Paul Boldizar, Author at loanbase.com

DSCR Vs. Interest Coverage Ratio

Paul Boldizar

Coverage ratios, whether it’s a debt service coverage ratio (DSCR) or an interest coverage ratio, measure the ability of an entity to repay its current debt. Commercial lenders use these coverage ratios to determine if a person, project, or business is able to take on additional debt. If an entity’s coverage ratio is within an acceptable range, additional debt may be extended. If its coverage ratio is too low, loans may either be denied or offered with less than desirable terms. Four Common Coverage Ratios There are many types of coverage ratios. The four most common are: Debt Service Coverage Ratio (DSCR). This ratio determines if an entity’s profits are enough to cover its debt service, including both principal and interest. Interest Coverage Ratio. This ratio determines if an entity’s profits are enough to cover the interest payments on its debts. Asset Coverage Ratio. This ratio measures an entity’s ability to cover its debt service by selling off the assets it owns. Cash Coverage Ratio. This ratio measures an entity’s ability to cover its debt service using cash on hand. Regardless of your assets owned and cash on hand, lenders will still need to determine your borrowing ability by calculating either your DSCR or interest coverage ratio. Let’s take a closer look at these two coverage ratios and see how they affect your borrowing ability. What is Interest Coverage Ratio? An interest coverage ratio, sometimes referred to as a times interest earned (TIE) ratio, helps a lender determine how many interest payments you can cover with your current net operating income. Interest payments can include the interest on your mortgage, business loans, or credit cards. The net operating income part of this equation refers to your income after expenses but before paying interest and taxes. This is usually referred to as earnings before interest and taxes (EBIT). How To Calculate Interest Coverage Ratios The mathematical formula for calculating your interest coverage ratio is as follows: To get a better understanding, let’s take a look at a couple of real-world examples. Interest Coverage Ratio Examples The higher your interest cover ratio is, the more likely you are to get the financing you need. The following two scenarios help illustrate this fact. ABC Shipping, Inc. ABC Shipping wants to apply for a construction loan to build a new warehouse. In the first quarter of 2022, the company had a gross income of $10 million. After payroll and expenses that quarter, ABC Shipping had a net operating income of $8.5 million (before interest and taxes). ABC Shipping has numerous loans, and the interest payments on these loans total $2.5 million per quarter. Using these numbers, we can calculate the interest coverage ratio to determine if they are in a position to take on more debt. Based on these calculations, ABC Shipping has an interest coverage ratio of 3.4. This means that with its first-quarter net operating income it can cover 3.4 quarters’ worth of interest payments. This puts the company in a very good position to take on more debt. XYZ Shipping, Inc. XYZ Shipping would also like to take on more debt to build a new warehouse. In the first quarter of 2022, the company had a gross income of $8 million. After payroll and expenses that quarter, XYZ Shipping had a net operating income of $4 million (before interest and taxes). XYZ Shipping is deep in debt and pays out $4.5 million per quarter in interest payments. Using these numbers, let’s calculate the interest coverage ratio for XYZ Shipping. XYZ Shipping isn’t doing well financially. Its net operating income for the quarter falls just shy of its expenses. With an interest coverage ratio of 0.94, it’s unlikely XYZ Shipping will get the financing it’s looking for. What is DSCR? Another method lenders use to determine an entity’s solvency is its debt service coverage ratio (DSCR). The difference between an interest coverage ratio and a DSCR is that a DSCR takes into consideration your total debt service. This includes the principal and interest payments made on all debt. How To Calculate DSCRs The mathematical formula for calculating your DSCR is as follows: For a real-world example of calculating DSCR, let’s re-visit ABC and XYZ Shipping a year into the future to see how their finances are doing. A DSCR Example The higher a company’s DSCR is, the more likely they are to get the financing they’d prefer. A lower DSCR may not yield the same results. ABC Shipping, Inc ABC Shipping was approved for its new warehouse loan, and business is booming. In the first quarter of 2023, ABC Shipping has a gross income of $15 million. After payroll and expenses, ABC Shipping has a quarterly net operating income of $12.75 million (before interest and taxes). ABC Shipping’s total debt service has increased significantly in the past year. In addition to the previous year’s interest payments, it now pays monthly principal and interest payments on its new warehouse loan. Based on the new and existing loans, ABC Shipping pays out $5 million per quarter in principal and interest payments. Let’s use these new figures to calculate ABC’s DSCR. A year later, even with additional debt, ABC Shipping is still solvent. With a DSCR of 2.55, it can pay off debt obligations for 2.55 quarters with its current net operating income. XYZ Shipping, Inc At the end of the first quarter of 2022, XYZ Shipping took a look at its 0.94 interest coverage ratio and decided to make some changes. A year later, it has expenses under control and has consolidated all of its high-interest loans into a more manageable, low-interest loan. As a result, its finances a year later look much better. In the first quarter of 2023, XYZ Shipping’s gross income is $9 million. After payroll and expenses, it has a net operating income of $7 million. After consolidating all of its loans, XYZ Shipping now has a quarterly principal and interest payment of $4 million. Let’s use these new

What is a Reverse 1031 Exchange and How Does it Work?

Paul Boldizar

A reverse 1031 exchange is a complicated financial strategy that involves the purchase of like-kind property before selling an existing property. It can be an appealing option for investors who want to take advantage of favorable market prices. The process allows the purchase of a new like-kind property backed by the future proceeds from the sale of an existing property. We will go over the advantages of a reverse 1031 exchange to better understand how it can be used as a sound financial strategy. While there are advantages and disadvantages to this strategy, the tax benefits and ability to purchase in favorable market conditions may make it a beneficial approach when purchasing like-kind properties. What is a Reverse 1031 Exchange? A traditional 1031 exchange is when an investor sells off a property and purchases a new property with those finances. A reverse 1031 exchange works in the opposite way – an investor purchases a property and sells off another property to fund the purchase. The investor has 180 days to sell the like-kind property. Funds are then used to pay for a new property without facing capital gains tax. How does a Reverse 1031 Exchange Work? A reverse 1031 exchange allows an investor to act on an enticing property immediately. It should be noted that the investor cannot hold the title of the new property until the existing property is sold. The title of the new property will remain with an Exchange Accommodation Titleholder (EAT) until the sale of the existing property is completed. A reverse 1031 exchange gives investors time to postpone capital gain taxes on their property. Structure of a Reverse 1031 Exchange The Revenue Procedure 2000-37 forbids the acting party to have complete ownership of both the relinquished property and the replacement property at the same time. There are two ways to approach the subject of a reverse 1031 – exchange last or exchange first. Exchange Last The exchange last structure is the preferred strategy for both buyers and investors. It allows for more flexibility regarding the structuring and financing of the properties. In an exchange last structure, the acquired property is “parked” by the EAT. After the closure of the relinquished property, the 1031 is eligible to be closed. Exchange First An exchange first approach is when the EAT takes possession of the relinquished title before the closing of the replacement property. This method requires significantly more cash on hand for the buyer and offers less flexibility in the structuring and financing of both properties in question. What is ‘Parking’? This is an expression used frequently in discussions about reverse 1031 exchange. Parking refers to the process of the EAT taking possession and holding onto the title of a property during an exchange. What Is the Process of a Reverse 1031 Exchange? There are eight main steps in a reverse 1031 exchange. Below is the most common approach to a reverse 1031 exchange (an exchange last approach): Find and purchase a replacement property. You can use cash, conventional financing, or short-term private money loans to do so. Reach a qualified exchange accommodation agreement (QEAA) with your EAT. This is a formal, written agreement with your EAT to hold possession of the replacement property. An EAT is an unrelated party. Relinquish title and possession of the new property to EAT. Once the sale of the replacement property is finalized, the title and possession can be temporarily transferred to your EAT. Decide which property to sell. The property must be a like-property to the replacement property. We will talk further about specific guidelines later on in the article. Find a buyer for your property. Obtain a formal, written contract for the sale of your relinquished property. It is important to list your EAT as the seller of the relinquished property. Reach an agreement with your Qualified Intermediary (QI). The QI is responsible for transferring the title of the relinquished property to the buyer, as well as acquiring the title of the replacement property. Transfer the deed of the relinquished property. The buyer will purchase the relinquished property from your EAT. Obtain the deed of your new property. Once all transitions and money have gone through, the EAT will then transfer the deed of the replacement property to you. While the process can be a tedious one, it may be worth it for investors looking to avoid costly capital gains taxes. Reverse 1031 Exchange Timeline The timeline for a reverse 1031 exchange mirrors those of a 1031 exchange. 45 days. The relinquished property must be identified within 45 days of purchasing the replacement property. 180 days. The closing of the sale of the relinquished property must be finalized within 180 days of purchasing the replacement property. This timeline is enforced by the Internal Revenue Service (IRS) Revenue Procedure 2000-37. Reverse 1031 Exchange Requirements The requirements on property type and value for a reverse 1031 exchange are the same as for a 1031 exchange and are as follows: Property value. The replacement property must be equal to or greater in value than the relinquished property. Otherwise, a tax is triggered on the difference in value. “Like-kind” Property Exchange. The IRS defines “like-kind” property as those that have the same nature or characteristics, regardless of grade or quality. An example of this would be exchanging an office investment property for another office complex. Investment or business purposes. The properties involved in the exchange must be held for investment or business purposes. Neither the replacement property, nor the relinquished property can be a residence of the taxpayer. It is necessary to keep those three requirements in mind while sorting through potential properties. Otherwise, the taxpayer will not reap the tax benefits of going through the strenuous process of the reverse 1031 exchange. Reverse 1031 Exchange Rules In addition to following the property requirements set forth on a reverse 1031 exchange, it is essential to follow the set rules. Timeline. The timeline defined above must be met. The exchange must be

Benefits of an Interest-Only Mortgage

Paul Boldizar

An interest-only mortgage is when you are not required to pay back the principal balance of a loan during the set term. Instead, monthly payments initially target only the acquired interest on the loan. Interest-only loans may give the borrower more financial freedom to operate in the market in a more advantageous manner. What is an Interest-Only Loan? There are two main types of loans – an amortized loan and an interest-only loan. An amortized loan is where you pay back the interest and part of the principal balance each month. An interest-only loan is where you are only required to pay back the interest of the loan for the first several years of the loan term. How do Interest-Only Loans Work? The actual payment timeline on interest-only loans varies between lenders. However, the interest-only repayment can be up to ten years. This means that for the first ten years of the loan, you will only be required to pay the interest portion of the loan. After ten years have passed, the payments will increase significantly. You will have to either pay back the principal in a lump sum or make subsequent payments on both interest and principal amounts. Qualifications for an Interest-Only Loan Interest-only mortgages can be a risk for the lender. For that reason, an interest-only loan is harder to qualify for. The exact qualifications will differ between lenders, but the list below contains the general guidelines: Large down payment. Because of the high risk to the lender, the lender will require a higher down payment for an interest-only loan than an amortized loan. Some lenders may ask for up to 50% of the loan as a downpayment. Low debt-to-income ratio. Lenders will look for a low debt-to-income ratio to show the ability to pay back the loan. Good credit score. Lenders will look for a borrower with a good to excellent credit score. The exact score may differ between lenders, depending on the purpose of the loan and an individual’s financial history. However, many lenders prefer borrowers with a 700+ FICO score to minimize the risk of non-repayment. Evidence of sufficient earnings. The lender may ask to see savings and business accounts for an additional guarantee. A thorough mortgage repayment plan. The lender may ask to see how you plan to pay back the loan. Paying back an interest-only loan requires more foresight and financial planning from the borrower, so having a repayment plan prepared reflects positively on the borrower. The key to qualifying for an interest-only mortgage is to have sufficient funds and a soundproof plan for your repayments. The lender will want to see that you are financially prepared for the loan. What are the Advantages of an Interest-Only Mortgage? Choosing an interest-only mortgage can be advantageous for many investors including those that want to: Increase cash flow. An interest-only mortgage is a great option for investors looking to maintain a higher cash flow when interest rates are going up and their cash flow margins are thinning. An interest-only loan requires smaller initial payments, giving the investor more cash flow for other investments. Qualify for a larger property. While payments will remain low at the beginning, they will increase significantly later on. This allows you to purchase a larger property if you foresee a significant income increase or rise in revenue in the future. Pay off the loan faster. Most interest-only mortgages do not limit the additional payments you can make on the loan. That means you can pay back the principal of the loan on your own schedule. Interest-only mortgages are useful for short-term loans, such as bridge loans or fix-and-flip loans. An interest-only mortgage can be useful if you are planning to sell the property within the first few years of purchasing. You can pay off the loan by selling the property and keeping payments low while you hold it. What are the Disadvantages of an Interest-Only Mortgage? Some disadvantages associated with interest-only mortgages include; Higher interest rates. While overall monthly payments are lower without having to pay down the principal, interest rates are generally higher with an interest-only mortgage. Temporarily low payments. Initially, the monthly payments are significantly lower with an interest-only mortgage. However, once the interest-only term expires, the total monthly payments will increase drastically. This can be a shock to an unprepared borrower. No increase in equity. When you take out an amortized loan, you will make payments against the principal portion of the mortgage, gaining a little bit of equity in your propety each month. If you decide to sell, you will receive more cash out. And if the market turns and your property value decreases, you will still maintain some equity. However, with an interest-only loan, your equity will stay constant as long as you are only making payments on the interest. You will be less protected in a down-turn, and you will get less cash out upon sale. With an interest-only mortgage, it is important to be prepared for the increase in payments once the interest-only term expires. When Should you Use an Interest-Only Mortgage? If you are looking to keep monthly repayments low in the short run, then an interest-only mortgage is a good option. This makes it appealing to investors who plan to hold property only in the short term. It also makes it a viable option for any investor looking to temporarily increase monthly cash flow when the market interest rates are high. How to Calculate Interest-Only Payments Interest-only mortgages make for significantly lower monthly payments. The calculated payments will depend on the given interest rate and whether it is an adjustable-rate or a fixed-rate. The example below is looking at a fixed interest rate mortgage. Example of Payments on an Interest-Only Mortgage On a mortgage of $500,000 with a 4% interest rate, payable over 25 years, you will pay approximately $1,666 a month. With an amortized loan, the total payment would be nearly double that amount per month. The difference between

What is a Prepayment Penalty?

Paul Boldizar

A prepayment penalty is a fee when a mortgage loan is paid off sooner than expected. A company faces a high level of risk when issuing a loan, therefore it charges interest each month to insure against that financial risk. When a loan is paid back quickly, the company loses out on these interest payments. In this case, the company has a prepayment penalty set in place to offset any financial loss.

The law does require that the lender disclose the prepayment penalty upfront. This information can be found in the fine print of the contract (the loan estimate) or in the monthly billing statement if you already have the loan. A borrower can also ask the lender to clearly point out where the prepayment penalty clause is in the contract.

What is an SREO and Why is it Important?

Paul Boldizar

SREO stands for a schedule of real estate owned. While it isn’t a conventional schedule in terms of time and plan, it does present a clear schedule regarding information related to all real estate owned by an investor.

This document lists out all of the property that an investor has full or partial ownership of. It also includes the current market values of said property and any debt obligations connected to these properties.

It can also be referred to as real estate owned (REO). An SREO is only required with commercial real estate and is a critical document when completing a commercial real estate loan application for a new property.

Rising rates and good news for multifamily investors: vacancies are down and rents are up.

Paul Boldizar

Federal Reserve expected to raise rates again. The Federal Reserve has raised the Federal Funds Rate by 0.5%. This is the highest interest rate hike in 20 years. This already follows a .25% increase in March. Raising interest rates is a response by the Fed to get a handle on soaring inflation. Inflation is now at a 40-year high in the U.S. The Consumer Price Index (CPI), a tool used to measure price changes over time for goods and services, was 8.5% higher than it was this time last year. The inflation is largely a result of uncertainty with the Ukrainian war and a supply-chain disruption in China due to their coronavirus lockdowns. There are expectations that the interest rate will be lifted even further, with some experts expecting the Fed to target 2% by May 2023 and 2.9% in early 2023. The Fed’s response is affecting the indexes on which variable interest rate mortgages are based. Borrowers with variable-rate loans are seeing their monthly payments increase and may seek to refinance into fixed-rate mortgages before rates climb further. In addition, higher interest rates could lead to thinner cash flow margins for investors. This can push them to get more creative and look at options like interest-only loans to decrease the total loan payment and maintain a higher level of cash flow. Owner-occupants get a 30-day head start over investors at FHA foreclosed property auctions. The Federal Housing Administration (FHA) has announced that it is giving priority to owner-occupant buyers, approved nonprofits, and government entities in foreclosed property auctions. These entities have 30 days to bid on properties before the auction is open to investors. This expansion on the Claims Without Conveyance of Title (CWCOT) program will go into effect immediately. The goal is to increase the supply of single-family housing available on the market. The supply of affordable housing has been restricted recently, making it difficult for families to compete in the current real estate market. Until the implementation of this policy, investors were purchasing foreclosed properties and reselling them at a higher value. The FHA hopes that the CWCOT will lead to at least 50% of these properties being purchased by owner-occupant buyers, approved nonprofits, and government entities. This is just one step the current Administration has taken to ease the effects of rising housing costs on families. In April, the Administration and FHA announced the option to extend any unpaid mortgage on an FHA loan to a 40-year loan term. These actions aim to ease the burden on families looking to purchase a home or stay out of foreclosure. In addition, the new extension to CWCOT takes away any slight advantage investors have in the real estate market over owner-occupant buyers. Good news for multifamily investors – vacancies are down and rents are up. Rental vacancies spiked to 7% at the beginning of the coronavirus pandemic as people felt uncertain about the future and moved in with family. As the economy recovers and adjusts, vacancies have since seen a consistent decline. Currently, the vacancy index stands at 4.6%, up slightly from the low of 3.8% in August. While vacancies are down, meaning fewer housing and apartments left unrented, rent prices continue to rise. Year-over-year rent growth is at 16.3%, with most of the increase taking place in the spring and summer of last year. Through the first four months of 2022, rent prices have increased by 2.5% with the busy season for the rental market still looming ahead. While 2021 saw some of the biggest spikes in rent prices, 2022 still stands to be a promising year for investors seeking to take advantage of these current trends. This trend does not appear to be regional, with 93 of the 100 largest U.S. cities seeing a month-over-month rent increase. Although Sun Belt Cities, like Miami and New Orleans, have seen a more consistent upward trend in rent prices, almost all cities are experiencing a rent increase throughout the year. Increased college enrollments make off-campus housing a solid investment. The onset of the coronavirus pandemic created a shockwave through the higher education sector. Students began studying from home, while many chose to take a year or two off until they could return to campus. As things begin to regain some semblance of normalcy, college enrollment numbers are rebounding. This increase in college enrollment brings to light the current student housing crisis. Top-tier universities are struggling to find housing for all their students. U.C. Berkeley is one university that has been facing this crisis for some time. Currently, they only have enough space to house one-fifth of the student population. U.C. Berkely is not alone in this battle. There are some reports of universities having to house students in nearby hotels for the semester. The student housing crisis has created a unique opportunity for investors to diversify their portfolios by offering student housing. Student housing generally does not track the economy, making it a reliable investment when student enrollment is on the up. A joint venture between Chicago’s Core Space and Harrison Street paid $21.5 million in January for a third of an acre across from U.S. Berkely. They then built a 232-bed, 87-unit student housing project. These ventures are proving to be fruitful when targeting top universities facing the severe student housing crisis. Lower-income neighborhoods may see more investment dollars coming their way. The Biden-Harris Administration plans to modernize the 1977 Community Reinvestment Act, which currently only adheres to lending options from physical branches. The existing rule in Community Reinvestment Act requires banks to lend to lower-income groups in their areas. This has created a loophole for online lending institutions as they have no branches that abide by this policy. As online banking and lending become more common, the 1977 Community Reinvestment Act may be revisited to allow for fair lending to small businesses and people in low-income neighborhoods. In a prepared statement by the Federal Reserve, Vice Chairwoman Lael Brainard stated “Today’s proposal seeks to expand access

What Is A FICO Score?

Paul Boldizar

The FICO score was created by Fair Isaac Corporation (FICO) to provide an industry standard for credit scores. The FICO score is a summary of your credit report and examines a person’s financial and credit history to determine a number rank between 300-850.

This number given, based on credit history, can help determine the financial capabilities of a borrower. It is used by lenders to measure the risk level of lending to a specific person. While the FICO score is not the only credit score available, it serves as a significant landmark score for all lenders.

Refinancing From a Short-Term Fix and Flip To Long-Term Debt

Paul Boldizar

Fix and flip projects continue to be in high demand in the United States, and for good reason. In 2021, the average profit made per home was $67,000. Property flipping proves to be a significant source of income for many. Once an investor gets into the fix and flip industry, new doors for future investment start to open. A borrower can convert their short-term fix and flip loan to long-term debt through several refinancing options. These options give access to lower interest rates and more funds for additional flipping projects or investments. What Is A Fix and Flip Loan? A fix and flip loan is a short-term loan that helps an investor purchase and renovate a property. Oftentimes the property is sold for profit within 12-18 months. Once the property is sold, the investor pays off the loan from the profits. A fix and flip loan is ideal for anyone who wants to make a quick profit in real estate. It is seen as a fast turnaround for profit in the market. However, an investor generally has to prove that the property will be profitable to obtain the loan. What Is A Cash-Out Refinance? A cash-out refinance is when an investor takes out a loan on a property that they already own. This amount is generally larger than the original loan, which allows for additional spending on other projects or current renovations. A cash-out refinance is a particularly good option for those that follow the Buy, Rehab, Rent, Refinance, Repeat (BRRR) method. A cash-out refi allows the borrower to get access to additional funds quickly, using the current property as collateral, for other projects. Why Would I Want To Refinance From A Short-Term Fix and Flip To A Long-Term Debt? Refinancing a short-term fix and flip loan to long-term debt is often referred to as a “fix and hold” loan. This process is becoming more common in real estate. When you refinance a short-term fix and flip loan, the appraiser generally looks at the value of the property after renovations. Refinancing a short-term fix and flip loan results in better refinancing terms and lower interest rates. How To Refinance From A Short-Term Fix and Flip Loan To Long-Term Debt? You can refinance from a short-term fix and flip loan to long-term debt either with your original lender or with a new lender. The lender will look at the new value of the property to determine new interest rates and payment schedules. Generally, interest rates are lowered once a short-term fix and flip loan is refinanced. This proves more beneficial for long-term investments. The two most common means of converting a short-term fix and flip loan to long-term debt are a home equity line of credit (HELOC) and a cash-out refinance. What Is The Difference In Underwriting Between The Two? The underwriting, the behind-the-scenes process in determining eligibility for a loan, between a short-term fix and flip and long-term refinancing loan have some key differences to note. Short-Term Fix And Flip Loan. The customer’s banking and buying history, as well as the property value, are analyzed for a fix and flip loan. The lender will also look into the prospective value of the property being “fixed and flipped”, the prospective rehab costs of the property, the previous credit history of the borrower, financial background, and proof of funds. Long-Term Debt. Both fix and flip loans and long-term refinancing options are asset-based. Acquiring long-term debt, however, looks more closely into the borrower’s history and financial stability rather than their buying history and proof of funds. What Is The Difference In The Interest Rates, Terms, & Fees Between The Two? It’s important to examine the short-term and long-term repercussions of a loan when looking to make further investments. The interest rates, terms, and fees between a short-term fix and flip loan and a more conventional long-term loan will vary greatly. A Short-Term Fix And Flip Loan. This type of loan has higher interest rates, flexible terms, less paperwork, and lower fees than a traditional loan. Long-Term Debt. Refinancing into long-term debt has significantly lower interest rates, more rigid terms based on the borrowers’ personal history, more paperwork, and higher fees than a fix and flip loan. Cash-Out Refinance As Part Of A BRRR Strategy Cash-out refinancing allows a borrower to follow the BRRR Strategy with a lot more financial flexibility. A borrower can get a cash-out refinancing option on a property that has already gone through rehab, or renovations. This gives the borrower more funds for additional projects, with little to no money out of pocket. This proves to be a huge advantage, as a borrower can continue expanding projects with significantly more cash on hand. How Much Equity Can I Cash Out To Purchase A Fix And Flip? The exact amount and percentage will vary between different lenders. The majority of lenders allow a borrower to cash out between 80% and 85% of the value of their property. This means that if your property is valued at $500,000, you can cash out $400,000 to purchase an additional fix and flip project (minus the amount still owed on the original loan). Which Type Of Lenders Offer A Cash-Out Refi On A Fix And Flip? Most lenders will offer a cash-out refinance loan on a fix and flip project once the project has undergone rehab. The lender will appraise the property post-rehab to determine a fair value and will usually lend up to 80% of the appraised value. Cash-Out Refinance Eligibility Cash-out refinance eligibility will vary slightly depending on the lender. However, these are the general guidelines that a borrower can expect to see: More than 20% equity in the property. A credit score of 700 or higher is ideal. Debt-Service Coverage Ratio (DSCR) of 1.20 or higher. The loan-to-value ratio of 80% or higher. Proof of income and employment. HELOC Vs. Cash-Out Refinance For Fix And Flip A home equity line of credit (HELOC) and cash-out refinancing are two common methods to

The rise of mixed-use properties and surprising retail projections.

Paul Boldizar

Using Airbnb properties to capitalize on the growing “remote worker” movement. The CEO of Airbnb, Brian Chesky, has announced that he plans on working remotely and living out of Airbnbs for the time being. This brings to attention a growing trend of remote workers letting go of their regular rental agreements and fully embracing the remote lifestyle through the short-term rental market giant. Airbnb took a major hit at the beginning of the Covid-19 pandemic as all travel virtually came to a halt. It was quick to recover, however. This year there has been a 56% hike in the number of nights and experiences booked through Airbnb, which brings reservations within 8% of the 2019 total. One in five bookings through Airbnb in Q4 2021 were for a month or longer. It should be noted that this trend might be here to stay. Over 20% of work teams and departments in the U.S. plan to remain on remote status over the next five years. As Brian Chesky said, “All you need is a laptop and someone’s internet in their home and you can do your job. In fact, you can even run a nearly $100 billion company.” Retail projections not as gloomy as anticipated. Union Bank of Switzerland (UBS) previously predicted 80,000 retail closures in the US over the next 5 years, but new data has dropped its prediction to 50,000 retail closures by 2026. This illustrates the optimistic outlook many are having for the future success of retail space, even amidst the rising popularity of E-Commerce. Despite the convenience and ease of online shopping, many still prefer in-store shopping. The loyalty to in-store shopping has allowed retail stores to pull through the pandemic much more gallantly than expected. In fact, in 2022 retailers have reported net openings across the nation rather than a net closing. Coresight Research data shows 1,385 store closures through the first three months of 2022, compared to 3,694 announced openings. General merchandise stores and auto parts businesses are expected to experience the largest growth in new retail space. On the other hand, clothing and accessory retailers, consumer electronics businesses, and home furnishing chains are expected to see the most closures. In addition, UBS said that the number of shopping centers in the U.S. reached its peak last year of 115,000 centers, up from 90,000 in 2000. While it’s expected to be a bumpy road ahead, the outlook for retail openings is much more optimistic than previously expected. Based on generational data, the rental market is anticipated to remain strong. There has certainly been a shifting mindset among various generations on how they view the housing market. Surveys reveal that younger generations, particularly Generation Z, place much smaller importance on the value of homeownership than older generations do. Baby Boomers hold the highest esteem for homeownership of any other generation. This is not a surprise given the post-WW2 prosperity that Baby Boomers thrived in. A recent survey posed various questions regarding homeownership to people across all generations. The data showed that younger generations were more inclined to feel discouraged and less rewarded by homeownership than older generations. One of the key reasons for this discouragement among younger generations is affordability. 74% of Millennials said they cannot afford a home, and 21% said that owning a home is a financial risk. While millennials aren’t as interested in purchasing homes for themselves, the younger generation will still need places to live. As rentals become a more popular option, the rental real estate market is anticipated to continue to thrive even while traditional homeownership may not. Purchasing rental properties is a good option for those looking for a good investment in the coming years. Layering tax credits, traditional lending, and grants to build low-income housing. The cost of housing has been rising, largely due to a lack of supply. For the past 20 years, every state in the US has severely underbuilt housing. The supply just doesn’t meet today’s demand. These rising prices have caused some hiccups for builders of affordable housing. Historically, the financing to build affordable housing relied heavily on the Low-Income Housing Tax Credit (LITHC). However, due to rising prices, the LITHC has much less of an impact today than it did in the past. From 2016 to 2019, the cost to build new affordable housing under the LITHC program has increased from $425,000 to $480,000. Due to the need to meet a feasible return on affordable housing projects, developers are now relying on a larger mix of funding gathered from the local, state, and federal levels, private equity, and philanthropy. It is estimated that the average number of loans has doubled in the past two decades for affordable housing projects. LITHC projects built between 2000 and 2018 layered an average of 3.5 permanent sources of funding, with one in four projects layering at least four sources of funding. These rising costs and layering of credits have caused an additional problem. The cost of planning and coordination has gone up as the complexities grow with the rising costs. This only adds to the initial costs of affordable housing projects. Commercial RE firms starting to focus more on mixed-use properties. Mixed-use properties are those that serve a multi-purpose function. For example, having an apartment complex with a small shopping plaza on the ground floor. These mixed-use properties are rising in popularity very quickly as people search for comfort and convenience all in one. As more workers shift toward a “work from anywhere” lifestyle, you find more of them wanting to socialize and intertwine different aspects of their lives in a shared setting. Mixed-use properties have two main advantages. The first is tenant attraction and retention. Creating a convenient and comfortable space for consumers to live, work, and play leads to overall satisfaction and a high retention rate. The second advantage goes along with the expression, “don’t put your eggs in one basket”. Diversifying the portfolio minimizes risk when compared to the reliance on a single-use property.

Difference Between Recourse and Non-Recourse Loans

Paul Boldizar

A recourse loan is a type of loan that allows the lender to take action in the form of collecting collateral (such as taking control of a house or car) and maybe even seizing other personal assets and finances (garnishing wages, levying accounts) when a debt is not paid back.

This gives the lender more financial security when making an investment. If there was no way to guarantee the return of the loan, lenders would incur much more risk for each loan they originate. Recourse loans are frequently seen when purchasing a car, opening a new credit card, mortgaging a house, and in hard-money loans.

Paul Boldizar

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