There are many value-add opportunities in the Los Angeles market. The housing demand remains strong, and the inventory remains low. As a hard-money lender in Los Angeles, I am available to advise and guide investors in their quest to build a sustainable portfolio of residential properties.
This blog will explain the place and the time for a hard-money loan at the time of acquisition, renovation, and stabilization and the time to refinance with a conventional (bank) loan.
The Hard-Money Lender
A hardmoney lender evaluates the merits of a deal like an investor. This entrepreneurial spirit recognizes the value of a vacant property and the potential to improve the property’s placement in the market.
A hardmoney lender in Los Angeles looks for opportunities to invest in the creation of value. The optimal place for a loan funded with private money is at the acquisition, renovation, and securing of a qualified tenant. The transaction is underwritten upon its merits first and the financial strength and liquidity of the investor second.
A conventional lender will not, and cannot, evaluate a deal based on potential. The value needs to be in place, and the property needs to be self-sustaining before underwriting begins. A conventional lender will look to the financial strength and the investor’s credit history first and the deal’s merits second.
The Investment Path
The goal of a long-term investor is to obtain the optimal rent and position the property to qualify for a conventional loan. A bank will offer lower rates over the long term. It is essential to realize that an investor, like the property, must qualify for a conventional loan.
The investor must focus on personal finances and the forward plan. The tasks an investor must do to achieve the goal are to:
- manage personal debt
- evaluate personal finances
- create a contingency plan, and
- research the local market.
1. Manage Personal Debt
The positive leverage of debt is the best way to create wealth. However, personal debt cannot impede doing so. Obligations like car, student, and credit card loans lessen spending power and liquidity.
2. Evaluate Personal Finances
Building a residential portfolio is not without risk. Every stage of investing must prepare for vacancies, an increase in the renovation budget, or a lower-than-expected rent. The investor’s personal finances must be able to handle these “blips” in projections. The level of loss coverage over what length of time must be known.
3. Create a Contingency Plan
As the owner/landlord, your phone will ring when there is a broken pipe, roof leak, and other maintenance tasks needing attention. Even if the property is professionally managed, these expenses will eventually find their way to the owner. It is best to set aside at least 20% of the rent collected every month for this contingency fund.
If the contingency account is not funded to cover unplanned expenses, then the owner’s personal fundsmust be used.
4. Research the Local Market
The investor’s knowledge of the local market is crucial. An investment will not be profitable if the renovations to a property are too extensive for the neighborhood or if the purchase price is too high.
If the property is in an area with good schools; a strong job market; and amenities like shopping, playgrounds, and ballfields, then higher rents and stable tenants are easier to secure. But, value-add opportunities in these locations are hard to find.
Value-add opportunities are mostly in second-tier locations. These deals will prove profitable if the investor researches and understands the market.
Creating a portfolio takes time, patience, and planning. The objective is to identify a motivated seller, create value through renovation, and secure a qualified tenant. This is the place for a hardmoney loan in Los Angeles.
The end goal is to refinance with a loan, convert any remaining equity to cash, and enjoy the recurring income. The converted cash can be used toward the next opportunity.
If you are considering creating or growing a portfolio, it is in your best interest to work with a reputable hardmoney lender in Los Angeles. PB Financial Group is a premier, direct hardmoney and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to satisfy your financing needs efficiently on important real estate projects throughout California.
PB Financial NMLS #357614/DRE #01522495