Cap rate is used for a number of reasons. For our purposes, we are going to look at what a hard money lender looks at when evaluating a potential loan. First things first, how do we calculate a cap rate? With some basic information, it is not terribly difficult. First you need to know the net operating income for the property, or NOI. NOI is the income minus the expenses of a property, not including the debt service for the existing mortgage. So if your property brings in $100,000 per year, and expenses amount to $40,000 per year, your NOI would be $60,000. NOI should be expressed as an annual number for this calculation.

Next you need to look at the value of your property. Divide your NOI by the value of the property and you will have your cap rate. In the example above, a $1,000,000 property with an NOI of $60,000 would have a 6% cap rate. When evaluating a property, the higher the cap rate is, generally speaking, the better investment that property would be to purchase. A $1,000,000 property with a 6% cap rate would generate $60,000 per year in net operating income. That same property with a 10% cap rate would generate $100,000 per year in net operating income. Pretty basic.

Where it gets tricky is when you look at where your numbers come from. For a cap rate to be a beneficial number to look at, it is very important to know that your numbers are accurate. If you have inflated income numbers, or understated expesnses, your cap rate is not going to be accurate. Like anything else, if it is not accurate, you cannot rely on it.

In the lending world, we use the cap rate in a backwards fashion from how I have explained it above. When looking at a property and making a decision on whether or not to make a loan against it, valuation is paramount. Cap rate is a good, quick way to estimate this valuation. If we know the NOI for a property, and know the cap rate for comparable properties in the area, we can quickly calculate an estimated value.

Using the same example as above, if we have a property with $60,000 net operating income, and we know the average cap rate for comparable properties in the area is 8%, we can divide $60,000 by .08 (8%) to arrive at an estimated value of $750,000 for that property.

That is cap rate in a nutshell. If you have questions or would like to talk with me about obtaining a commercial loan here in California, please call me today. You can always reach me at 877 462 3422, ask for Chris!

Hard money lending is changing all the time. With the recent downturn in the markets and bad news on most economic fronts, guidelines for hard money have tightened up along with the rest of the credit markets. A good example of this is the loan to value on which a loan can be made. In today’s market, that number is in the 60-65% range. What that means is that for every $100,000 in property value, you can borrower a maximum of $60-$65,000. When you factor in the declining real estate market, one can see how borrowing money can get difficult.

This is where cross collateralization comes in. If you own multiple properties, we can take a look at more than one, and add the total values of those properties together. The loan to value still must conform, but if you need a certain amount of cash in hand for a project or business purposes, the power of cross collateralization can help get you there.

Say, for example, you own two properties, each with $100,000 in value. You owe $40,000 on one, and $30,000 on the other. You need $50,000 cash in order to expand your business. At 65% loan to value, you will not net $50,000 using either of these properties. If we cross collateralize them, however, you now have $200,000 in property value, and $70,000 in liens. At 65% loan to value, or $130,000 in potential loans allowed against the properties, we now have the room to make that $50,000 loan to you.

Another way to utilize the power of cross collateralization is on a purchase. With the credit markets in turmoil right now, you need to be able to put money down when buying a property. If you own property with enough equity in it, however, we can structure your loan to minimize the amount of cash you must put down in order to acquire the property, using the same principals outlined above.

If you have no money to bring to the table, and own no property, this is not the best business to try and get into. You should find a partner, or save some money, before spending too much more of your time looking for 100% financing. If you have some money, say at least 20% of the purchase price, then you start to have some real financing options.

A program that I currently have access to can fund 100% of the purchase price or more. Keep reading though, you still need some cash. This program works on homes that are being rehabbed. Short sales that need new floorings, fixtures, etc. work well. Even properties needing major rehab can work, but the common theme is that you are going to put work into the property in order to improve the value. The investors on these loans like that, but want to make sure it gets done, so in exchange for lending you 100% of the aquisition cost we are going to require the funds to complete this work be held in a builders control account. In addition, you will need to bring the first six months of payments, and cash to cover points and fees to the closing table.

So if you have the ability to bring the cost of rehab, 6 months interest payments and fees to the closing table as cash, we can fund the rest of your project. You have no payments for 6 months, the rehab costs are available and easy to draw, and there is no prepayment penalty. These are typically short term loans, and sometimes we are able to obtain funding for more than the purchase price.

In addition to having some cash to bring to the table, there are some other qualifications. Credit score is not a big concern, but what is on your credit can have a bearing. Recent foreclosures, bankruptcies or major delinquencies will need to be explained, and compensating factors may need to be looked at. Owner occupied properties are also not going to qualify. This type of program is strictly for investment properties.

Loan amounts can vary, but range from $50k on up to $500k or so. Over $500k becomes a bit more difficult, and will require some additional financial and credit strength, but it is available for the right deals. Funding time on these aquisition and rehab loans can be as quick as one week, although a typical transaction can usually be completed in 2-3 weeks. Of course, if there are timing issues involved, we can work with those deadlines. Just be sure to mention those deadlines upfront.

Feel free to contact me with any questions. 877 462 3422. This is primarily a California program, but we can help in other Western US states.

Hard money lenders are loan to value driven. Credit scores, the ability to repay and the overall picture do play a part in the decision to lend or not to lend on a particular transaction, but the largest consideration is given to the property value and the percentage of debt against it. With hard money lenders, this loan to value ratio typically needs to be a maximum of 65%, 70% depending on the location and type of property. For example, commercial properties located in San Francisco we may be able to lend as high as 70% on, whereas rural properties we may be capped at 60% of the value.

Hard money lenders offer flexibility that is needed in today’s market. Cross collateralization of multiple properties is one way that a hard money lender can overcome higher loan to value ratios. Additionally, hard money lenders will work with borrowers on a personal level. You have the opportunity to speak with the individual making the funding decision. With no minimum credit score required, hard money lenders will give you the opportunity to present your individual situation and will then make a decision based on a “make sense” type of scenario. If the loan makes sense for both the borrower and the hard money lender, the deal will typically fund. A good hard money loan is one where there is a solid exit strategy and a clear benefit to the borrower.

Working with a hard money specialist is extremely important when trying to obtain private financing. Structuring these deals is different than putting together a conventional loan package. In addition to properly structuring your transaction, it is equally important that your hard money specialist has the resources available to get your transaction funded.

My name is Chris Goulart, and I am a hard money specialist. I am a direct hard money lender, and also have many additional resources should your particular file not fit our guidelines. Please feel free to read more about what we can offer in the way of hard money, or contact me today to talk about your loan scenario. I can be reached at 877 462 3422. This is my direct line, and it will forward to my cell phone when I am out of the office.