We have multiple conversations with several investors on different investing strategies on what seems like a daily basis. The recurring theme tying them all together is the title of this article – “counting the true cost of an investment.”
Here are three situations in which real estate investors often fail to count the true cost:
1. The first situation is a real estate investor who is making hard money or private loan from their self-directed retirement account to a rehabber-borrower.
a. The rehabber-borrower is negotiating for the lowest rates and points on the loan; however, the IRA account holder needs to charge an interest rate and points that not only reflect the true risk, cost and value of their money, but also the costs associated with processing the IRA paperwork, having the money wired to the rehabber-borrower’s account, and legal fees for the preparation of all the documents such as the note, mortgage, personal guaranty, etc.
b. All of these costs are ultimately paid by the borrower, but the IRA account holder won’t know to collect them at closing unless they count the true costs and anticipate them before funding the loan.
2. In the second scenario, it is the “buy-and-hold” real estate investor who has calculated their “cash flow” to be the difference between the gross monthly rent collected fewer management fees and the debt service (assuming debt service includes taxes and insurance as part of the escrow payment).
a. That buy-and-hold investor is failing to set aside money for future repairs and improvements.
b. Let’s face it, HVAC units, roofs, windows and plumbing components will eventually wear out and need to be replaced. Anticipating the life expectancy of these components and setting aside reserves each month to have the capital on hand when it’s time to put a new roof on a house, for example, would be prudent.
3. Finally, there is the note investor who believes they are buying a performing, first-position note secured by good collateral. They are looking at what it will cost to buy the note versus the payment coming and use that information to calculate their yield or rate of return.
a. What they have failed to consider are the service fees for having that note boarded with a servicer and the potential costs for someone to manage that note by watching the servicer and tracking the legal, accounting and insurance costs.
Hopefully, the points above will help you consider all the factors of an investment opportunity prior to making a decision to move forward.
GL&L Holdings personnel can not only provide you advice about your potential investment, but we can also provide you the funds that you need in order to make your investment opportunity a reality.
www.gllholdings.com
832-770-9415
