BiggerPockets

PRIVATE MORTGAGE LOANS VS OWNING REAL ESTATE

Thursday, August 19

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Private mortgage lending can provide a very high return, but no chance for appreciation and no inflation protection.

Owning income properties will provide a smaller amount of current income, but provide inflation protection, capital appreciation potential and sometimes the possibility for outsized gains.

Ownership of real estate can also be leveraged, allowing for the arbitrage between cap rate and interest paid known as mortgage reduction.

For the experienced, knowledgable investor, I recommend splitting your portfolio equally between the two.

Also, IMO, hard money lending requires greater knowledge and has more risk. A good property has to be purchased only once, it can than be held for 30 years throwing off increasing cash flow via rising rents, and appreciating in value. Most HMLs are for 6 months or one year, a new investment must be found, and each new loan carries the risk of a bad investment, however small. So in owning a good property 30 years you have a one time investment risk. 30 years of making a hard money loan turning over twice a year will be making 60 loans, with a fairly high risk that some of them will be bad.

Further, owning real estate you decide when and if to sell; making loans the borrower may pay you off at the most inopportune times. Further, in lending the good loans tend to pay off, the bad ones are hard to collect.

The amount of cash needed to begin a loan portfolio varies with the risk the investor is wiling to incurr and the knowledge and experience of the investor. Obviously, a small amount to invest may mean having a portfolio of a single loan, this is more risky than having more money invested and a diversified portfolio of 20 loans.

The mostly passive investor can achieve a return of 12-14% annually in private lending, the more active investor 16 -20%.

Direct property investment may have current yield of 8-10% for the passive investor, 10-12% for the more active investor. However, this does not take into account price appreciation which historically on commercial property has averaged 5 - 6 % over the last half century. Further, the arbitrage between the cap rate earned and the interest rate paid will enhance the cash on cash return. Part of your income in direct real estate investment will be tax deferred and ultimately taxed at the lower capital gains rate.

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Net Leased Real Estate

Wednesday, August 18

Property investors are increasingly eager to get their hands on real estate they can pretty much ignore.
Demand is strong for single-tenant net-lease properties, which are office buildings, warehouses or retail properties occupied by one tenant that is responsible for expenses, including taxes, insurance and maintenance, and almost everything else.

Investors find net-lease properties desirable because they don't require hands-on, day-to-day management. What's more, the tenant usually holds a long-term lease -- sometimes 30 years -- which gives investors the impression that income can be counted on for years."

Individuals can invest in net-lease properties by either buying a property on one's own or forming a partnership with one or more investors and purchasing it jointly. A third option is buying a fractional interest in the property through what is known as a tenant-in-common program. That option allows investors to get in on more costly properties. A tenant-in-common program is a form of 1031 exchanges, transactions in which an investor sells a property and replaces it with a like-kind property to defer capital-gains taxes.

There are two basic types of single-tenant net-lease properties. Triple net-lease properties are ones in which the tenant -- the lessee -- pays rent to the owner, as well as all taxes, insurance and maintenance expenses. Double net-lease properties are those in which the tenant pays rent to the landlord, as well as all taxes and insurance expenses that arise from the use of the property. But the owner pays maintenance expenses.

Among the most common net-lease properties: auto-parts stores, video stores, drugstores and restaurants. Auto-parts and video stores generally cost between $600,000 and $1.5 million, while restaurants can range from $750,000 to $2.25 million, according to Bernard Haddigan, national director of Marcus & Millichap Real Estate Investment Brokerage Co.'s national retail group. Drugstores can cost between $3 million and $7 million, says Mr. Haddigan, who is based in the Atlanta office of the Encino, Calif., firm. Properties with tenants that have good credit ratings have prices toward the higher ends of those ranges, he says.

Investors should lean toward general-purpose buildings, as opposed to special-purpose buildings, brokers say. General-purpose buildings can accommodate all manner of tenants so that, in the event a tenant leaves, a new tenant can move right in without having to reconfigure the entire building 

Triple Net Leased Properties

Wednesday, August 18

TRIPLE-NET (NNN) PROPERTIES

Net-leased real estate provides a unique investment opportunity to individuals or institutions interested in owning real estate without the hassles of management and leasing typically found in conventional real estate investments. Net-leased projects are most commonly single-tenant, credit-driven investments on long-term leases which require minimal or no landlord responsibility.

As a result, investors are not bound to their geographic markets, whereas they would most likely be with a traditional real estate investment, not just closely watched "backyard" opportunities.

A triple-net (NNN) property is effectively a long-term bond of a corporation in the form of a lease document encompassed by real estate. The investment appears to be a bond-type investment due to the "coupon-clipper" type of returns, 7%-15%. However, they also provide the added benefits of tax reduction and property appreciation found in conventional real estate.

The net-leased investment can be categorized three ways:

Retail refers to big-box users (i.e. discount variety stores, department stores, or home improvement stores) as well as small-box users (i.e. restaurants or drug stores).

Industrial includes facilities used for either distribution, manufacturing, or research and development.

Office refers to any single user such as an oil company or pharmaceutical firm occupying a facility as the sole tenant.

Pricing on net-leased projects is based primarily on the tenant‚s credit, the terms of the lease, and the location. Although each of these variables has an important role in the pricing of net-leased projects, it is the combination of all three that will determine a true purchase price.


Tenant's Credit

·        Many net-leased projects are based solely on a tenant‚s credit.

·        Tenants considered investment grade by a recognized rating agency usually trade at a premium (i.e. Walmart, Walgreens, General Motors).

·        Tenants with junk bond (non-investment grade) ratings or minimal net worth typically trade for a higher return (i.e. UA Theaters, Dairy Mart convenience stores, Taco Cabana restaurants).

Lease

·        Length of a lease is a another primary factor in determining the sales price on a net-leased investment. Primary terms of 15 or more years are preferred; 10 years is sufficient in 1031 tax-deferred exchanges and similar cases

·        "Absolute" triple-net leases, where the tenant is responsible for roof, structure, and parking, trade at a premium.

·        "Double-net (NN)" leases, where the landlord is responsible for roof and structure, trade at a higher yield and usually include a reserve taken for any potential repairs.

·        Leases with "bumps"- rental increases or upside trade at a premium, with the exception of flat leases with investment grade credit.

Location

·        NNN leases are credit-driven, causing location to be the least important factor.

·        Investors often pay an added premium for the residual benefit of specifying a certain geographic location.

The combination of credit, lease and location can lead to paying a higher premium (i.e. Walmart: 20 year absolute NNN, flat) or receiving a higher yield (i.e. CSK Auto: 15 year NN).

The market for net-leased real estate investments is strong. The availability of attractive financing combined with minimal landlord responsibilities create highly desirable opportunities, especially for investors desiring a property for an IRS Section 1031 tax-deferred exchange.

Whether a risk-averse individual or institution is in need of a smart depreciation vehicle or a relatively safe "coupon-clipper," net-leased properties provide great investments in both credit and real estate markets.

 

STATE FORECLOSURE PROCEDURES - WYOMING

Friday, August 13

WYOMINGConveyance is by warranty deed. Mortgages are the usual security instruments. Foreclosures may follow judicial or power of sale proceedings. Residential foreclosures take around 120 days; agricultural foreclosures, around 13 months. -  Judicial Foreclosure Available: Yes -  Non-Judicial Foreclosure Available: Yes -  Primary Security Instruments: Deed of Trust, Mortgage -  Timeline: Typically 90 days -  Right of Redemption: Yes -  Deficiency Judgments Allowed: Yes  In Wyoming, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.  Judicial Foreclosure The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder.     Non-Judicial Foreclosure The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".  Power of Sale Foreclosure Guidelines If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:  Written notice of intent to foreclose the mortgage by advertisement and sale must be served upon the record owner, and the person in possession of the mortgaged premises (if different than the record owner), by certified mail with return receipt, at least ten (10) days before the first publication of notice of sale.
The notice must be published at least once a week for four (4) consecutive weeks in a newspaper printed in the county where the property is located. If there is no newspaper printed in the county, then the notice must be published in a paper printed in the state and of general circulation in said county.
Said notice must specify the name of the borrower, the lender and the lender's representative, the date of the mortgage and when it was recorded, the amount of the default, a description of the property and the time and place of sale.
The sale must be held at the front door of the courthouse of the county in which the premises to be sold, or some part of them, are situated, between the hours of 9:00 am and 5:00 pm, and must be conducted by the person appointed for that purpose in the mortgage or by the sheriff or deputy sheriff of the county. Anyone may bid, including the lender. The highest bidder will receive a certificate of purchase. Such sale may be postponed from time to time by inserting a notice as soon as possible in the newspaper in which the original advertisement was published and continuing such publication until the time to which the sale shall be postponed, at the expense of the party requesting such postponement.
  The borrower has three (3) months from the date of sale to redeem the property by paying the amount of the purchase price or the amount given or bid if purchased by the execution creditor or by the mortgagee under a mortgage, together with interest at the rate of ten percent (10%) from the date of sale plus the amount of any assessments or taxes and the amount due on any prior lien which the purchaser paid after the purchase, with interest.  Lenders may obtain deficiency judgments in Wyoming.  

STATE FORECLOSURE PROCEDURES - WISCONSIN

Friday, August 13

WISCONSINConveyance is by warranty deed, but installment land contracts are used extensively, too. Mortgages are the customary security instruments. Within limits, the actual mortgage wording determines foreclosure requirements; redemption varies from 2 months for abandoned property to a full year in some cases. Lenders generally waive their right to a deficiency judgment in order to reduce the redemption period to 6 months. Wisconsin is a quasi-community property state. -  Judicial Foreclosure Available: Yes -  Non-Judicial Foreclosure Available: Yes -  Primary Security Instruments: Deed of Trust, Mortgage -  Timeline: Typically 90 days -  Right of Redemption: Yes -  Deficiency Judgments Allowed: Yes  In Wisconsin, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.  Judicial Foreclosure The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder. However, in Wisconsin, no sale may be made for one year from the date the judgment is entered unless the lender waives the right to a deficiency, in which case the delay is six months, or two months if the property is abandoned. Sales by consent may be earlier.  Non-Judicial Foreclosure The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".  Power of Sale Foreclosure Guidelines If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:  The foreclosure notice must be recorded with the county prior to the time the first notice of foreclosure is published. The notice, which must include the time and place of sale, must be published once a week for six consecutive weeks in a newspaper in the county where the property is located. The notice must be served upon the borrower in the same manner that civil process in a lawsuit is served. In instances where the borrower can't be found, then the notice shall be posted in a conspicuous spot on the mortgaged premises and served on any occupant.Said notice must specify the names of the borrower and lender, the date the mortgage was recorded, the amount due at the date of the notice, a property description and the time and place of sale.
  The sale must be held at the time and place stated in the foreclosure notice. The winning bidder will receive a certificate of purchase. If necessary, the sale may be postponed. Unless the foreclosure sale has been confirmed by court order, the borrower has one year (12 months) to redeem the property by paying the amount of the highest bid at the foreclosure sale, plus interest.  Wisconsin law allows a foreclosure sale to be confirmed by court order. If the lender states their intentions in the application for sales confirmation, then they may file a deficiency suit. Otherwise, deficiency suits are not allowed.

STATE FORECLOSURE PROCEDURES - WASHINGTON

Friday, August 13

WASHINGTONConveyance is by warranty deed. Both deeds of trust with private power of sale and mortgages are used as security instruments. Mortgages require judicial Foreclosure. Deeds of trusty require that a notice of default be sent first and 30 days later, a notice of sale. The notice of sale must be recorded, posted, and mailed at least 90 days before the sale, and the sale cannot take place any earlier than 190 days after the actual default. Washington is a community property state. -  Judicial Foreclosure Available: Yes -  Non-Judicial Foreclosure Available: Yes -  Primary Security Instruments: Deed of Trust, Mortgage -  Timeline: Typically 120 days -  Right of Redemption: Yes, but may be precluded. -  Deficiency Judgments Allowed: Yes  In Washington, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.  Judicial Foreclosure The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder.  Non-Judicial Foreclosure The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".  Power of Sale Foreclosure Guidelines If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:  The notice of sale must be transmitted both by regular mail and by certified mail, return receipt requested, to the borrower at their last known address, and by regular mail to the attorney of record for the borrower, if any, not less than thirty (30) days prior to the day of sale.

The sheriff must publish a notice of the sale once a week, consecutively, for four (4) weeks, in any daily or weekly legal newspaper of general circulation published in the county in which the property is located. Additionally, the sheriff must also post the notice in two public places, one of which must be the courthouse door, in the county where the sale is to take place for a period of not less than four weeks prior to the day of sale. Said notice must contain the time and place of the foreclosure sale, the names of the parties to the deed, the date of the deed, recording information, a property description, the terms of the sale, and the borrowers rights (or lack of) redemption. The borrower has up to eleven (11) days before the sale stop the foreclosure process by paying the past due payments, plus expenses, including trustee and attorney fees.
The sale must be made by auction between 9:00 am in the morning and 4:00 am in the afternoon at the courthouse door on Friday unless Friday is a legal holiday and then the sale must be held on the next following regular business day. The sale may not be conducted less than 190 days from the date of default and the highest bidder will receive a certificate of sale. The sheriff may postpone the sale (not exceeding one (1) week next after the day appointed) by giving notice and by posting written notices of the adjournment under the notices of sale originally posted.  Unless redemption rights have been precluded, the borrower may, within eight (8) months after the date of the sale, redeem the property by paying the amount of the highest bid at the foreclosure, plus interest.  If the non-judicial foreclosure process is used by the lender, then it cannot sue for a deficiency judgment. On judicial foreclosure sales, the borrower can be sued for a deficiency, unless the property is found to be abandoned for six (6) months before the decree of foreclosure.