Completed Flip in La Mesa

A few months ago we took on a project to flip ourselves. Although I am in the hard money business and don't really take on many flips, when a "home run" property comes up, I can't help myself but to latch on to it (this was one of those deals).

The property was purchased for about $370,000, we put about $70,000 or work into this place. The property went on the market for $650,000 about a month ago and is in escrow now. 

I'm going to keep this blog posting short because the last one about this property was fairly long winded. 

Please see the completed pictures below; 

Completed Flip in Encanto

Hello all,

I have not had the time to make updates to this blog lately but I have come to realize that the San Diego Hard Money Blog has viewers that are anxious for some San Diego hard Money Deals that have funded.

My last post was about a property in Encanto where the purchase price was $155,000 on the acquisition of a 3 bedroom 2 bathroom house. This house is on the market for $250,000 now.

Well here are some pictures of the completed project:

New Flip in Encanto

Here are the before pictures of a new loan that we gave a hard money loan on in Encanto.

The purchase price was $155,000. The flippers have an estimated $40,000 in repair costs for this property. We did a hard money loan for $125,000 on this property. When the property is completed it should be worth about $220,000.  This is a great price point because it's the low end and the low end sells fast.

The comparable rents on a property like this 3 bedroom 2 bath house should be about $1,500 a month in the area. If I need to take this house back, I will be making $1,500 on my investment of $125,000. After taxes and insurance I will be $1,370 positive every month, this is a $13% cash on cash return.

This hard money loan is paying the investor 10%

Take a look at the pictures;

Winners of the rental economy

By Nin-Hai Tseng, writer-reporter May 25, 2011: 5:00 AM ET

Members of the Rent is Too Damn High Party beware! Residential rental prices are on the rise. Here's who wins in the new non-ownership society.

FORTUNE -- There are still many factors discouraging even the most savvy homebuyers from purchasing a home, but a new class of renters is expected to bring a bright spot to the troubled U.S. real estate market. Prices for rental apartments are expected to rise nationally – by approximately 4.5% in 2011 and up to another 3% in 2012, according to Rent.com.

During the housing boom between 2001 and 2005, prices for rentals fell by nearly 10% as easy credit offered by banks lured many newcomers to homeownership. Since the bust of the housing market, rents have more than made up those declines as more people now question the financial merits of homeownership or simply can't get approved for a mortgage. From 2006 to 2009, rental prices on average increased by more than 15%, according to Moody's Analytics economist Andreas Carbacho-Burgos. Nationwide, the average rent today is $1,360 a month.

Why Buy when you can rent?

Experts predict rents will continue rising.

Christina Aragon, director of strategy and consumer insight of Rent.com, says this is being driven by demographic changes coupled with an improving economy and ongoing foreclosure problems hampering the market for single-family homes. Much of the demand for rentals will likely come from younger people who tend to rent rather than buy. The economic recession pushed many jobless twenty- and early thirty-somethings to crash with friends and parents, but Aragon expects that the improving job market will get them to find their own place. What's more, the number of people aged 25 to 34 is forecast to grow 1.4% per year through 2013, helping drive demand further.

Paying more to the landlord might be bad news for renters, but it could signal that better days are ahead for the overall housing market. Here are a few winners of our burgeoning rental economy.

Builders and developers

Since the bust of the housing market, residential construction has dropped to record lows. But that is poised to change as builders and developers have already begun trying to cash in on higher demand for rental apartments.

Charles Brindell, chairman of the National Association of Home Builders' Multifamily Leadership Board, says he expects apartment construction to pick up to at least 160,000 units this year, mostly in urban areas along the East Coast. This would be significantly higher, given that construction since 2009 has totaled less than 90,000 a year – the lowest in 50 years.

Brindell, also CEO of a Texas-based firm that invests and develops apartment communities, says he's bullish because of the improving job prospects for younger workers. Brindell's Mill Creek Residential Trust is planning to build 3,000 apartment units this year, mostly in the Northeast including the Boston area, Long Island, New York, and Virginia.

However, while a burst of activity in multi-family homes is certainly good news for the construction sector, it is by no means enough to return the homebuilders to their previous level of activity. The NAHB index that tracks builder confidence remains low at 16 -- it was as high as 72 in 2005.

Real estate investment trusts (REITs)

It's not that homeownership is dead, but people are certainly renting more and investors have picked up on the higher demand.

REITs, which invest in commercial properties from office buildings to rental apartments – have outperformed the S&P500 since the financial crisis. In 2010, investments in apartment complexes led gains in the overall REITs market with total returns at 47%. Returns for the overall REITs market was 28%, markedly higher than the S&P500 that saw returns of 15%.

Last month, real estate investment trusts Equity Residential (EQR), headed by real estate mogul Sam Zell, and AvalonBay Communities (AVB) -- both among the nation's biggest apartment owners -- posted higher year-over-year revenue as the companies raised rents.

For Equity Residential, average rent rose 3.6% to $1,400 and occupancy rose to 95% from 94.6% the previous year on properties the company operated for a year or more. Revenue rose by 4%. And AvalonBay reported that revenues jumped 3.7% and average monthly rental rates ticked up slightly quarter over quarter from $1,873 to $1,879.

As of Monday, total returns for REITs were 8.73% (with about seven months to go), outperforming the Russell 2000, NASDAQ and S&P 500. Investments in apartment complexes continued contributing much of the gains.

Overall U.S. housing market

Given that many homeowners are still trying to clean up their messy finances, it might be hard to see how higher rents could benefit the overall U.S. housing market. In theory, at least, renting could become so expensive that it costs less to buy a house and make monthly mortgage payments.

In fact, that's happening already, even if it hasn't yet translated to a return to homeownership. In Moody Analytics' latest list of rent ratios for 54 U.S. metropolitan areas, 29 cities fell into the  "better to buy" category. With many experts predicting that home prices have further to fall this year and with higher expectations for rentals, more cities could end up on the buy side of the buy-versus-rent calculator.

But much of that will likely depend on huge hurdles weighing on the housing market – namely, record foreclosure rates, high unemployment and tighter lending standards for new mortgages. Areas that continue to experience high foreclosure rates and widespread unemployment, such as Florida and Arizona, might find it more affordable to buy than rent. Yet renting will likely be king in more urban areas with more employment opportunities, such as New York and Seattle.

Posted in: AvalonBay Communities, Equity Residential, housing, Macro, National Association of Home Builders,Real estate investment trust

Flip in La Mesa

Unit 2

Front Unit 

Unit 3

Side of 1st unit

If you are a reader of my blog, you know that Priority First is involved in many aspects of real estate investment from hard money loans, to acquisition and now to flipping.  In this particular case, we are doing a joint venture with one of the flippers that I work with.

I found this great deal near the historic down town area of La Mesa.  This is a 3 unit property that I am in contract for at about $370,000. This is a really great deal due to the fact that this is 3 separate buildings that house one unit each. 

The main building is a Spanish Mediterranean two bedroom one bath. This unit was the original structure on the property, it was built in 1934. This unit will be the main part of the property as we will plan to sell this unit to someone that is planning to live in it. The reason that we are doing this is because the house is so charming and the neighborhood is a very nice residential neighborhood. 

The second building is a two bedroom one and a half bath. This unit was built after the construction of the main house, most likely in the mid 1940s. If you look at the picture of the second unit, you will notice that it looks like it has a 2nd story. Apparently the previous owner has put up some stairs outside of the property and had turned the attic area into a loft/additional rental. When the city came, they made the owner rip off the exterior stairs because they were not permitted. The room is still there but now has no access. Due to the fact that it's an existing part of the house, it becomes grandfathered in legally. What we will do is build a staircase inside the property and open up the loft above in order to give this an extra bedroom. When we are done, this unit will be a 3 bedroom 1.5 bath or we might just add another bathroom upstairs and make it a 3 bedroom 2.5 bath.

The third unit is in the back of the property and it is a one bedroom one bath. This is situated at the back of the lot. Normally this is not a great thing because the tenant will need to go through the whole lot to get out to the street but in this case, there is a alley way in the back of the property where the tenant can come in and out as he /she pleases. There is an additional bonus for this unit, attached to the unit there is a garage AND a car port. If the tenant has a couple cars or has some sort of desert toys, they can easily park them there.

As you can see by the pictures, this place has some serious deferred maintenance. We estimate that the property will need anywhere from $80,000 - $100,000 in work to restore it.

I think that once this place is done, we will be able to sell it for about $600,000. In the area there are two bedroom houses that are selling in the $400,000 range. If someone were to buy this property to live in, they would almost cover their whole mortgage with the rents from the units in the back.

The current rents are at $3,250, once we are done with the work the property should rent out for $4,700.

Property Acquisition in Lakeside

I am very excited today because we are acquiring a new property in Lakeside. The property came to me from one of my flipper clients. I had called him about his opinion on a 2 unit property that I was looking at (it needed a lot of work). When he stopped by he had mentioned that he had a deal for me that was better than the one we were looking at.

This is a 3 unit property that is in Lakeside. The property is 2 buildings and each unit is 1 bedroom 1 bath. The rent on units like this is about $1,000 (in fixed up condition). So I figure that I will calculate conservatively and estimate that I will get $900 per door. The property needs about $30,000 in work in order to get it to high end sale shape.

Some may wonder why I am building the units with granite counter tops and nice appliances but I think that by doing this I will get more high end tenants that respect the property and will take care of it.

The key to this property is that I am in escrow for $156,000!!!!

If this unit gives me $2,700 a month in rent;

$2,700 -Rent
-$162.50 - Taxes
-$270 - Management
 -----------------------
$2,267.5

This gives me a 14.5% return on $186,000 ($156,000+ $30,000)

This will be a great cash flow property for many years to come.

Here are the before pictures, I can't wait to see it when the contractor is done with it.

Flip in Escondido

This is a completed flip that is currently on the market. The property was purchased by the borrower in the middle of February and was flipped in 45 days. The property has now been on the market for 30 days and has a few bites.

Purchase price                 $155,000
Loan Amount                   $110,000
Sales Price                       $250,000
Interest Paid to investor    11%

This property would rent for $1,700 - $1,800 if it would be on the market as a rental. After $115 for taxes, $170 for property management, this property would net $1,415 per month. On the original loan amount of $110,000, this gives you an annual return of over 15%.

Take a look at the before and after pictures;

El Cortez Loan

This one funded about 2 month ago but I am just getting to put it up on the blog now. The borrowers purchased this property in 2010 for $150,000 and put in about $30,000 in work. They then went ahead and rented this unit out for $2,500 a month a s a vacation rental. The borrowers are flippers that were going to try to hold the unit but decided to see what they could get on the market for it. The property is in contract for just under $200,000.

We did a 2 year note for this borrower (although he only kept it for 2 months).  This is a 1st trust deed for $120,000 and it's paying the investor 10% annualized.

What is Hard Money??

I wanted to write this post for all of the people that don't have an extremely secure grasp on what hard money lending is. Fell free to comment if you have any questions.

1. What is the process for Hard Money Loans?
   Hard Money Loans provide Investors access to capital to purchase investment properties. They can fund quickly, typically within 72 hours of receiving the final docs from the Title Company. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects.
2. What is the interest rate?
   The interest rate depends upon the Lender. The rate will range from 10% interest only to 15% interest only annual interest rate payable monthly in most cases..
3. What Loan-to-Value are Hard Money Lenders looking for?
   Typically a loan does not exceed 70%- 80% of the purchase price. 
4. How long is the loan for?
   Typically write the notes from 3 months to 12 months depending on the Lender and your needs. Longer the term can lead to increased costs or interest rate.
5. What are the costs?
   All loans will require Title Policy, Insurance, and Appraisal. These services come with fees that can range from a few hundred to a couple of thousand dollars. Most require origination points ranging from 1 to 7 points.
6. Can I get money pay for repairs?
   Yes. Most Lenders require a “Draw Request” form to be filled out to identify the completed repairs to the property, copies of the invoices from the contractors or sub contractors. After work is inspected, draws can be dispersed. Typically work is not paid in advanced.
7. Does my credit matter?
   Maybe. Hard Money Lender do check credit, not necessary for credit scores, but to check for bankruptcies, foreclosures, charge offs and collections. They look for ability to repay. The loan is more collateral based, which means they look really closely at the property.
8. Do I need to put any money down?
   In most cases, Yes. Most lenders want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Expect to pay all origination/discount points and other costs at or before closing. If you cannot afford to close you typically cannot afford to take out this type of loan.
9. Can interest to be deferred to the end of the loan?
   Sometimes. Most have interest payable monthly. Again, if you cannot afford to close you typically cannot afford to take out this type of loan.
10. How does Hard Money compare to a traditional non-owner occupied investor loan?
    This would be like comparing apples to oranges. Hard Money has a very specific purpose. Typically these loans are for quick turn around or after repair situations. Conventional financing is used for your traditional rentals and long term hold scenarios. As the foreclosure market increase you will find investors to use Hard Money as way to secure the property in a short period of time then refinance into Conventional finance.

Another Completed flip in Lincoln Park

This property was purchased on March 11th 2011 for $165,000. the flipper put $55,000 down payment on the purchase and we financed $110,000. The property is now finished and is in contract for over the asking price of $265,000. The flipper was able to finish the work in 2-3 weeks and had the property staged and on the market.