Lately I’ve been noticing a trending question among my students – they have been telling me they have some extra cash on hand or in their self-directed IRA accounts and need some advice on what to do with it.
This question really got the wheels turning in my brain and I decided to create a BRAND NEW training that will help answer this question called “How to Become a Successful and Confident Self-Directed Private Investor.”
Active vs. Passive
To be an active real estate investor, you have to have access to funding if you want to do BIG DEALS. Of course wholesale deals can be done without funding at all but normally those deals average $2,000 - $10,000 fees. The Funding for BIG deals could be your own money, private lenders, hard money lenders, gap funding, bridge funding, rental funding, a line of credit. Active investors are looking for current income and to build their personal net worth by flipping properties, wholesaling, and owning rentals. This is usually someone who is actively doing deals to create current income into their business and life so they can pay today’s bills, quit their job, save for an upcoming event or build assets. An active investor might also just be interested in building a nest egg, creating passive income and setting some money aside for the future.
A passive real estate investor is someone who already has money saved in retirement accounts or cash on hand and is trying to get the best return on investment they can in a responsible manner. Their money can be found in a brokerage account, a self-directed IRA, old 401k or pension or its just cash on hand.
Pulling Back the Curtain on Underwriting
If you are looking at being a passive investor, you can do a better job of reducing your risk by using these 8 simple steps to becoming a more successful and confident private lender. Understanding and knowing exactly how we underwrite files will help you do your own due diligence for private investments you may make. Below, I will break down our process at Freeland on exactly how we underwrite potential loans and investments to responsibility lend to borrowers and deploy investors capital.
8 STEPS TO BECOMING A MORE SUCCESSFUL AND CONFIDENT PRIVATE SELF DIRECTED INVESTOR
Step 1: Borrower completes a loan application. The loan application covers the basics like name, address, email, phone number, property address, etc. and it also can allow a credit check. If you are a borrower, the application should also sell your investor in the deal. Tell the private lender or passive investor all about the funding opportunity – why are you buying it at that price, what is the rehab amount, why is the neighborhood awesome?
Step 2: Need a copy of the Purchase & Sale Agreement and the Rehab Budget Estimation Guide. This is a scope of work to be done on the property. It tells a story about the property.
The number one question about an investment is NOT yield – it should be when am I going to get my money back? How safe is my principal? My investors know they are going to get their principal back in one year or less.
Your second question should then be about the yield and return. The third question should be HOW are you going to do it? What is your business plan?
Step 3: Check good old Google – check out the street view of the potential investment. Check out the neighborhood and see what neighboring houses look like, is there any graffiti in the area, and are there boarded up houses? Busy streets? The neighborhood the potential investment resides in is VERY important.
Step 4: Next, we will check a program called HomeFacts.com. This site will tell us about the crime rate, unemployment rates and school districts in a neighborhood. We prefer a neighborhood that has a C+ or B- crime rate, school districts that are rated at least a 6 or higher out of 10 and an employment rate of 8% or less.
Step 5: Checking Trulia.com comes next. We use Trulia because it gives us a block by block breakdown of crime. Sometimes it’s tough to tell if an area is gentrifying or if it’s a “war zone.” If we see something that falls under the capital crime category such as a high rate of murder, drug traffic, rape or other violent crimes, we are staying away from those areas.
Specifically, look at their map view and check out the block by block view of crime.
Step 6: The next thing to look at it is comps. One resource we use to find comps is Zillow.com. You can search your potential property and if you scroll down on the page, you should see a “Nearby Similar Sales” section on the right hand side.
This will give you the selling price of homes that are similar in the neighborhood. Other resources you can use to find comps are:
- Realquest – national database that provides A LOT of detail such as property tax values, if the property taxes are current or behind on a property, etc. This is what we consider the “holy grail” of comp software
- Current market analysis from the MLS which consists of 3 active, 3 pending and 3 sold properties
Step 7: At Freeland, we require our borrowers to fill out the Rehab Budget Estimate Guide. Check out the scope of work and schedule. If you need to, call the rehab contractor to verify the rehab budget, schedule and total scope of work. From this, you can compare the estimates to the actual rehab cost estimate.
My brother Mark and I use ghant charts which are process driven charts. If our investors want to see these, we gladly provide them.
Step 8: Finally, we’re on to the appraisal which is for sure the most important piece. Keep in mind appraisals aren’t always accurate, but normally they are. An appraisal is a professional opinion of value. Make sure the appraisal is an after repair value appraisal.
It’s happened before that we have requested an after repair value appraisal and received an as-is appraisal.
If you are a passive investor, make the borrower pay for the appraisal, but order it and do not tell the borrower who you are ordering it from. Make sure the Rehab Budget Estimate Guide is attached, so the appraiser can use it to help formulate his professional opinion of the after repair value.
To watch the FULL training with Josh, play video below.
*Investors in Freeland MUST establish an existing personal relationship prior to investing. Accredited Investors Only. This blog post and training is NOT a solicitation to sell securities and we do not intend to make any such offering in this training class.
Stay tuned for future training in this brand new series, How to Be a Successful and Confident Self-Direct Real Estate Investor.