Metrics Explained: Return on Investment

ROI, Return on investment, Business and financial concept., real estate investment

ROI, Return on investment, Business and financial concept, Real estate investment

In our series “Metrics Explained”, we will dive into two concepts that are commonplace to any seasoned real estate investor. This article about ROI is part-one of a two-part series.

Return on Investment, or ROI, is one of the best-known measurements of how much money or profit is made on a given investment. It is a ratio between net profit and cost of investment that can be stated as follows:

ROI = Gain – Cost / Cost

Though it is a simple concept, there are a number of variables you must account for to render an accurate measurement. For example, when calculating gains, you should be mindful of the time your rental property stays vacant, such as transitions between tenants, as the lack of income during that period will affect the ROI. When it comes to costs, be sure to include repair and preventative maintenance expenses, property taxes and insurance costs on top of down payments and mortgage payments.

Because the ROI is a snapshot in time of profitability, appreciation of (and sometimes depreciation) the real estate value along with tax advantages of rental can have an impact on your returns. Additionally, rents will typically go up with inflation while your mortgage payments stay the same, all of which can increase your ROI.

The 203(k) FHA Loan: Adding on Your Rehab Costs to Your Loan

5 little red houses, The 203(k) FHA Loan: Adding on Your Rehab Costs to Your LoanAn 203(k) FHA Loan, sometimes called a Rehab loan or FHA Construction Loan, allows you to buy or refinance a home that needs work. With this FHA loan, you can include in your mortgage the dollar value needed to repair or upgrade the home. Your loan will then cover the purchase or refinance price and the cost of upgrades, allowing you to pay for the renovations over time as you pay down the mortgage. This is a superb financing tool that may allow you to get into an area where turn-key homes are more expensive. It is important to remember that in order for a lender to approve financing, the home must meet certain safety and livability standards. As 203(k) loans are insured by the Federal Housing Administration, lenders may be able to offer more lenient qualification requirements than other type of renovation loans.

The process for an FHA 203(k) loan is quite similar to that of regular home buying, but with a few extra steps:

  1. Apply with a 203(k) approved lender
  2. Get approval for the loan
  3. Select a contractor for your renovation project
  4. Get estimates for the project
  5. Close the loan
  6. Complete the repairs
  7. Move into your new home

Are you interested in a 203(k) loan or would you like more information? RLG has the tools and resources at its disposal to get you on your way. Call us today to experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

Cash-out Refinance: Standard and Delayed

Refinance, investment lending, mortgage, investment, real estate and property concept - close up of home model, dollar money and house keys

Refinance, investment lending, mortgage, investment, real estate and property concept - close up of home model, dollar money and house keysWith mortgage refinance rates at records lows, you likely have neighbors or family members that have rushed to save money by reducing their finance rate with their mortgage company. Today we are going to discuss two variants of the traditional refinancing option.

Homeowners may find themselves in a situation where they need access to funds for a home renovation project or for other financial needs. If you have equity in your home, a Cash-out Refinance is a method you might consider that allows you to both refinance your home and borrow money at the same time. A cash-out finance replaces your existing mortgage with a new loan with a higher balance, sometimes with more favorable terms. The difference goes to you in cash so you can perform upgrades to your home, consolidate debt, or for other financial reasons. A cash-out refinance is not to be confused with a home equity line of credit (HELOC) in which you borrow money using your home equity as collateral.

There may a situation in which you want or need to pay cash for a house. Perhaps you want to buy a home that lenders are leery of financing due to its state or repair. Or you may be in a situation where you need to outbid other buyers. In these cases, and others, you might decide to pay cash for a property. Using Delayed Financing Cash-out Refinance, a buyer purchases a home with cash up front, then immediately or soon thereafter obtains a cash-out refinance to mortgage the property, which returns a significant portion of your money to you. If the home you wish to buy needs major work in order to pass home inspection or if it will not qualify for financing, you might consider paying cash for the home, renovating it, and then request a cash-out refinance to get back funds you put into the project. In either case, you regain financial liquidity and can proceed with your investment goals.

Do you have any questions about a cash-out refinancing? RLG has the tools and experience to guide you with your personal and investment properties. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!


What is Cap Rate?

Business, finance, saving money, property ladder or mortgage loan concept : Wood house model, coins and financial statement or saving account book on desk table, cap rateThe capitalization rate (or cap rate, in short) is a metric used in real estate to indicate the potential rate of return from an investment property. It is calculated based on the net income the property is expected to generate. The formula is spelled as follows:

Capitalization Rate = Net Operating Income / Current Market Value

The Net Operating Income is essentially the difference between revenue and operating expenses. It does not include principal and interest payments on loans or capital expenditures. Assuming you own a rental property that pulls in $100,000 in total annual revenue and incurs $65,000 in maintenance costs and taxes, your NOI will be $35,000.

To calculate your cap rate, you will divide the $65,000 by the property’s current value. Supposing the property is valued at $500,000, then the cap rate will be 0.07 or 7%. This percentage is used as an indicator of the return you can expect on an investment. In contrast, if the cap rate on a similar rental property is only 2%, that means that the one projected at 7% would be more profitable and produce the highest return.

In addition to profit, the rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, with a property whose cap rate is 10%, you would divide 100 by the cap rate. In this case, it would amount to a 10-year payback period.

While a higher cap rate may seem like the obvious choice, it is also understood as a measure of risk. With higher cap rates, there is a greater risk of not getting the return you expect, and perhaps not getting your investment back. As a best practice, use this metric to gauge comparable homes in a same neighborhood and beware of cap rates that are irresistibly high.

Do you like our content? Subscribe to our YouTube channel and stay on top of all the real estate trends. Are you ready to invest? Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

What is ARV in Investment Lending?

Key on wood background, FHA loan

FHA Loan, Key on wood background, ARV, Investment LendingThe ARV, or After Repair Value, is a figure used in the BRRR Method (Buy, Rehab, Rent, Refi) to determine the difference between the as-is price of the home and the value of the property after repairs. It is a critical number for real estate investors as loans are granted based on the loan-to-value derived from the ARV.

The after-repair value formula is:

ARV = Property’s Current Value + Value of Renovations

To calculate the property’s current value, it is important to enlist the help of a professional appraiser as they have the expertise needed to identify any issues and “quirks” that could affect the property’s value.

Once you have the property’s value pinned down, you will need to estimate the costs of renovations. Keep in mind that the costs incurred to flip the house must be less than the value of the renovation so your investment will see positive returns. Here are some factors to consider:

  1. Size of space

Remodeling a guest bathroom will almost certainly be less costly than larger areas such as the master bedroom or the kitchen. Full kitchen remodeling projects are likely to run at least $50,000. To cut back on expenses, you may want to consider a partial renovation and avoid major structural changes such as knocking down walls and rearranging the layout.

  1. Property condition

Older houses will often require more maintenance and have underlying issues. An inspection report is key in ensuring that your fixer-upper does not turn out to be a money pit.

  1. Design and Materials

When it comes to pricing, cabinetry, flooring, and windows run the gamut. Choose finished materials that fit into your budget.

  1. Contractor

Get estimates from at least three contractors to zero in on an offer that combines both quality and fair price. Asking for specifics about the scope of work, such as itemized list of repairs, is a good idea.

When determining the maximum price you should consider paying for a property, many real estate investors abide by the 70% rule. Imagine the ARV for your property is $100,000, and it needs $25,000 in repairs, then the most you should pay for it is $45,000. Lenders often times rely on the ARV to determine how much money you can borrow.

Breaking Down the BRRR Method

Investment Lending Concept, BRRR Method

Investment Lending Concept, BRRR MethodThe BRRR Method, which stands for Buy, Rehab, Rent, Refinance, is one of these buzzwords that are often thrown around in the real estate industry. Notwithstanding the hype, this strategy can yield great returns on investment. Simply put, the BRRR boils down to adding enough value to a property to recover the money you invested in it. This, in turn, allows you to take the money and use it to buy more properties. Over time, you will be able to build a real estate portfolio that gives you complete financial independence.

Let’s dive into each step of this multipronged method:

  1. Buy

Finding a good deal is one of the most important aspects of the BRRR method. To implement this strategy successfully, you need to buy properties under the market value and never invest more than 70 to 75% of the property’s after repair value (ARV).

Most lenders use the ARV to determine how much money you can borrow and typically offer loan-to-value (LTV) rates ranging from 60 to 75%. Keep in mind that your lender is likely to request their own appraisal as part of their due diligence to compare with the ARV that you present, so it’s important to make yours as accurate as possible.

  1. Rehab

Rehabbing a house comes with a myriad of challenges. Your focus should be on making the house functional and livable. Any aesthetic improvements should make sense financially so the value added exceeds the costs. A finished basement or garage and basement, on one hand, are rarely worth the expenses. New tiles and new light fixtures, on the other hand, can have a positive effect on rent while keeping the costs low.

  1. Rent

It will be a lot easier to refinance your investment property when it is occupied by renters as properties that stay vacant for an extended period of time send out the wrong signals to lenders. Make sure to screen tenants diligently. Checking the tenant’s background, verifying their job and income, and contacting previous landlords are some measures you can take in anticipation of a lease agreement.

Try to maintain an open communication line with your tenants and work hard to keep the good ones by being responsive and attentive to maintenance faults.

  1. Refinance

The next step is to recoup the initial equity with a cash-out refinance so you can repeat the process and build out your real estate portfolio. The goal is to get as high of an appraised value as you possibly can. The typical cash out financing is done after 6 months of owning the property, based on ARV. This wait period is called the seasoning term and can vary from lender to lender.

Are you interested in going the BRRR route? RLG has the tools and resources at its disposal to get you on your way. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

Ridge Lending Group Employee Spotlight – Sarah Telfer

Sarah Telfer, Ridge Lending Group, Investment Lending

Sarah Telfer, Ridge Lending Group, Investment LendingSarah Telfer is the newest RLG team member and loan officer assistant! Sarah nurtures client relationships, assists loan officers, and deepens her knowledge of the industry on a daily basis. Learn a little more about Sarah today: 

What brought you to RLG: I was looking for my next challenge and had always been intrigued about the industry.

What do you like most about working at RLG:  Caeli is a wealth of knowledge and the team is “next level.”

Hometown: Portland, Oregon.

Hobbies: Spending quality time with family/dogs, staying active, creating themed parties and charcuterie boards, and playing cribbage/games.

Book you’ve read over and over again: Unstoppable Influence.

Top 3 movies: Harry Potter series, Seven, and Anchorman.  

A bit about your family: I’m a proud mother of two amazing kiddos (son, 17 and daughter, 9) that keep me challenged and on my toes daily. My husband and I also care for my elderly grandmother who we took into our home in 2018; she is a firecracker.

Favorite food: Seafood.

Thing you’re scared of: Heights. 

Worst habit: Overthinking and being way too hard on myself. 

Dream vacation: My family’s goal is to complete the top 100 places to visit. However, if I needed to choose one, I’d love to spend a decent amount of time traveling in Europe.

Favorite cocktail: French 75 or Wine.

Types of Commercial Loans

Administrator business man financial inspector and secretary making report, calculating balance. Internal Revenue Service checking document. Audit concept, conventional loans, investment loans, investment lending

Administrator business man financial inspector and secretary making report, calculating balance. Internal Revenue Service checking document. Audit concept, conventional loans, investment loans, investment lending

There are 5 primary types of commercial real estate loans that you can tap into: conventional loans, bridge loans, SBA loans, hard money loans, and owner financing.

  1. Conventional: Most banks and financial institutions offer conventional loans. It typically consists of a fixed-rate mortgage used by investor to buy an existing, occupied property.
  2. Bridge: A bridge loan is short-term source of capital made available for investors looking to service a debt until they can complete a flip and refinance the property or to pay out a balloon payment, for example.
  3. Hard Money: Hard money loans are an alternative form of capital provided by private individuals or companies. These short-term loans are secured by using commercial real estate as collateral.
  4. SBA: SBA loans can be broken down in two: SBA 7(a) and SBA 504. These loans are backed by the Small Business Administration (SBA), thereby their names. The SBA 7(a) differs from SBA 504 in that it offers more flexibility with how you can use your funds. Under a SBA 7(a), borrower can secure up to $5 million, whereas the SBA 504 program has no maximum loan amount.
  5. Owner Financing: owner-financed deals are done outside of financial institutions, where the seller acts as the lender in the purchase of their property.

Are you interested in a commercial loan? Call us today and we will be happy to discuss in more detail how to set you up with an investment property loan that will fit your growth needs

The FHA Loan: Putting as Little as 3.5% Down

FHA Loan, investment lending

FHA Loan, investment lending

FHA loans are mortgages insured by the Federal Housing Administration (FHA), which can be issued by any FHA-approved lender in the United States. Unlike conventional loans, FHA loans are government-backed, which protects lenders against defaults. This in turn allows lenders to offer prospective borrowers more competitive rates.

The biggest obstacle to most new homebuyers is the feared down payment. But did you know that FHA loans allow down payments as small as 3.5%?

On a $250,000 home, a 3.5% down payment translates to $8,750 – quite a contrast to a traditional 20% down payment of $50,000.

To qualify for a 3.5% down payment with a FHA loan, your credit score needs to be at least 580. If your score is lower than this, you will need to put at least 10% down.

Contact RLG today to see if you qualify!

Home Equity Loans and Home Equity Lines of Credit

Ridge Lending Group Home Equity Loans and Home Equity Lines of Credit

Ridge Lending Group Home Equity Loans and Home Equity Lines of CreditDo you own your home? Do you have a kitchen or bathroom that you have always wanted to remodel but have not had the savings to get the project started? A home equity loan may be for you.

A home equity loan is a loan in which the borrower uses the equity of their house as collateral. This loan allows you to borrow money based on the value of your home and the equity you have in it. Most home equity loans come with a fixed rate, and the loan repayment period is typically between 10 and 30 years.

A home equity loan is normally best suited for folks who need money to pay for a large-ticket item, such as a home renovation project. In terms of dollar value, loans can range from $10,000 on the lower side to well over $100,000.

After your loan closes, the entire amount of your loan will be deposited into your account.

Home Equity Line of Credit

A home equity line of credit (HELOC) uses the equity you have in your home as security for a home equity line of credit, a type of revolving credit. Many homeowners opt for a HELOC because they can often secure lower interest rates than other types of loans, such as personal loan from a bank, which is unsecured.

Once approved for a HELOC, you use the funds for individual purchases as needed up to an approved amount, roughly in the same manner as a credit card. With a HELOC, you do not need to borrow the full amount of the loan, and the available credit is replenished as you pay it back. In fact, you could pay back the loan in full during the draw period, re-borrow the total amount, and pay it back again. But it differs from a credit card in that it uses the equity in your home as collateral.

The repayment period on a HELOC is usually between 10-20 years while the draw period lasts about ten years. HELOC loans can have annual fees associated with them, and interest rates on a HELOC’s repayment period are adjustable. You pay interest only on what you actually borrow from the available loan, and you usually don’t have to begin repaying the loan until after the draw period closes.

Home equity lines of credit are best for people who expect to need varying amounts of cash over time—for example, to start a business. If you do not need to borrow as much as a home equity loan requires, you might consider a HELOC and borrow only what you need instead.

Do you think a HELOC could be a good fit to help renovate your home? Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!