All Forum Posts by: Alex Breshears

I'm going to chime in an STR owner and a private lender. Tread cautiously right now. Many markets are hitting a saturation point and leisure travel demand is waning as disposable income disappears for may households. In addition, just purchasing the property is the VERY beginning of the equation. There are considerable costs involved in furniture, decor and technology. We have about $3,000 worth of just technology in place to remote monitor the home and safeguard it. And that's just the technology for us as owners, that doesn't include electronic technology like flat screen smart TV's, wifi, cable internet, etc. There is a process you could consider called rental arbitrage. You would lease something from a landlord willing to let you do an airbnb with the property. This will likely be problematic as the nationwide housing shortage is causing a shortage of homes, especially SFH which I would personally find ideal for STR's,but that's my business model. Realistically, I underwrite about 10k per bedroom of the property for just the inside furniture, decor, kitchen items, technology, etc. So a 3/2 would be about $30k for example. If you want to be successful in this market with STR's you need to have nice looking homes, picking up the flea market floral couch that's been passed through 3 generations isn't going to cut it anymore in most places. These have becoming sophisticated businesses, and you will need to research your competition to see what amenities they offer, what are they pointing out about the area (proximity to X, Y, Z, fire pits, swimming pools, lake access, free ski lift tickets etc). Buying is not even the beginning, the analysis and figuring out your business model is, and THEN you go look for properties that fit that model, capital, and time commitment you have available.

Hi Mark!

As a private lender, I will tell you when you are lending out your own capital, as long as you are within the limits of the usury laws of the state you are lending in, you can do whatever you want.  You must lend on non-owner occupied property only, as owner occupied property is under Federal regulations and licensing will apply.

Now as far as scaling a full fledged business. I want you to take a step back and ask why do you want to do this as a business? Personally, I do private lending and lend my own capital, and that is plenty of passive income for me and my time. I didn't want to run a full fledged office with people, and payroll, and phone lines, and internet access and subscriptions to technology platforms. That just isn't me. I like my business in a backpack. If I have internet connection, I can log in and look at borrower documents, see if payments have been made, wire funds to the closing company, etc.  There is a trade off where volume becomes more of a ball and chain than just "more money".  So before you think about scaling to a large business, I would say really evaluate what you want your lifestyle to be, and then head in the direction that gets you there. Many people end up in real estate investing because they say they want financial freedom, when in reality they want time freedom or geographical freedom (go where I want, when I want).  Building a business is a wonderful, trying, and amazing experience, but if you are one of the people who deep down wants those freedoms, building a business isn't going to get you there. Bigger is not always better. So think about the cash flow you want each month, the time commitments you have to family, activities, and anything else, and then decide exactly how far down the road you want to go.  Don't aspire for financial freedom by working yourself into another job if that isn't truly what you want.

Hi Matthew! This is a great question, and one that gets asked a lot! So good news, there is a book about private lending coming out by BiggerPockets on July 28th. It will be on pre-order this week. In that book we talk about the ins and outs of lending, ways to safeguard your capital, how you can mitigate risks, who else to involve in the process of doing the loan. Soup to nuts everything to do your first loan. Now, for general take aways right now I will suggest a few things. First, make sure you have at least a TYPE of property identified. Don't just walk in "hey dad do you want to loan me money so I can invest in real estate?" That will always end with a no. lol. Start with talking about the type of property you already invest in, or the type of property you want to invest in, why that type of property, where, what are you going to do with it. So for example, you want to buy a duplex on the north side of town and then renovate it and move tenants into it. The property should rent for about $800 each unit if it's a 2/1 on each side, I can buy something over there for about $120k and then maybe spend about $20k doing some light cosmetic rehab, update somethings, and then I can do a refinance out of your loan in 12 months because the property should appraise around $180k when it is rented and done. I have X amount of dollars to put towards this project, I have X experience from doing this type of thing, would you like to earn an additional $1200 a month if I make interest only payments to you, and your loan is secured by real estate so if I miss payments, you have the right to foreclose and sell the home at auction to get your money back. Second, realize that you need to do this with ONLY investment property. Lending on a primary residence is a MAJOR no-no unless you have the federal licensing in place to lend on owner occupied property. Even the duplex example I gave you, if you or a direct family member move in and its your primary residence but you rent out the other side, do not do a private loan. That is an owner occupied property. Third - get an attorney involved, no money changes hands outside of closing, and make sure you have adequate hazard insurance to cover the property in the event it burns to the ground the day before you put it on the MLS to sell. There are so many other things to consider, but as a first time talking to someone about private lending, those tend to be the largest concerns people have, especially if they are coming from the stock market space as they will inherently view this method of investing as risky.

I agree with this 100%. The syndication space and the equity fund space is a bit scary right now. Some of these pitch decks are using some pretty aggressive underwriting in their pro forma to show really nice IRR, Equity Multiples, and Cash on Cash returns. There's no mention of the debt structure and terms in these pitch decks, and never any mention of the type of insurance involved in the properties the passive investors will be contribution their capital towards. Those two things and really wreck a deal quick! Plus they are showing exiting at an even lower cap rate! They are already buying them at the 3 and 4 cap rate mark, and in an environment with rising rates, inflation, etc it will get harder to find qualified tenants with enough income to qualify. I'm not saying duck and run, but make sure you really understand what you are investing in and with whom you are investing!

Hi Clifford! This is a great question! You can always put in an offer, but that doesn't mean they will accept it.  I know in my market, homes are sold 15 months before they are even started. Once the lots are laid out and public utilities are in, buyers are picking their lots and floorplans and putting down significant deposits. With building costs rising over the last two years, many builders have been put in a pinch and they raised their prices to compensate for that increase in materials and labor. Realize that most lenders are going to require a downpayment, even if you buy the property with equity already in it.  Many lenders are starting to get a bit jumpy about the valuations, so they are lowering what they establish as the value and lower the leverage amount on the property.  Go for it and give it a try though!

Hi Christine! There are a few options to this situation depending on where you are and where the property is. As a private lender and a STR owner, there can be some challenges ahead with STR's and the cash flow they generate. I personally have been getting more conservative on the cash flow from these properties as inflation is eating away at the discretionary spending of many Americans.

DSCR loans are rather expensive right now, and will likely require a significant amount down, think 20%+. (Again lenders can be very different so these terms aren't totally set in stone.). With the expense of these loans, you really need to know that your projected cash flow (when done conservatively) can cover the debt on the property. The last thing you want is to be in a position where you have outlayed a lot of cash for furniture, decor, and technology only to find out that you are in the hole every month.

Depending on your personal finances, there are still second home loans out there in the market, with 10% down, but it will be full conventional underwriting on you as a borrower. If your DTI is already high, this may not be an option you can pursue.

Bringing on a capital partner who can also sign on the debt may work if you have someone in your network who wants to own a STR but maybe doesn't have the experience or time to set one up.

A private lender will likely be in the same terms range as a hard money loan, origination points, closing costs, potential downpayment for the property purchase price (depending on if there is any equity at the time of purchase).  

The best thing I can tell you is to be well capitalized. It will take a lot of capital just to stand one up, plus any associated downpayments and closing costs. Look at the seasonality of the market as well, since you don't want to be standing one up at the start of a slow season for example. If you do, that may increase your holding costs, so again another need for capital.

Hi Janet! Congrats on the success you have had so far! As a private lender, I can't say all our terms are the same, so my loan terms and requirements may be different from others.  A true private lender tends to be very flexible, so there are a variety of ways this could work.  For example, a private lender may be able to cross collateralize with the property that you have significant equity in. They could also potentially do that for any other property that is not your primary residence.  Private lenders may be a bit hesistant to offer a second lien on a primary residence as some states (even if the loan is for business purposes), have very stringent requirements for loans on a primary residence. You can also consider bringing in a short term partner who will provide assets, you can finish the rehab, and then sell to pay back the lender and the capital partner.

Hi Cody! As a private lender myself, I will tell you that it will be hard to find a lender that will do this type of loan.  Think about it from the lender's perspective. They are supplying the capital that is most at risk of being lost. If the market softens, your business plan doesn't go as planned, you don't have adequate insurance if something happens to the property, and the list goes on and on, the capital is at stake.  Also, with rising interest rates, few people are going to want debt tied up in a deal for 5 years, especially at those rates.  You may have more luck trying to find a capital partner, so they are on title of the property and could participate in how it is run and also participate in the upside. 

Right now DSCR loan rates are pretty high to have them as a long term debt. What you can do is potentially refinance those 10 properties into 1 portfolio loan through a local bank if they are all in the same state/market. That would be a blanket portfolio loan that would use the properties as collateral, so as long as there is equity and cash flow that might be a easy way to get your 10 conventional loans back in your name.

Hi Vaibhav! I love your enthusiasm for the real estate investing process! My suggestion for finding a partner would be to zero in on a market first, and also to be very upfront with what you can bring to the table. Maybe you can locate the deal but need some experience in the operation of one of these units. As an owner, I can tell you that these properties can require a lot of upfront costs and processes, and they definitely are not a passive investment. So letting others know what you offer, what you are specifically looking for, and where will really help others know how they may fit in your ecosystem of investing.