Archive for Real Estate-Private Lender Valuation

Private Lenders as with most other investors, invest their money in businesses.  Having a business entity builds credibility with a private investor and provides other benefits such as liability protection, tax advantages, etc.  So, before one begins raising provide money for any kind of investment, it is highly recommended you incorporate in the state in which your business is located, so that you are a legally recognized corporate entity: Corporation, LLC, Partnership... A sole proprietor or DBA (doing business as), marks you as an amateur, and an investment risk.

When you are doing leveraged financing, where an institution (like a bank) lends money on the property and creates a mortgage lien in the first (senior position).  That means in case of default, the institution gets fully paid back the principal and it's collection costs before any other lien holder gets paid.

Other lien holders (e.g. you investor) are in the 2nd position--holding a junior lien.  In case of default it is unlikely that little or any of their investment will be repaid.  This risk can be unacceptable to many private lenders.

First, use  the MAO (Maximum Allowable Offer) rule.

MAO =  70% of the after repair market value - the costs of repairs.

AND Market value is not what the RE Agents say, but what it would actually sell for these days

You don't want to just ask for the "exact" (e.g. estimated ) cost of a rehab project.  Often costs will increase due higher material costs, unexpected repairs, and time delays.  The professor's rule of thumb is to add an additional 10% for minor rehab (<= $5,000), and higher percentages as the rehab becomes more extensive.

The professor as created a useful algorithm for this in his Deal Evaluation Tool.  This is an excel spreadsheet you can use to generate all your financial information for you and your investors for any type of real estate deal.  You can check it out at:

The valuation of a quad is based on comps (sales of similar properties in the last 3-6 mos), just like single family homes.

For multi-family, the valuation is generally based on the NOI "net operating income" which is defined as the total actual annual income from the property minus the total actual annual expenses.  Then the formula for the Estimated value is:

Estimated Value = NOI/(cap rate)

Thus if the cap rate is 10% and the NOI is $50,000, then the estimated value is $500,000.

The cap rate will depend on the class of the apartment (from "A" - high end living space & amenities, to "C" - working class functional, to "D" - livable but not nice.)  and the economy.  "A" has the lowest cap rate (5-6%), B (6-8%), C (9-11%), D (12% or greater).  A bad economy tends to increase the cap rate.

Private Investors are very concerned about how much risk you are exposing their money to.  Obviously, renting to a poorly qualified tenant is going to risk eviction costs and cause other problems which could cause a loss of investment or return.  So, even if the investor doesn't ask you, your failure to address that will diminish you chances of getting an investment.

With rentals, you have to address 2 issues for the investor:
1) What is your exit strategy:  When and how are you going to pay the investor back his principal?
2) How are you going to pay the return on his investment. With rentals that return is usually paid out of the cash flow from the rents.  That cashflow should be at least 25% more that the payment you are making to your investor.

Private investors are most definitely interested in wholesale deals.  A quick turn over of their money with a high profit is actually the best scenario, especially when the risk is low.  If for example an invest lends you $50K, and you flip the property for a profit of $20K in 2 months, and lets say you agreed to pay you investor a fixed 5% of his investment.  Then the investor would recieve $105,000 in 2 months.  That's a 30% annualized return.  Your investor would be delighted.

It should be clear that you only have 1 chance to make a first impression.  So, any private investor is going to judge you on what you say, and how well organized you are.  Because an investor is going to think that the same attitude with which you approach your presentation will be the way you handle his money.  So, you should have at least a clear business plan in your head and a written summary of it that you can share with your potential private lenders if they are interested.  And if they are interested they are eventually going to want to see a complete business plan before they invest.

private-investor-questionsAttention: This is ONLY for Real Estate Investors who are willing to Do What It Takes to Have Private Money for their Deals.

Do you want $100,000’s of Private Money from Private Lenders to Use As You Please for Your Real Estate Deals?

Flub these Answers and You Can Kiss Good-bye any Chance of Getting Private Money Investments

What you need to know first 

This is What You Need to Know First

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