In todays email:

• 💬 State of the market: Bank failures 😟 and how it affects lending.

• 👀 Featured Video: Private lending basics explained.

• 🤑 Show me the money: Breakdown of how I make money.

• 🥶 Cool Tools: Best financial calculator for your phone or desktop.

State of Real Estate

BANK FAILURES: The start of 2023 has been rough for the banking industry. It started with Silvergate Bank and then Silicon Valley Bank and then Signature bank which all failed within the month of March. Some other banks have received rescue funds like First Republic and Credit Suisse. So what happens to real estate in these uncertain times? Well time will tell but historically the banks will hunker down and get tight with the lending and make it even tougher to get a loan. This is because they have to preserve capital just in case the next shoe drops. The CRE (Commercial Real Estate) will be hit the hardest and not much lending will go on since much of the CRE debt is in the smaller banks (I heard up to 80% which is $2.3 trillion…yes trillion with a “T”) and they are going to be cautious going forward until the crisis is behind us.

The bank failures, means that the Federal Reserve cannot be so aggressive in raising its short-term interest rates and therefore mortgage rates will decline as we have seen in the past few days. However, still relatively high (around 6.5% as the writing of this newsletter). However, it is all the uncertainty that results in people doing nothing and just going into “wait and see” mode.

In summary, I think that the inventory and sales (as mentioned in last newsletter) will remain low since people are staying in their house longer and not moving unless they have to and the lenders will be super particular on who they lend to since capital preservation is now the name of the game. These factors will keep the housing market on ice 🥶 .

Featured Video 

How private lending works

What is a private lending? Private lending is a type of lending where an individual or a group of individuals (i.e. private investors) lend money to another individual or business, rather than a traditional financial institution such as a bank. Private lending is typically done for higher-risk loans that traditional lenders may not approve or for borrowers who cannot meet the strict requirements of traditional lenders. Private lenders often charge higher interest rates than traditional lenders and usually require collateral to secure the loan. Private lending is a way for investors to earn higher returns on their money than they might get from more traditional investments, while also helping borrowers who may not be able to get loans through other channels.

WHAT IS A REAL ESTATE PRIVATE LOAN?

• It is simply loan from an investor to an individual or entity which is secured on real estate.

• The real estate is the collateral for the loan.

• The loan is secure by a mortgage or deed of trust depending on the state the property is located in.

• Typically the loan is used to purchase the property and/or rehab the property.

WHAT ARE THE MAIN DOCUMENTS REQUIRED FOR PRIVATE LENDING?

• Note - Promissory note spelling out the terms of the loan such as interest rate, length of loan, amount borrowed, etc.

• Mortgage/Deed Of Trust - Security instrument which allows the lender to foreclose and get the property back if borrower does not pay as agreed.

• Title Insurance - Protects the lender from financial loss sustained from defects in a title to a property.

• Hazard Insurance - need to name the lender as mortgagee of loss payee on the hazard insurance policy in case of loss.

OTHER REQUIREMENTS?

• Personal guarantee is required by some private lenders as well.

• Appraisal is typically required for loans.

• Demonstrate and show other successful projects.

• Purchase asset in a entity and not personally.

• Minimum FICO score (usually >600).

TYPICAL LOAN PARAMETERS (every lender is different)?

• LTV (Loan-To-Value) to be at or below 70%. This is to reduce the risk in case of a downturn in property values and to insure equity.

• For Fix and Flip many lenders will also require that the loan-to-cost be 90% or less.

• Some require points or origination fees which ranges dramatically from 0-5 points. (1 point is 1% of the loan).

• Interest rates: 8-16%.

Show Me The Money 

How I make money in real estate

One of the newsletter subscribers emailed and asked “Hey Randy…from where do you making the bulk of your money.”

I will try to be transparent and talk about how I make money and what are the main areas from where I receive monthly income. Every month I track my cash flow from various sources of income. Approximately 70% of the income streams are for the most part passive and the remaining 30% are active. This is pretty fluid and changes each month. For me, the key performance indicator is measuring the free cash flow (FCF) which is represents the cash that my company generates after accounting for cash outflows to support operations and maintain assets. I want the FCF to consistently go up each month.

Below is a list of the main income streams split up in 2 buckets - passive and active. The passive and active is not black and white and there are shades of grey. The charts below will help give you a visual picture of how it all breaks down.

PASSIVE

• Mortgage notes: 37%

• Rentals and seller financed houses: 18%

• Private lending: 5%

• Fund investments as limited partner (syndications in apartments, self storage, businesses, etc.): 5%

• Principal paydown: 5%

ACTIVE

• REO - Real Estate Owned (houses that I have taken back through the foreclosure process): 21%

• Consulting/Advisory Services: 9%

Many of the active real estate activities will become passive or pseudo-passive. For example, if a loan is non-performing we have to do some "activity" to get it re-performing like a loan modification. Once modified then the activity becomes more passive over time as the now performing loan seasons.

When comparing 2021 to 2022 you can see an increase in the amount of income derived from private lending and fund investing (as a Limited Partner) and the REO activity has decreased due to the low inventory of non-performing loans available on the market which is where most of our REO inventory comes from.

It is important for you to shift as the real estate market shifts and be constantly making adjustments to maximize your cash flow.

SUMMARY: If you would like multiple streams of lifetime income flowing into your life you need to read this information carefully. To start, just pick one thing that excites you and pursue it hard. Then, as you establish yourself you can start adding additional income streams until you reach your desired month income goal.

What is your monthly income goal?

Are you serious about making changes and creating wealth? Serious people know they need to set goals and let other know about them.

👊 REPLY NOW to this email with your passive income goal! 👊 

Cool Tools

There are many financial calculators that you can buy and even more that are online that you can use for your real estate business. However, over the years I found one calculator to be particularly useful and pretty easily to use. Like anything it takes practice to get quick at doing the calculations. I recommend two different solutions below. However, by far the best and least expensive solution is the 10bii financial calculator and you can get the app on your iPhone or Android for $5.99. You can also get it on your computer.

NOTE: On a future newsletter, I will show you how to use the 10bii to get the payment, interest rate, term, etc. by showing some examples and case studies.

10bii Financial Calculator by In-A-Day Development is my go-to daily calculator (https://inadaydevelopment.com/10bii)

• Calculate Time Value of Money (Length of Term, Present Value, Nominal Interest, Loan Payments, Future Value) and see the cash flow diagram produced for you automatically. Values for N, PV, I, PMT, and FV are displayed right above their keys for easy reference.

• Easily enter and see diagrams for Cash Flows, including rapid calculation of Net Present Value and Internal Rate of Return.

• Switch between Nominal and Effective interest rates with the simple touch of a button.

• Get answers to common financial-based questions WITHOUT having to know how to use a financial calculator! With the 10bii Financial Calculator's Easy Modes, answer a few simple questions worded in plain language and find out just how much you'll save with that refi, how much you'll have at retirement, how long it'll take you to save up for that big purchase and more.

TValue Online has many capabilities and can be used on MAC and PC (https://www.timevalue.com/tvalue-online)

• Use TValue Online on any Mac or PC computer, iPad or tablet, smartphone, or on any other device that can access the Internet

• Easily store and access your files in the cloud or on your desktop computer

• Email TValue files or PDFs to clients/customers or yourself from within TValue Online

• No need to install TValue on your application servers or desktops

• TValue Online is updated regularly so you always have the latest features and most current release.

🖐️ IF YOU HAVE A QUESTION YOU WANT ANSWERED, PLEASE RAISE YOUR HAND BY SIMPLY REPLYING TO THIS EMAIL.

Last weeks POP QUIZ was…Why don’t we as the note buyer get a traditional appraisal to determine the value of the property?

ANSWER: We cannot get into the house since we don’t own the house as the note buyer. Typical appraisals are based on interior and exterior inspection of condition and features. As a note buyer, we would get a BPO (Brokers Price Opinion) or AVM (Automatic Valuation Model) which bases value mainly on the exterior, year built, bedrooms, baths, square feet, etc. and not so much on the interior condition or features of the house.

This weeks POP QUIZ: What lien position is an IRS lien on a property?

Check out next weeks newsletter for the complete answer.

PLEASE RECOMMEND THIS NEWSLETTER TO OTHERS. THE BIGGER THE COMMUNITY THE BETTER FOR ALL. NO SCARCITY MINDSET HERE!

We would love to get your feedback and thoughts! Let us know what questions you have and topics of interest. You can just respond by replying directly to this email…we like to make it easy 😌.