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How to Make Money in Commercial Real Estate

When it comes to investing wealth, real estate has proven itself time and time again to be a reliable way to make money. With $32.6 trillion up for grabs globally, many are turning to commercial real estate to bolster their investment portfolios. If you want to try your hand in commercial real estate, here are a few ways to enter the market.

Become a Broker

One of the ways to make money in commercial real estate is to become a broker and help developers and investors find the perfect properties to suit their needs. While this bears some similarity to residential realtors, it is significantly more involved.

In residential real estate, clients are looking for one thing: a place to live. A commercial real estate broker’s clients will be looking for unique elements that suit their business or investment needs, including:

  • Parking
  • Proximity to public transportation
  • Highway access for commuters
  • Storage space
  • Foot traffic (for retail spaces)
  • Space to grow
  • And more

Once you find the right property, commercial mortgage brokers will also need to help developers or investors identify and secure funding for their projects by working with different financial entities. Like residential real estate loans, commercial real estate loans come in many shapes and sizes. You’ll need to learn about all the different ways to secure funding and help clients navigate the commercial real estate financing process.

It might sound like a lot to juggle, but if you can do it, you can easily make over $100,000 per year—with some brokers reaching seven figures annually! Of course, commercial real estate brokers work on commission, so don’t expect to make much in your first few years as you build your reputation.

Invest in Commercial Real Estate

If the commission life isn’t for you, commercial real estate investment is another great way to earn money. Two of the most popular ways to invest in commercial real estate are::

  1. Buy a property, make improvements, and sell for a profit 
  2. Buy a property and rent it to tenants 

Real estate investing has the potential to generate a strong stream of income if you’re able to capitalize on market trends. Of course, there’s also plenty of risk involved, so make sure you do your research before applying for a loan and purchasing your first commercial property.

Work as a Commercial Real Estate Developer

Becoming a commercial real estate developer might take the most time and capital, but it has the potential to generate the most return on your investment.

Commercial real estate development is like starting from the ground up—quite literally. A developer buys a plot of land, builds a commercial property, and either sells it or rents it to tenants for income. Because you’re not buying an existing property, you can make it into whatever you need it to be to suit local business trends. Plus, brand-new buildings can typically be rented out for more money!

Since you are starting from scratch, commercial real estate development takes a bit more effort (and capital) to get started. Luckily, there are plenty of financial institutions that offer loan programs for each phase of the development process:

  • Construction loans
  • Land development loans
  • Bridge loans
  • Rehab or redevelopment loans

On average, commercial real estate developers earn around $80,000 annually, but that number can increase drastically depending on the real estate market and the choices you make. Many successful commercial real estate developers earn annual salaries in the millions of dollars.

Start Your Commercial Real Estate Journey

Are you ready to start your exciting journey in the commercial real estate market? No matter which path you take, it’s important to have enough capital to fund your business.

At Broadmark Realty Capital, we specialize in construction loans designed to suit the needs of commercial real estate investors and developers. With flexible loan terms and ample experience, we can get you the funds you need quickly, so you can capitalize on the next opportunity. Contact us and get your next commercial real estate project off the ground in no time.

Single-family homes in high demand due to COVID-19

Following the Great Recession, the single-family rental (SFR) market experienced solid growth. In fact, the SFR market expanded by more than 3.8 million households between 2006 and 2016. Now, with COVID-19 a part of everyday life, this trend has continued as Americans rethink the kinds of lifestyles they want. With social distancing and stay at home orders in place, densely populated areas are losing their appeal to many, creating an uptick in interest for single-family homes.

Single-family homes are in demand

Demand for single-family homes was already a rising trend prior to the onset of the global pandemic. Experts are now predicting that the impact of COVID-19 could make homeownership more difficult for those who have suffered job losses, reduced salaries or potential decreases in credit scores. This means we may see an increase in demand for rental homes.

Whether renting or buying, data suggests that nearly one-third of Americans are considering a move to less populated cities, and in some regions, they’ve already relocated.

Real Estate Market Differences

Despite COVID-19, real estate investors continue to find profitable deals across the US. For 2020, experts have marked states such as Texas, North Carolina, Florida, Georgia, Tennessee and Arizona at the top of the list. Additional secondary markets have picked up steam, while expensive fees and high land costs have slowed others.

On the other hand, COVID-19 has created labor shortages in some markets, which means that some investors can’t get approval for property inspections while others have had job sites shut down. This all can mean delays in construction.

Why renters prefer single-family homes

Investors should consider what amenities will be in high demand, given the way COVID-19 has altered how people approach living and working. Outdoor living spaces, for instance, will be more appealing and having a home office will be a top priority for many.

Additional amenities that will likely attract long-term renters even after the pandemic is no longer an issue are:

Privacy – There are no other tenants right above, below or beside single-family inhabitants. Renters prefer this privacy. They don’t want the sound of their neighbors blaring music or TV coming through the walls, or of kids running and jumping in the unit above them. 

More space than a townhome, condo or apartment – Tenants have a lot of stuff! A single-family home provides more storage, with larger closets, basements, attics, and garages. Single-family homes could also provide space for a home office, washer and dryer, shed, and/or an outdoor living space.

Feels like home versus a rental – As mentioned before renters tend to feel more permanently set up in a single-family home where their pets and children can play in a backyard. In addition, it allows families with children to have school stability. Moving a child in and out of schools is hard for both kids and parents – and is preventable if they stay in one place.


Renters are paying their rents amidst COVID

Real estate investors across the country were expecting a period of increases in unpaid rents due to COVID-19. Surprisingly, this has not yet been the case. In May, Multi-Housing News reported that 87.7 percent of renters paid full or partial rent. For comparison, 89.8 percent of renters paid their rent during the same time period last year. Multi-Housing News goes on to say that as of July 5, 2020, 77.4 percent of renters made payments, and as of July 13, that number was up to nearly 88 percent.

The data doesn’t show any difference in payment trends between property types – it is largely the same between apartment, condos, townhomes, and single-family rentals. 

Advantages of investing in single-family homes over condos, townhomes, and duplexes

Appreciation – Single-family homes tend to appreciate faster than multi-unit properties. A single-family home is valued on supply and demand, while other rental properties are valued on rents and market condition.

Monthly cost savings – The monthly cost of owning a single-family home versus owning a multi-unit investment property can be significantly less. They’re typically easier to finance, carry lower interest rates, and don’t carry the burden of monthly condo fees. In addition, HOA fees are less common and lower on single-family homes, depending on your local market.

Liquidity – Historically, there’s a higher interest in living in a single-family home rather than apartments or multi-unit properties. Most of the market for live-in homes is due to people seeking to escape a shared wall with another person.This can make it easier for investors to collect income from their investments, potentially resulting in higher profits and more liquidity. 

Easier to manage due to longer leases – Turnover costs time and money. Updating, cleaning, repainting, and attracting new tenants can be expensive and exhausting. Tenants looking for a single-family home are more likely to sign longer leases. They tend to become more emotionally attached due to the ability to add their own touches to the property – planting flowers, adding their own patio furniture, watching their kids and/or pets play in the yard, etc. This reduces costs caused by vacancies. 

Even with the uncertainty of the market during the pandemic, investors have continued to flock towards single-family homes. They’ve noticed that owning a large pool of rental homes is allowing them to weather the crisis far better than initially feared. Many investors assume single-family homes will become more desirable to live in, but also more expensive to buy. 

Housing trends are likely to change or fluctuate as the U.S. recovers from COVID-19. While some variations may be subtle, staying acutely aware will help real estate investors make informed decisions.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

Real Estate Trends That May Become The New Normal

In a matter of weeks, lives across the U.S. have changed in ways we could have never imagined.  People can no longer work, eat, shop, travel, and socialize as they had before. Instead of traveling, shopping, and going out to restaurants, many consumers are tightening their wallets to only spend on essentials.

Physical distancing has changed the way people interact and inhabit space and could potentially lower demand for certain types of spaces. This has created an unprecedented challenge for the real estate industry. The longer this pandemic continues, the more likely we are to see lasting changes in behavior.

Most property managers have been able to adjust their operations to protect the safety and health of both staff and tenants, but it’s important for real estate leaders to think about how the real estate landscape could forever be changed and adjust their strategies accordingly.

Consumer shifts

Americans have never before spent this much time in their homes; because of this we expect consumer preferences to shift. We’ve highlighted three primary shifts below:

Working from home

You can almost be certain that one result of this pandemic will be more working from home. Even once social distancing standards have been lifted, we suspect many people will continue to work from home at least part of the time. We’re curious as to how many people dislike their work space at home, or didn’t even have a space – you know, the ones that had to turn their kitchen table or living room into an office.  Some consumers prefer a more separate office – a room at the front or even back of the home. In addition, the concept of at-home school spaces will be closely aligned with home office spaces. This includes quiet, dedicated environments that have easy access to technology such as a strong Internet connection.

Sustainable living

In recent years, this has been one of the fastest-growing trends in home building and community design. Think: the rise of community gardens, energy-efficient appliances, and smart living amenities. Expect the pandemic to speed up these trends. New homes and commercial real estate projects have an advantage over resale in this category. Builders or property managers can sell the benefits of the smart living technology they implement into their projects moving forward.

“Surban” over Urban

“Surban” – a mix of urban and suburban living – is a recent trend that is expected to continue to attract millennials and young families looking for more privacy and open space. Since having to social distance, individuals are likely to continue to move to the suburbs. Some may refer to these areas as “mixed use.”  Examples of these areas would include:

  • Downtown Naperville, Illinois, in the suburbs of Chicago
  • A-Town in Anaheim, California, in the neighborhood around Angel Stadium of Anaheim
  • Legacy Town Center in Plano, Texas, in the suburbs of Dallas
  • Downtown Tempe, Arizona, in the suburbs of Phoenix

In the post-pandemic age, customer-focused sensibility will be vital to best position existing assets in a competitive landscape. COVID-19 is likely to shape us in a way that will require our buildings and operations to be reshaped as well. Real estate owners and operators who are able to adjust and serve tenants’ needs on-site will help your community stand out among competition, positioning it to perform optimally in the new normal.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

The Value of Hard Money in the Real Estate Investment Industry

Private (or hard money) lenders are some of the most important funding sources for real estate project investors. Whether you’re new to real estate investing or an expert, chances are you will want to scale your business at some point. And every successful real estate investor knows that, to scale your business, you need one thing: reliable funding.

With the current condition of the market, it’s now more important than ever to make sure that you have a relationship with a hard money lender that you can rely on. Here are a few benefits to using a private lender:

Men discussing the hard money

Hard money loans are approved and funded quickly

The approval speed of hard money loans is one of their biggest advantages. In many cases, lenders can approve your loan in one to two days. They will consider the attributes of the property, the down payment amount or equity you have in the property, your experience, your exit strategy, and they will make sure you have some cash reserves to make monthly payments.

In addition to the quick approval, hard money lenders can also fund projects quickly. If needed, projects can be funded or have draws completed within three to five days.  Compare that to the 20+ days it can take a bank to fund. In today’s real estate market, how quickly you can close on a project is often more important than the cost of capital. Most investors would rather pay slightly more to be assured they will close in a week rather than risk closing in 45 days.

This fast funding is also helpful when you’re trying to close on a project in a timely manner. For example, a deal that would benefit from a 1031 exchange.

Private loans provide funding for projects that cannot be financed elsewhere

Hard money lenders often provide funding that banks may not consider. An example of this would be a short-term loan for an investor that wants to purchase a property, quickly rehab it, then sell or rent the units. In most cases, you only need a 12-18-month loan, which most banks don’t offer. Banks prefer long-term loans and are happy to make their interest over a long period of time.

In addition, hard money loans are ideal for properties that have numerous issues that prevent them qualifying with a bank. These issues could be related to the foundation, electrical work or plumbing, for example. Banks are highly regulated, risk-averse lenders and are unable to consider loan scenarios that are outside their criteria.

A hard money lender would be able to fund a loan for a property that has these issues. They employ their own lending guidelines and some even have in-house underwriters, enabling them to adjust the loan conditions to meet your funding needs.

writing pros of private lending

Increased capital, bigger projects

Many hard money lenders will have a maximum loan amount as well as a maximum Loan-to-Cost (LTC) ratio, dictating the amount of financing you receive for your commercial real estate project. Hard money lenders that have a high LTC percentage can provide increased capital upfront, providing you with more flexibility and the option to fund the project on your own rather than bringing in a partner.

In addition, increased capital allows you to slowly build your way up to bigger projects. You can start looking at multifamily and commercial deals, rather than solely looking at single-family properties. Closing more deals will also increase your personal capital and give you higher returns on bigger deals.

A note on our lending environment

We understand there is uncertainty in the markets and recognize the seriousness of the current environment. Broadmark Realty Capital’s focus is primarily on short-term, real-estate-backed senior mortgage loans, and we currently have no debt on our balance sheet. Because we do not use leverage and are not dependent on outside lenders to fund our loans or construction draws, we expect to be able to effectively navigate the liquidity and funding challenges that some of our highly levered competitors are facing in this environment.

The world has changed considerably since we founded Broadmark ten years ago following the financial crisis, and the current global public health emergency is a stark reminder that developments in financial markets are impossible to predict. However, what has remained a constant over the past decade is our commitment to always functioning responsibly on behalf of our borrowers and our investors. We remain focused on continuing to serve as a reliable source of funding for our borrowers who have come to value our flexibility and the certainty of execution that we provide.

How To Choose The Right Location Of An Investment Property

Imagine putting all your investment money into your dream project. You buy the property, develop the land, build the apartments or multi-family homes, only to not be able to sell or rent a single unit. Nobody wants that. To help you avoid this, here are some tips on how to determine a good location for your investment property.

Job and population growth and the investment property

Job and population growth drive the housing market. The more growth there is in an area, the more demand there is for housing – and higher demand plus limited supply leads to increased rents and increased values. There are some markets that are generally stable due to a steady population increase; if you choose to invest in those markets, you should expect more protection on your investment (and possibly easier access to financing) as there is guaranteed demand.

Not only do you want to look at the population growth of a metropolitan area, but you also want to look at population growth within the zip code your considering. Savvy investors pass on deals in metropolitan areas with good jobs and economics if their research shows that a particular zip code or neighborhood is declining.

Population growth isn’t the only factor for good investment potential, either. Here are a few questions you might want to ask yourself:

  • What does the number of jobs in your overall market look like? Are they increasing? Decreasing?
  • The median salary: Increasing? Decreasing?
  • What types of jobs are available: Professionals? High-tech? Laborers? Technicians?
  • Job diversification: Are there 1 or 2 major industries or a stable variety of industries and sources of jobs?

Ideally, you would want to see a well-diverse source of jobs, a mix of workers, rising salaries, and low unemployment. A great source for population trends in your location is the U.S Census Bureau.

Housing Price Trends: be careful where you invest

Look into the housing market in the area you’re considering. Are prices going up or down? And look at the trend of median prices in the market and see how much prices have dropped from their peak to their low. It’s best to be at the forefront of market trends and buy when prices are at a low but beginning to recover. To identify if a market is in recovery or a market boom, you’ll want to look at how many homes are on the market, the month’s supply of inventory and how long is it taking to sell.

The months supply is the ratio of homes for sale to homes that sold. This indicates how long the current for-sale inventory would last given the current sales rate. During a slow real estate market, there are more homes listed than there are buyers. Conversely, in a strong market there are more buyers than sellers and property stays on the market for less time. Economists believe that 6 to 6 ½ months of inventory is market equilibrium – a balance between supply and demand.

Price to Rent Ratio and investment locations

The price to rent ratio is another simple way to financially evaluate the area for its overall economic efficiency.

To calculate the price/rent ratio, you take the median home price divided by the median annual rent. For example, if the area has a median housing price of $400,000 and a median yearly rent of $24,000, the price/rent ratio is 16.66 ($400,000 ÷ $24,000)

Typically, the lower the price to rent ratio, the better the market will be for investing. But, a location with a low price/rent ratio may be low for a reason, because it’s a bad location! The price/rent ratio is important, but don’t forget to look at other factors.

Convenience factors for choosing investment property

Some people choose to live further than 10 miles from jobs, shopping centers, restaurants and other community centers, but most people don’t. Access to public transit such as buses, trolleys, trains, etc. are important to your potential buyers or tenants. For families with children, public school districts are also an important factor.

Other convenience factors could include:

  • Proximity to parks where one can exercise, relax and enjoy themselves
  • Main streets lined with tall trees
  • Sidewalk-lined boulevards
  • Coffee shops, pubs, local shops
  • Views of water, mountains or other scenery

Research has also found that the majority of the potential buyers or tenants in today’s market want the option to be able to walk to places rather than driving.

Walkability and property investment

Millennials currently make up the largest sector of renters and homebuyers (!), and this group is known for prioritizing open floor plans and location. They are inclined to favor cities or neighborhoods with a better walk score than those where transportation is required. Redfin released a study that showed more than half of millennials prefer walkable communities. If you’ve got walkability, you’ll see greater demand and higher selling prices.

To find out if the area you’re interested in investing in has a high walkability score, you can go to real estate websites such as Zillow or Trulia.

Safety and Crime Rates

Your tenants and buyers are looking for a home where they feel safe. Plus, as a landlord, a high crime area can cost you more long-term, because of vandalizing, stolen A/C units and more. To study these trends, you can use a website such as Trulia and search for crime by location. It’s also best practice is to go visit the location you are considering for your investment. Look for signs of crime such as boarded houses or protective cages over HVAC units, etc.

Conclusion: go out and find your investment property

When it comes to real estate investing and selecting a property, the more information you have the better your decision will be, and the easier it will be to secure good financing, whether from a private money lender or from more traditional routes. This is a guide to help you choose the ideal location for your investment, and it’s important to apply these principles to your unique, local market.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

1031 Exchange Explained: The Basics for Real Estate Investors

Three words that can make or break an investor – capital gains taxes. The taxes from selling your investment property range from 15 to 30 percent, when state and federal taxes are combined. Ouch, there goes your profit margins or money for future investments. So how can you, as an investor, avoid them? The 1031 Exchange.

The 1031 Exchange is a powerful tool, making it a favorite among savvy and successful investment professionals. Let’s dive into the basics of the 1031 Exchange.

What is a 1031 Exchange?

A 1031 exchange gets its name from the Internal Revenue Code, Section 1031, which allows you to avoid paying capital gains taxes on an investment property upon its sale – as long as the profits are reinvested in like-kind properties. Like-kind refers to the nature or character of the investment rather than the form; therefore, any investment property can be exchanged for another type of investment property. In theory, an investor could defer capital gains on investment properties until death, potentially avoiding them altogether.

What real estate investment-properties qualify for a 1031 Exchange?

There are two parts of the exchange. The first half is the property you currently hold. This property must be held for business or investment use to qualify – meaning no personal residences. Property held “primarily for sale” is also excluded, such as a fixer-upper, vacant land being developed into

a house, or vacation or second homes. That said, you can still utilize a 1031 Exchange if you rehab a property and rent it out before selling. The IRS perceives this as a long-term investment; therefore, eligible for capital gains tax deferment.

The second half of the exchange is the property you intend to acquire. This is the property that must be like-kind to the property you currently hold, meaning it must also be an investment property. According to the IRS, like-kind property is defined as:

“Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.”

Is a Qualified Intermediary needed?

You will likely need a Qualified Intermediary (QI) to serve as a third-party to accommodate the sale, and hold subsequent payout from the property you currently hold. The QI sells your property and buys the replacement asset on your behalf before transferring the deed to you. They ensure the transaction is completed successfully and within the IRS guidelines, so you’ll want to choose a reputable one. A great way of finding a QI is to ask your local escrow officer for a recommendation.

Are there deadlines for a 1031 Exchange?

To qualify for the 1031 exchange, the like-kind exchange does not have to be an immediate swap of properties, but you do have to meet two time limits or your gains will be taxed.

The clock starts once the sale of your currently held property takes place. From that point, you have 45 calendar days to identify your replacement property. The replacement property must be clearly described in writing, signed, and delivered to someone involved in the exchange. Notifying your attorney, real estate agent, accountant or someone acting as your agent does not qualify.

The second limitation is that you have 180 days from the time you close on the sale of your current property to close on your selected replacement property. Both time limits are triggered on the same day, and there are no extensions or exceptions. The only event that would change this time limit would be the due date of your tax return. If your return is due before the 180-day window, then that date would become your new time limit.

Is it worth it?

Yes. If you intend to continue to invest your money in like-kind real estate, you should never have to pay capital gains taxes again. As mentioned before, it’s possible you can defer your taxes indefinitely. If you have heirs and they inherit a property that was received through a 1031 exchange, all deferred taxes are erased because they would be receiving it at the market rate value. This makes a 1031 Exchange a powerful tool for building a portfolio using pre-tax dollars.

Broadmark Realty Capital Inc. is a hard money lender specializing in construction and development financing. We work with builders and developers who require quick closings, outside-the-box thinking, and the utmost professional service. Our ability to close quickly on loans can help give you confidence that you will qualify for the 1031 Exchange.

Please note – this blog was written as useful information and should not be treated as legal advice. It’s always best to seek guidance from the experts.