All Forum Posts by: K S.

Quote from @Account Closed:

Quote from @K S.:

I lent money to a flipper in San Diego who claimed bankruptcy and fled to Canada. I then realized the lender made over a million dollars when he foreclosed on his property. I was wiped out as second lien holder which got me to thinking about legitimetly becoming a private lender.

My question is if I already make 7.5% off a few of my 250k condos, then how does private lenders (not hard money lenders) make money off charging 7-8% returns when they can just purchase condos in cash for the same CAP rate?

2 thoughts. one is that 7-8% you mention is not the same as owning the condos. The 7-8% lenders earn is on debt, while that condo is earning the same on equity. Which is the best investment? From a risk adjusted yield without appreciation being considered, the debt by far the strongest investment. 

My last thought is as a private lender who lends in other states, I earn 12% + 2 points on all my deals, and I do <70 LTV. Lending in CA is not great unless you have a massive bankroll.

Hi Zach, I'm from San Diego too.

Oh ok so it's 12% not 7%. That changes things for sure but what about comparing it to the S&P 500 which earned 12% in the last 10 years for no effort at all? I"m going to assume the origination fees are what makes or breaks this investing strategy?  

So you don't think 250k would be enough in San Diego for construction draws and renovations? That fraud that I worked with previously would accept 18% gap funds of much smaller amounts from private lenders.

Quote from @Jeff S.:

I will.

There is no legal definition of a private or hard money lender, @K S. For some odd reason, emotions seem strong on this board over the terms, and many here have their private definitions. Don’t get hung up.

Since 2010 we’ve been lending our hard-earned money to experienced house flippers in Los Angeles and North Orange County, CA. I guess that makes us “indy lenders” according to @Mike Klarman, above? (Yet another lender definition I never heard of.) Nonetheless, Mike makes a good point. If you want to become a lender, you’ll have to decide on what and to whom you will lend, as well as your terms, location, loan position, etc., etc., etc. You seem confused over the difference between a real estate investor and a lender.

As a real estate investor, you own the property and enjoy cash flow, appreciation, tax benefits, and equity. Your potential return is unlimited, but for this you get to deal with toilets, tenants, and termites. No thanks.

Loans are not real estate investments and (hopefully) don’t involve property ownership. Unless they sell them, lenders don’t make appreciation on their notes. They earn interest on the loan and perhaps an origination fee. Even if you default, the return to a lender is easily calculated using the loan terms usually defined in the note. That is, the return to a lender is semi-fixed and predictable.

Lately, and this is regional, you should expect to earn around 10 to 15% as a private/hard money lender (with no TTT’s 🤗). The lender you mentioned made $1M after foreclosing and owning the property. At that point, he was not a lender; he owned the property.

I’ve published our loan process here step-by-step on occasion. Though it’s been several years, you can see it in my post in this thread. It’s still about 90% accurate for us.

Thanks Jeff I'll check out your link. I didn't know it was around 10-15%. I know they didn't make appreciation on the note, that was a rhetoric response to another responder who didn't see the difference between the two investment vehicles. I was curious about starting low with 250k doing construction draws or renovation draws.

Quote from @Chris Seveney:

@K S.

You just said they make money by lending at 7.5-8% and they don’t have to deal with tenants

That’s how they make money

I don’t understand your question.

What don't you understand? Do you earn appreciation on the note or claim depreciation on your taxes? Sounds like they make money in some other ways like origination fees or taking equity from short sales but I doubt that happens often. 

Any actual private lenders want to respond?  

I did say private lender like for flips, rehabs etc.

"The big difference between the two is that often times one is the lender of the note and the other is the lender of gap funds to close."

You can be a private lender and hold the first note.

I specifically said not hard money lender unless someone recommends it.

Mike, I'm guessing you're not a private lender but thanks for the advice. 

I lent money to a flipper in San Diego who claimed bankruptcy and fled to Canada. I then realized the lender made over a million dollars when he foreclosed on his property. I was wiped out as second lien holder which got me to thinking about legitimetly becoming a private lender.

My question is if I already make 7.5% off a few of my 250k condos, then how does private lenders (not hard money lenders) make money off charging 7-8% returns when they can just purchase condos in cash for the same CAP rate?

SoCal CAP rates do seem to be 5% from the redfin descriptions I read on some of them.

I'd much rather buy a 1 million dollar SFH in north county than a 1 million dollar 4 unit in a low income neighborhood. At least one forum member has retired on just a few upper scale single family homes. Unfortunately, it's not 2012 anymore so that's a lot of cash.

You don't even need multis to SB1033 condo out with ADUs. And SB9 lot split is only applicable to R1 zones making multi family land less attractive. It's like single family lots with ADUs is more attractive as you can have 3 to 4 units on a single family zoned piece of land and it could be in a nicer neighborhood. 

Buy a golf arcade instead like Golden Tee with Power Putt Live. More robust. Cost 4,500 and coin opperated.

Or put a mini put course that you can purchase oline of various sizes i.e. 5x10, 4,12 etc.

Quote from @Dan H.:

Quote from @K S.:

Quote from @Khu Far:

I would like to start my REI and not sure how to move forward.

I vote no for single and multi units unless you're going to add nice ADU duplexes with the extra land, take advantage of the SB1033 ADU/condo and SB9 lot splits. Otherwise, you're better off investing in the S&P 500 like VOO and 401k matching. Here's why:

100k into the S&P 500 10 years ago would net you 370,000 today or 580k ~17 years ago.
https://www.officialdata.org/us/stocks/s-p-500/2013?amount=1...

You can also invest an additional 3k/month and have $1,000,000 in 10 years at the same rate.
https://www.calculator.net/investment-calculator.html?ctype=...

Meanwhile my 100k house I bought in cash 17 years ago sold for 325k but net only 237k after selling expenses, renovation and taxes. I don't think multis are any better, just multiplying the problems by 4.

 >Meanwhile my 100k house I bought in cash 17 years ago sold for 325k but net only 237k after selling expenses, renovation and taxes.

You do not indicate if it was owner occupied but let’s do use same numbers but leveraged. 
- 17 years ago non-fha and non-va was likely max 90% LTV. That $100k house was $10k plus closing. Let's use $3k closing so $13k. This would allow you to purchase 7 with money left over. 7 * $237k= $1.659m.
- same condition above today has max LTV of 95% allowing 15 purchases with the $100k.  15*$237k=$3.55m.  
- non owner occupied SFR max LTV was 80%. With closing costs 4 properties. 4*$237k=$948k.

A big advantage of RE investing is leverage.  Other advantages include value add, tax benefits, capability to legally avoid paying taxes on extracted money, and ideally cash flow.  

If you purchase a property with no loan such that you are not leveraging your money, you are missing out on a big advantage of investing in RE and you may be better off investing in stocks as it is much more passive.  

Good luck

You made a few assumptions so here are a few more details for you to see. I find it interesting that nobody really crunches the actuall numbers in Real Estate which I think is part of the cognitive dissonence we practice in order to make our investments look a little better.

No 1031:
Purchase: 120k, Sold 330k = 210k in just equity
Gross Rent: 220k - 60k expenses - 15k taxes = 145k <-- actual rental income

$210k (equity) + 145k (rent) = 355k 
i.e. 355k -30k(closing) -50k(taxes) -25k(renovation) -14,500(recapture) = $245k

=245k profit (including all rental income, tax deductions and appreciation.

So if you had a mortgage, you would subtract the 145k in rental income and add 30k in principal. So I think that's 130k total.

130k x 4 houses = 520k (less than 580k in the S&P 500). Or 740k with 1031 exchanges but not everyone wants to tie up their money again.

On top of that, you're negative because you only put down 5% and $900-1000 in rents back then wouldn't cover you. You needed ~25% down.

This guy only has 75k-100k and is looking to put it somewhere to grow. Not hustle as he sounds like a passive investor as his age would suggest that he doesn't want to be in debt for the next 15-30 years and risk quitting his day job that close before retirement.

You can always purchase land in California and build a small cabin to rent out. You would just need to come up with another 100k or so.

If you like truly passive real estate and don't mind risk, you can go half on a hard rock hotel property in San Diego. They sell for 250k and return 7.5%. Little upside in appreciation but you get the cash flow and the tax benefits.

Quote from @Khu Far:

I would like to start my REI and not sure how to move forward.

I vote no for single and multi units unless you're going to add nice ADU duplexes with the extra land, take advantage of the SB1033 ADU/condo and SB9 lot splits. Otherwise, you're better off investing in the S&P 500 like VOO and 401k matching. Here's why:

100k into the S&P 500 10 years ago would net you 370,000 today or 580k ~17 years ago.
https://www.officialdata.org/us/stocks/s-p-500/2013?amount=1...

You can also invest an additional 3k/month and have $1,000,000 in 10 years at the same rate.
https://www.calculator.net/investment-calculator.html?ctype=...

Meanwhile my 100k house I bought in cash 17 years ago sold for 325k but net only 237k after selling expenses, renovation and taxes. I don't think multis are any better, just multiplying the problems by 4.

Quote from @Bradley Buxton:

@K S.

It might depend on if your PM company does all the management. AirBNB will only connect you with guests.  You'll have to do the math on the fees and weigh your time vs what the PM charges. Turnover can be very time consuming. 

 Bradley, are you saying that AirBNB with a co-host will still require my efforts like on pricing and handing the keys over or performing electronic codes assuming a yale lock or something?

Because my current PM who does 30 day rentals takes care of everything the same way they do 1yr leases. But as an out of state investor, I couldn't do AirBNB if it requires me to hand out key codes and to constantly gauge pricing and updating the web site etc.