra time to transition into a more stable and rewarding investment position, a bridge loan can provide you the breathing room needed to stabilize and, eventually, move forward. Bridge loan terms are short – usually 6-24 months, with options to extend – and structured flexibly to make them suitable for a variety of real estate project types.

You’ll pay a higher interest rate than you would for a longer term loan, and bridge loans are definitely not intended to replace traditional financing. Your credit score and debt-to-income ratio will be important factors in the approval process, and the loan-to-value ratio is typically less – often around 80% – than with other real estate loan products.

If you have temporary cash flow challenges within your real estate investment portfolio, a bridge loan can provide the resources to get you from where you are to where you want to be and help maintain forward momentum for your investing journey.

Which Loan Is Right for Your Portfolio?

If you have a suitably diverse portfolio, any of these loan types could be right for you at one time or another:

• A conventional bank loan is perfect for projects where you have ample time, no credit worries, and want the assurance of an experienced, trusted lender at your side.
• If you have a home that needs a little love to unlock its earning potential, choose a fix & flip loan that’s fast and hassle-free.
• If you need a large lump sum and also have lots of equity, good credit, and time on your side, then a home equity loan is a great way to get the cash needed to nourish your portfolio.
• When you have everything in place for a shovel-ready construction project except the financing, a ground up/new construction loan is your ideal financing solution.
• And if you need some cash immediately to buy time to get you from point A to point B in your investing journey, choose a bridge loan that delivers quick cash and resolves quickly.

The key is to understand your project, process and goals, and then tailor the loan choice to support them in the most effective way.

Seek Out Loans Precisely Tailored to Your Needs

Bottom line: there’s a lot you can be doing with your money, it just requires buy-in from you to discover the right loan product match that supports your investing goals. Look for competitively priced loans that are tailored to your needs, and an investor-friendly process that is designed to help you get the most from your money.

Financing is a key element in your real estate investment strategy. Don’t let a bad loan decision compromise your real estate portfolio performance. There are solutions out there that provide optimal returns – it’s up to you to be active and find them.

As an experienced residential real estate builder, you might tackle a variety of construction projects, from single family homes to multi-family rental units. But translating construction project blueprints into a dream residential property requires vision, planning, and — funding.

A bridge loan, also referred to as bridge financing or a swing loan, is a means of obtaining short-term financing for individuals who are looking to increase the value of their property or are in a financial pinch while they meet other obligations or during an interim period of acquiring permanent financing.

Bridge loans are typically used in real estate and have a duration ranging from 6-18 months. These types of loans usually come with high interest rates and can also be attached to collateral such as property.

A fix-and-flip loan is a financial tool designed especially for residential real estate investors who plan to rehabilitate and resell—or flip—a property in a short period of time, most often 12 to 18 months. It’s a credit line that can be used to cover both the purchase price and the renovation costs on residential investment properties. With this type of loan, up to 90% of the purchase price and 100% of the rehab costs are covered, with the rehab funds normally disbursed in periodic draws to fund different stages of the house’s repairs as the project progresses.