Good news continues to flow in that benefit the California real estate market, Interest rates are at the lowest level in recorded history. The largest institutional banks settled for a staggering 25 Billion dollars with the Federal government for inappropriate foreclosure activity and now the California Homeowners Bill of Rights is completely implemented.  All have led to a resurgence in the California real estate market that will benefit homeowners as prices should continue to increase due to the positive economic factors.

But probably the best news is that foreclosure activity is down 65% from January 2012.  Couple this with the banks being much more active in “working things out” with delinquent homeowners and with the Homeowners Bill of Right instructing California lenders to stop the process of dual tracking will only lead to more future positive news for homeowners and real estate professionals throughout California.

Good Credit Equals Better Interest Rates

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Many people get stressed at just the sound of a Lender saying the words……..“We need to Check Your Credit”.

A lot of people also say “Credit Doesn’t Matter” ………… until it does…….. and some people find out the hard way when they need a loan……………..and end up getting Turned Down.

In today’s world, when consumers look to purchase a new car, or a high-priced consumer item, or real estate, unless they intend to pay “Cash”, then obtaining financing is necessary.

When financing is necessary, in just about every circumstance, checking the person’s credit will be required.

There’s an old saying…………. “The Better the Credit, the Lower the Interest Rate”.

It’s in every person’s best interest to have good credit.

A person’s Credit History is contained in the following “3” National Credit Bureaus:

  • Equifax
  • Trans Union
  • Experian

The “Credit Data” and “Credit History” contained in the above “3” National Credit Bureaus comes from information provided by “Creditors” that earlier extended “Credit” to the person, prior Credit Applications submitted by the person to potential Creditors, or from current Creditors that the person is currently indebted to and where they’re currently making “Contractual Payments”.

In addition, even when the person paid off a Financial Obligation years earlier, the Payment History will still be contained in the Credit Bureaus and further will appear on the person’s Credit Report when a potential Creditors pull it.

Additionally, there’s a term that most people are familiar with, it called a “FICO Credit Score”.

FICO is an acronym for Fair Isaac Company, this was the company that initially created the computer Algorithm that performs “Calculations & Risk Analyses” that considers a person’s credit payment history, the length of their Credit History, the Amount of Debt the person owes relative to the Credit Limits for each Creditor, in addition to amount owed relative to the Total Credit Limit of all Creditors.

The Exact manner that a person’s FICO Credit Score is calculated in a Trade Secret of the Fair Isaac Company, as are the Other Credit Score calculations for the “2” Other National Credit Bureaus.

The names of each respective Credit Scores for each Credit Bureau are as follows:

  • Experian:…………..Fair Isaac Rick Model V2
  • Equifax:…………….Equifax Beacon 5.0
  • TransUnion:………TransUnion FICO Rick Score 04

The “3” National Credit Bureaus also contain information from prior Credit Applications regarding Employers and Resident Addresses that a person provided when applying for Credit.

CreditWhen a potential Creditor Pulls a person’s Credit Report, there are several options available.  Some Creditors only pull “1” of the “3” National Credit Bureaus, so in such a case the potential Creditor will only see what’s contained in the persons credit file for that National Credit Bureau.

While the information for many millions of people is very similar, each of the “3” National Credit Bureaus contains some differences.

Real Estate Lender almost always pull a “Tri-Merged Credit Report”, which contains information from all “3” National Credit Bureaus.

Every person should be aware of the Data and Credit Histories contained in all “3” National Credit Bureaus.

There are MANY FREE websites online where people can check their credit and FICO Credit Scores.

In today’s world, it’s important that people be very careful when going online to obtain a copy of their Credit Report……. everyone is encouraged to only deal with reparable and Trustworthy national companies.

Everyone is entitled to a FREE copy of their Credit Report from each of the “3” National Credit Bureaus once a year.

The First Step that everyone should to do is to obtain a copy of their Credit Report.

After a person obtains a copy of their Credit Report from each of the “3” National Credit Bureaus, it’s imperative that a close review of all reported information contained in the Credit Report is confirmed to be true and correct.

Special attention MUST be made to verify that the Payment History for both Active and Closed Accounts are correct, in addition to verifying that there’re no credit accounts reported that don’t belong to the person.

Fraud these days are on the rise, and we all need to protect ourselves at all costs.

All “3” Credit Bureaus have the Option to “Lock a Persons Credit File”, so should an unscrupulous person try to open credit in another person’s name, the Creditor who the Unscrupulous Person is trying to defraud will not be able to obtain ANY credit Information on the Unsuspecting Person and will most likely decline the credit application.

If there are some “Negative Items” that are reported on a person’s Credit Report and are not correct, then the person must immediately contact either the Creditor that is reporting the Incorrect Information or each of the “3” National Credit Bureaus that are reporting the information.

There are many factors that make up a person’s Credit Score, such as, Payment History, Number of Open Accounts, Length of Credit, Credit Limits, and other factors that the Credit Bureaus consider when calculating a person’s Credit Score.

There is some information the Credit Bureaus have released that have Negative Effects when calculating a person’s Credit Score,

The things NOT to do are:

Not paying Creditors on time, which will result in late payments being reported

HIGH use of Credit with a short history of Credit

Carrying large balances on credit cards

Having Open Collection Accounts

Collection Accounts can be very damaging and can take years to drop off (most taking up to “7” years from the date reported to the Credit Bureaus).  Collection Accounts should not be ignored, and rather than wait for them to finally drop off a person’s credit Report proactive actions can be taken.

Oftentimes contacting Collection Companies to make an “Agreement” that upon the payment of the outstanding monies owed, the collection account will be removed from the person’s Credit Report. Credit

The amount of your available credit you use is referred to as “Credit Utilization”.  Keeping one’s “Credit Utilization below 30% of available credit limits will demonstrate that the person is managing their credit responsibly and not overspending.

With all of the above actions being done, a person’s Credit Score should rise faster than just not doing anything.  This will make a person look better when their Credit Report is pulled and having good credit will open many more doors……other than having the doors closed in the person’s face.

Having good credit will lead to better interest rates for car loans, personal loans and of course Real Estate Loans.

We specialize in making Residential, Commercial, Fix & Flip and Probate Hard Money/ Private Equity and Sub-Prime financing to Borrowers who have credit issues, difficulty proving their income or have been turned down by one of the Big Banks.

We would be happy to discuss the Specifics with those that have been turned down by one of the Big Banks to determine if a Sub-Prime Loan would be a good real estate financing option.

We’re a make sense lender, and we put our Borrower’s needs first and we always go the extra mile to get our clients the money they need.

We focus on solutions not problems.

We’re always happy to review any Borrower’s real estate financing situation to determine how a Sub-Prime Loan provided by our company could prove beneficial to our clients.

(888) 797-7970

info@westarlending.com

 

 

 

 

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Private Money/Hard Money Fix & Flip Loans

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In contrast to conventional lenders, which look mostly at a borrower’s income and credit score before deciding whether to approve a loan or not, Private Money/Hard Money Lenders typically base their final decision on the value of the Subject Property, which would be the collateral for a proposed loan.

Fix & Flip Loans contain “3” underlying Valuation Numbers:

  • Value of the Subject Property when purchased
  • Necessary Funds to make the Repairs & Improvements
  • Final value following completion…..After Repaired Value (AVR)

Often the “Acquisition Price” paid by a buyer is lower than the Value of the Subject Property, and if so, then the Borrower would be “Credited” for the “Acquired Equity” in the Subject Property.

Whenever a lender is considering the possible MAX LTV financing limits, several factors are taken into account:

  • The necessary amount of “Repairs & Improvement Funds”
  • The “Additional Value” that will be obtained from the Repairs & Improvements
  • The amount of “Repair & Improvement Funds” that the Borrower is able to invest
  • The anticipated Finished Value, now known as After Repaired Value (ARV)

Once the above “Numbers” have been calculated, then a Lender can determine the MAX LTV loan that could be funded against the Subject Property.

Compared to other financing options, Hard Money Fix & Flip Loans have shorter repayment terms and higher interest rates, but they’re much easier to qualify for and obtain, and Private Money Lender will fund on properties that the Big Banks won’t.Hard Money Fix & Flip Loans

 

It’s very important that when “Deciding & Calculating” the desired list of “Repairs & Improvements” to be made to the Subject Property that Costs and Incremental Value increase be carefully examined.

Repairs

These are the “Cost Components” that always need to be made to the Subject Property, but still the costs to make such repairs must always be carefully calculated, since if MAJOR repairs need to be done that require a Building Permit, that Building & Safety Department could require that much more additional work be done than was anticipated.

This is often the case when Plumbing or Electrical repairs are made, and the possibility exists that complete upgrades be required to be made to the Subject Property to comply with current building codes.

It’s important to always visit the local Building & Safety Department to confirm if the “City” will require additional repairs that might substantially increase the repair budget.

Improvements

Whenever the possibility exists to make Improvements that the following be carefully addressed:

  • Costs to make the desired improvements
  • Requirement of getting a Building Permit
  • Estimated added value that the improvements will add to the Subject Property

Time is money, and if a Building Permit is required then the “City” could require Plans or Drawings be submitted relating to the desired improvements, this will add additional time and money to a Fix & Flip project, which could prove to be financially devastating.

Whenever calculating the estimated “Cost & Time” relating to a Fix & Flip project, its always best to assume that it will take longer than anticipated and cost more than budgeted.

If Repair & Improvements Funds are needed and the investment of such funds adds necessary value to the Subject Property, then a Fund Control Account might need to be set up with an outside Fund Control Company who will oversee the disbursement of the Repair & Improvements Funds.

The Fund Control Company will further make inspections of the Subject Property to confirm that the Repair & Improvements are being made and are in compliance with local Building & Safety requirements.

Unfortunately, many Lenders only take into consideration a home’s purchase price when determining to fund a Fix & Flip Loan, and oftentimes don’t look furth into the proposed loan.

We delve further into the deal to determine the final market value of the Subject Property on which to base the Fix & Flip Loans our company arranges.

In addition, we can provide the necessary funds to make needed repairs and upgrades and can also consider the property’s ARV (After Repaired Value) when determining our final Fix and Flip loan amount.

Our LTV’s reach as high as 70% or more when we’re considering funding Fix & Flip Loans, and If the house is purchased at a substantial discount from current market value, the need for borrower funds contribution can be greatly reduced.

If you need a Fix & Flip Loan and would like our company to investigate the merits of the transaction, please call one of our fix and flip loan consultants at (888) 797-7970, or you can complete the Short & Simple Loan Submission for a fast response. Hard Money Fix & Flip Loans.

 

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Hazard Insurance is needed by Homeowners and Lenders

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In most people’s lives the largest investment they’ll ever make is to buy a house, and Hazard Insurance protects their biggest investment.

Hazard Insurance provides protection against the loss of a property from fire damage, but it also protects against:Hazard Insurance

  • Slip & Fall Accidents
  • Weather Damage
  • Burglary
  • Dog Bites

And many other potential liabilities.

Should a person’s house ever “Burn to the Ground” without Hazard Insurance, that person could be financially ruined and could literally end up homeless.

Another thing to consider, Hazard Insurance protects the structure and your personal property, but only up to the insurance policy’s “Coverage Limits”.

If a homeowner owns a valuable coin or stamp collection or any other unusually high value items, then the homeowner must pay the additional cost to add a “Rider” to the insurance policy to provide the extra insurance coverage.

Depending on where a person lives and their needs, Hazard Insurance may or may not include all the coverage they might need.

All Hazard Insurance Policies have what’s known as a the “Declarations Page” which Lists each “Category” of insurance coverage, and their respective Limits of Coverage.

Homeowners are encouraged to carefully “Check & Review” the Declarations Page to make sure that the insurance policy provides the necessary insurance coverage.

Almost all insurance companies hide behind the term “Act of God” and use that term for types of damages that they don’t want to cover.

Some of the types of coverage that insurance companies don’t typically cover are:

  • Earthquakes
  • Floods
  • Landslides
  • Damages caused by Social Unrest

If coverage is even available for “Act of God” losses from an insurance company, the homeowner would be required to pay for additional coverage or obtain a separate policy.

In California just about every insurance company won’t insure a home or any other structure if its location is in close proximity to “Brush”.

In this situation, there’s a Government Agency called the “California Fair Plan”, which works with insurance companies in providing the requested insurance coverage, and simultaneously “Shares the Risk” with the insurance companies when they provide insurance coverage in a brush area.

Another item to consider is that insurance companies have requirements relating to Deferred Maintenance, and many insurance companies will NOT insure a property if the property has:

  • Roof Damage
  • Large Cracks
  • Un-Permitted Additions

If a homeowner’s property has one of the above “Insurance Issues” then it might be difficult to obtain Hazard Insurance, but the good news is that there are “Non-Prime” insurance companies that might provide insurance coverage, but the costs will be more than traditional insurance companies.Hazard Insurance

Having hazard insurance coverage is paramount to all homeowners to protect their investments.

Lenders also need Hazard insurance to protect the security for their loans, which is the Subject Property.

There’s an old adage in the Real Estate world…………… “Land doesn’t Burn” but if the structure on the property burns to the ground, and all that’s left is a “Concrete Foundation”, the possibility exists that the lender’s loan could exceed the remaining value of the land and the lender could end up losing money.

When a Lender/Investor funds a loan there is a procedure where the Lender/Investor’s information is added to the Insurance Policy, this is known as the “Lender’s Loss Payable Endorsement”.

This procedure doesn’t “Specifically” Insure the Lender/Investor, it’s the homeowner that’s insured, but it does allow the Lender/Investor to receive any Notice of insurance Cancellation should the homeowner NOT pay the insurance premium.  This gives the Lender/Investor the opportunity to “Pay the Insurance Premium”, so the loan will continue to have insurance coverage.

Whether you’re a homeowner or a lender it’s important to check with the insurance agent or directly with the insurance company to confirm that there’s adequate insurance coverage to protect the interest of the homeowner and the interests of the lender.

Here at Westar Lending Group, we’re a “Make Sense Lender”, where we always put our Borrower’s needs first and we always go the extra mile to get our clients the money they need.

We focus on solutions, not problems!

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The Los Angeles Real Estate Market: 2021 Predictions

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The Los Angeles Real Estate Market: 2021 Predictions

It’s now been one year since the World Health Organization (WHO) and the Centers for Disease Control and Prevention (CDC) declared the COVID-19 outbreak as a pandemic. The official declaration allowed all levels of government, from the federal government down to city levels, to initiate various forms of restrictions and shutdowns in an effort to combat it.

Some of the actions taken appeared to be an honest attempt to combat COVID, but as time has passed, the imposed restrictions seemed unimaginative and outlived their effectiveness. Close to 100,000 businesses permanently closed. Almost 15% of the workforce was unemployed in April, 2020. By the end of the year, the unemployment rate decreased to 6.2%, but still higher than the pre-COVID rate of 3.5%.

Thankfully, all levels of government are in the process of relaxing the restrictions, a positive sign for people and businesses who have endured throughout and been challenged financially.

 

The Real Estate Market Performed Well in 2020

By the end of 2020, Median Market Prices for single-family homes rose to $625,350.00 in Los Angeles, an increase of 13.7% year-over-year.  The sales volume of single-family homes also rose by over 30%.

While commercial properties and “other” types of real estate rose at a rate less than single-family homes, they still experienced positive increases in both market price and sales volume even though some commercial landlords were having difficulty collecting the monthly rent from tenants.

There are two reasons that that the real estate market has performed well over the past year in spite of COVID:

  1. Historically low interest rates. In January, 2021, the 30-year interest rate was 2.65%, down from 3.74% during the last week of 2019. In 2020, many homeowners and commercial property owners took advantage of the low interest rates by refinancing their properties and, in the process, reduced their monthly expenses
  2. Lack of real estate inventory (Properties Listed for Sale) relative to buyers making offers in the marketplace. Excess demand relative to lower supply caused real estate prices to increase

Interest rates have risen slightly since the start of 2021 but remain at near historic lows. Moreover, market indicators show that there’s very little chance of interest rates rising to a level that would be detrimental to the economy and more specifically to the real estate market.

 

There are Still Challenges to Overcome in 2021

There are some possible events on the horizon that could have negative effects on the real estate market. Homeowners and renters could be required by mortgage lenders and landlords to begin paying back deferred mortgage payments and deferred rental payments.

We believe that a workable plan will be reached between real estate borrowers and lenders, and tenants and landlords that shouldn’t prove to be an overbearing financial burden, since mortgage lenders and landlords will only win when borrowers and tenants are not in financial binds. Covid19 Pandemic

In addition, there will be a reduction in many of the government stimulus programs moving forward, but the “Sunsetting” of such programs will be more than offset by opening and expansion of many categories of businesses and the related increased job availability which should reduce the unemployment rate.

Westar Lending Group originates residential and commercial hard money loans for people looking to purchase real estate, refinance properties or take cash out for a business or investment opportunity.  We anticipate that real estate prices will most likely not continue to rise at the same rate as they have over the past year, but overall, the real estate market should continue to remain strong in 2021. If you’re thinking of purchasing another property, consider making that move in 2021.

For example, if a great business or investment opportunity is presented, it’s possible to access the needed equity for a loan from an owned property. However, proceed with the upmost care and caution whenever reviewing or contemplating any possible investment opportunity.

 

Conclusion

We believe the following market Indicators will continue to remain strong in 2021:

  • Low mortgage interest rates
  • Low property inventory (MLS listings)
  • Excess buyer demand
  • Reduced COVID restrictions
  • Increased economic activity
  • Possible increased consumer confidence

 

References

Nearly 100,000 establishments that temporarily shut down due to the pandemic are now out of business
Monthly unemployment rate in the United States from February 2020 to February 2021
Mortgage Rates Little Changed

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Marketing Strategies for Originating Hard Money Loans

Mortgage Brokers Tip # 17 – Originating Hard Money Loans

 

Originating Hard Money Loans – Our company has been in the Mortgage business since 1986, and along the way we have celebrated “The Good Time” and endured “The Bad Times” in our more than 30 years in business.

Many of us started in the “A” Paper Business and traveled through the Sub-Prime Market to end up in the Private Equity/Hard Money Loan business.  Each “Type” of Lending Product has its own unique marketing strategies, unfortunately some are no longer effective, but some are still effective, in addition to new marketing opportunities available today due to technological advancements.

Originating Hard Money Loans

Since the Mortgage Market changes much like the weather, what’s the marketing “In Thing” to do this year, just may be old news come next year.  We all change our clothing when the weather changes, and to stay in the Mortgage Game we MUST change and adjust our marketing efforts when the mortgage market changes.  We’ve all heard the age old saying “The only thing that’s certain in life, is death and taxes.  We reluctantly offer a 3rd certainty………. the mortgage market changing………………..and it does and will continue long after we’re off to that “Great Mortgage Company in the Sky”.

The following ideas and suggestions are designed to help Mortgage Brokers add originating Private Equity/Hard Money Loans to their list of offered loan programs………….and hopefully submitted the loans to our company for funding and……………………………making more money!!!!

 

Current Hard Money Borrowers 

It’s a sad fact of life that so many Borrowers who are in the position to only obtain a Hard Money Loan seem to remain in the position.  Every time a Borrower applies for a Hard Money loan with our company we always counsel them on “Having a Plan” to get out.  Sometimes they do, but some many other times they don’t.

Due to the Dodd-Frank Consumer Lending Law, just about all Owner-Occupied properties are out of the question for Hard Money Loans, except for either Business Purpose or Investment purpose loans, but this situation rarely applies when a Hard Money Loan is refinanced.

The Marketing Campaign for these types of Borrowers would be a Direct Mail…………….yes Snail Mail.Marketing Campaign for Current Hard Money Borrowers

We always find the great looking Post Card works best, they can’t help seeing your lending proposal, but letters also work well also.  These Borrowers are always open to getting a better loan, and since Interest Rates are down for even Hard Money Loans, Borrowers who can only qualify for a Hard Money loan still might be able to get a lower interest Rate then they currently have or get cash out for another purpose.

Your company’s Title Company can provide a list of property owners who are designated as having a Hard Money/Private Equity Loan.  While some of the provided leads could be Seller Carrybacks, which are most of the time are at high LTV’s, a quick review of the list should allow for the Seller Carryback leads to be purged.

 

Small & Unique Commercial Properties

 The reason that this is a good target marketing list is that most Big Banks and Institutional Commercial Lenders have minimum lending amounts, be it $250,000.00, 500,000.00 or more.  There are many commercial lending opportunities available to where the Borrower only needs a $150,000.00 or some other size loan that the Big Banks just pass on.  Also, a lot of special use properties, such as Auto Repair, Muffler Shops, light industrial or very small office buildings are great prospects for originating financing.

Again, this would be a Snail Mail Campaign, and your Title Company can provide you a list of prospects. Originating Hard Money Loans

Since we’re talking about lending to the property owner and not the Business owner, which can be the same in an Owner User situation, the mailing piece needs to be addressed to the address where the property owner received the property tax bill.

 

 Probate Properties & Probate Attorneys

 There isn’t a Big Bank or Institutional Lender on the planet that will lend on property that is tied up in a Probate court case.  The Borrower is always the Executor or Administrator who signs on behalf of the Probate Estate with authority provided to them in “The Will” or by an order from the court.

There are many great opportunities available here by targeting Probate Attorneys for possible lending opportunities Now or in the future.  While not every Probate is handled by a Probate Attorney, typically Probate Estates that include substantial equity in real estate have an attorney involved.Probate Law Tips

The Marketing Campaign is an E-Mail outreach program. Originating Hard Money Loans

We have found that mailing a post card or letter to Probate Attorneys typically end up in the trash and is not effective in branding a company that offers Probates Loans.  There are services that will sell lists of Attorneys that includes their phone number, business location and their E-Mail address.  We have found that the available lists have high costs and cover all types of Attorneys.  So, purchasing such a list would include Slip & Fall Attorneys etc, and they’re just not good Attorney prospects for real estate financing.

It takes time and can be done on an ongoing basis, but the California State Bars website has E-Mails for most member Attorneys, that can be cut and pasted into a data base.  It’s a time-consuming job, but just getting 10 Attorney’s E-Mail addresses a day is 50 a week and later over 200 a month.  In a short time by only spending a few minutes a day will build a good size database to market to Probate Attorneys.

Probate Loan are just about exactly the same as a traditional Hard Money Loan as far as Interest Rates, Loan Terms and LTV, but with just a little Probate Court requirement.

That’s about our best Marketing Suggestions for now………………. we know it doesn’t sound like a lot of fun, but rarely do we have the opportunity to get for having fun, but hard work and taking action will lead to more money.

Originating Hard Money Loans

Click here to Contact UsIf anyone has any questions or would like to discuss the above Marketing suggestions and how they can help make more money for all us, then please call our office at (888) 797-7970. Originating Hard Money Loans

 

 

 

 

 

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The Dodd-Frank Consumer Lending Law, Changes Just Made and Possible More Changes Coming

In May of this year congress passed a “Roll Back Bill” to the Dodd-Frank Consumer Lending Law that was signed into law by President Donald Trump. There was some Bi-Partisan support for the law that made several substantial changes and modifications to the Dodd-Frank Law that went into effect back in July 2010. While the just passed rollback law mostly effects smaller regional banks, by increasing their regulatory Threshold Assets from $50 Billion up to $100 Billion, the real encouraging news is that there is Bi-Partisan support in Congress to continue making additional regulatory rollbacks.

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1031 Tax Free Exchange will Save You Money

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1031 Tax Free Exchange will Save You Money

1031 Tax Free Exchange – Since property values are going up some of you might be considering selling and taking profits on your properties. If the property you are considering selling is NOT your personal residence and qualifies as an investment property then the option is available to sell by taking advantage of IRS tax code section 1031. This is the tax code that allows investors to defer paying capital gains taxes when selling investment properties. This procedure is referred to as a “1031 tax free exchange”.

Under current tax laws the capital gains tax rate for selling investment property is taxed at a rate of 15%. The tax rate for capital gains is lower than most marginal tax rates, so it would be beneficial to take advantage of selling using a 1031 tax free exchange to get immediate tax savings.

There is a catch as there so often is with tax laws exceptions. The catch is that you can’t get your profits in cash, but you are allowed to roll over your profits into another investment property that you MUST purchase within 180 days.

If you don’t “need the money now” then rolling your profits into a replacement property will add to your net worth by saving taxes now and should allow for greater appreciation of the property purchased.

One other reason to do a 1031 tax free exchange is that the IRS calculates a 3% depreciation amount for every year an investment property is owned. This amount is “re-captured” at the time of sale by being added back into the property’s cost basis and taxed at the taxpayer’s marginal tax rate. Taking advantage of selling using a 1031 tax free exchange will also allow for the taxation of IRS depreciation to be rolled into the replacement property.

Under IRS tax code 1031 a tax fee exchange is treated as an exchange and not as a sale. This is an important distinction since selling is always treated as a “taxable event”.

It is this unique distinction that allows for any profits also known as capital gains to be transferred into the replacement property. It is VERY important that each requirement of tax code 1031 be followed very carefully as the devil is in the details, since if all requirements are not followed the exchange can be rejected and the “sale” will then be subject to capital gains taxes in the year of sale.

A few things need to be explained or defined prior to going any further:

Capital Gains: Taxable profits from an investment property

Like Kind Property: Property qualifying to be included in a 1031 tax free exchange must be considered like kind. In the world of real estate all real estate is considered like kind.

Replacement Property: This is the property that is purchased.

Accommodator: Company or third party that accepts and controls the net money from the sale of the property sold while the 1031 tax free exchange is in process.

Boot: Any sum of money received by the seller of a property in a 1031 tax free exchange. The amount of money received is taxable at the taxpayer’s marginal tax rate.

Recaptured depreciation: This is the taxable event that is triggered upon the sale of investment property when depreciation is added back to the cost basis of the property. The IRS 3% annual depreciation calculation is added back at the time of sale and taxed at the tax payer’s marginal tax rate.

“3” Property Rule: This is the rule that states that no more than 3 potential replacement properties can be identified to the IRS in any 1031 tax free exchange.

The general requirements of an IRS 1031 tax free exchange are:

  • The property must be an investment property
  • The replacement property much be like kind
  • The replacement property much be of equal or greater value
  • The seller is prevented from receiving the net cash proceeds
  • The funds much be handled by a third party, known as an accommodator
  • The replacement property much be identified within 45 days
  • The purchase of the replacement property must close within 180 days

There are applications in the law that allow for “partial tax free exchanges”. Under this situation the percentage of cash received under the law is referred to as ‘Boot”. In partial tax free exchanges the proportional percentage of cash received from sale of the property will be subject to the recapture of property depreciation and becomes a taxable event in the year the property is sold.

There are companies known as accommodators that can be retained to perform the duties of handling the funds, filing required forms and completing paperwork required to finalize an IRS 1031 tax free exchange. There are companies that only act as accommodators. There are also escrow companies that provide accommodation services in addition to standard escrow services.

It is very important that any accommodator you chose to handle your transaction needs to have adequate insurance and fidelity bonds to guard against misappropriation of your money while in their custody. There are many reputable companies that can professionally handle an IRS 1031 tax free exchange.

There are reasons other than tax deferment to consider when selling by way of an IRS 1031 tax free exchange. Some things to also consider are:

  • Relinquishment of management duties: The options exists to exchange into a managed real estate investment where monthly management duties are handed by a management company or by a general partner or some other management arrangement.
  • Exchange into a triple net property: Where management duties, costs and expenses relating to property ownership are transferred to the tenant occupying the property.
  • Exchanging multiple properties: It is permissible to exchange numerous properties into one replacement property thus reducing multiple management duties required when owning more than one property.

With tax rates high and possibly going higher in the near future it only makes sense if you are considering selling to take advantage of IRS 1031 and defer taxes now. In a future Blog we will be discussing tax advantages available when selling a personal residence.

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Why Finance with a Hard Money Loan

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Why Finance with a Hard Money Loan

Hard Money Loan – There are some people who will never need to borrow against any property they own or finance a property they are planning to purchase with a hard money loan. This can be attributed to great credit and great income levels or never having the need to “get the money fast” due to circumstances requiring urgency or immediacy.

Then there are people that don’t have perfect credit or those that don’t have the monthly income needed to satisfy the typical approval profile of the big banks or institutional lenders. Their alternative is to seek a hard money loan.

What is a Hard Money Loan?

A hard money loan is an asset-based loan meaning the collateral for the loan is an asset, typically a property. A hard money loan is issued to borrowers who cannot qualify for a bank and/or institutional loan because of poor credit scores or lower-than-accepted monthly income levels. Hard money lenders, like Westar Lending Group, fill the void and are there to help with the assistance of private investors and private investment companies by their side.

While the interest rate and mortgage loan costs are typically higher for hard money loans (because of the higher risk involved in financing the loan) many of the negatives associated with them are offset with the benefits attributed to the use of the money borrowed.

The Benefits of Hard Money Loans Come From What You Do With The Money Borrowed

Loaned money can be used for most any purpose such as paying off higher interest rate loans or credit cards. Paying off a higher rate with a lower rate will save money. That’s easy to understand. Other benefits include starting a business or investing in additional real estate. If the business is successful or the investment property goes up in value or provides positive monthly cash flow then the use of a hard money loan has benefited the borrower.

Then there are those situations where the benefit is simply the receipt of the money needed to pay obligations or supplement living expenses when life gets a little rough. The use of a hard money loan to fill a money gap in life should only be considered as a short term solution since there is a monthly interest payment due that just might become an additional financial burden if monthly income is not increased or augmented to offset the costs associated with the loan.

Interest Rates On Hard Money Loans

Interest rates on hard money loans can be up to 10% higher than the rates offered by banks or institutional real estate lenders so it is advised to use the proceeds of the loan prudently and carefully.

One of the situations where a hard money loan is currently employed is where active buyers of distressed properties simply do not have the luxury of time to get a bank loan or the banks are not lending on speculative real estate investments or where there exists more potential deals than money possessed by the interested buyer. So often a buyer will purchase property “A” for cash but then property “B” comes along and the buyer doesn’t have enough money to the buy it but there appears to be enough potential profit to justify any financing costs. So the buyer will typically borrow money on property “A” and use the proceeds to purchase property “B”. The profit derived from property “B” more than offsets the costs of money from the hard money loan.

If property buyers are successful in the home buying business, they will eventually accumulate more money as more deals are consummated so the need for hard money will decline as they become more successful.

But sometimes in life opportunities just keep coming in, so the funny thing about money is you just never have enough.

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Opportunity is Knocking

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Opportunity is Knocking

Opportunity is Knocking – With the current improvement in the California real estate market it just might be a good time to look into using the equity in your home to purchase a second property. The equity in your home can be used to get the down payment money to purchase that new property.

Many people have suffered from the mortgage meltdown that began in 2007 and from the overall real estate recession by losing their homes. So many people have been put in the position of going from being property owners to being renters. This recent event has caused an imbalance in the supply and demand ratio for available rental properties currently on the market. This has caused monthly rental amounts to increase and has provided the opportunity for real estate investors to take advantage of higher monthly rents. With current mortgage interest rates (now at historical lows) triggering lower monthly mortgage payments, the definite possibility exists for positive monthly rental net income.

Most institutional lender are not currently providing financing for cash out which many potential homeowners need in order to purchase an investment property. Private real estate financing does not live by the same constraints that the big banks or large institutional lenders are required to operate under when making lending decisions.

While the interest rates for private real estate financing are higher than traditional financing sources the opportunity that the current real estate market is offering far outweigh any additional interest rate expense. Opportunity is Knocking.

With one call and a few minutes over the telephone our company can calculate the costs associated with purchasing a second property and determine the ongoing monthly expenses from owning and managing a rental property. We can show you the amount of monthly rental income you can earn each and every month which would be in addition to any increase in property values leading to an appreciation in your net worth.

The old adage that “a rising tide lifts all boats” apply so perfectly to the real estate market. Owning one property when the real estate market goes up will get additional equity resulting in increased net worth. But when two properties are owned the owner gets a multiplier effect of having two properties increase in value leading to increased equity in both properties and an exponential increase in net worth for the benefit of the property owner.

It is so true two is better than one!!!! Opportunity is Knocking

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