The capitalization rate, or cap rate, is used to compare an income property with other properties that are similar to the subject.  It can also be used to value a property based on the income it generates.

The cap rate explained simply is the projected return for one year if the property was purchased with no financing, all cash transaction.  The cap rate is calculated by taking the property’s net operating income, or NOI, and dividing it by the fair market value of the property, the FMV.  A higher cap rate is more advantageous to a buyer.  You can view my post on commercial lending to learn how to calculate the net operating income, or NOI.

Calculating the cap rate on a property gives you an additional measure of value in addition to appraisals.  An appraisal of a property is going to give you a value based on comparable sales.  Typically, this is what you could sell the property for on the open market, and the comparables are like type buildings based on physical characteristics.  The cap rate, however, allows you to evaluate a property based on the income of the subject property, and may indicate a value different than a sales comparison appraisal would.

When calculating your cap rate, it is very important to have accurate and true numbers.  A small difference in cap rate can indicate a larger difference in value of a property than it may seem.  Let’s look at a couple examples to see how this actually works.

For this example, we are going to assume a subject property with a net operating income, or NOI, of $100,000.  If the market value of your property is $1,250,000, your cap rate would be 8%.  The numbers work like this:

Capitalization rate = NOI/FMV

Capitalization rate = $100,000/$1,250,000

Capitalization rate = 8%

Another example can help you estimate the value of a property using a cap rate formula.  Using the same example as above, let’s say you are looking at purchasing a property with a net operating income, or NOI, of $100,000.  By researching the area, you conclude the average cap rate is 7%.  By working backwards, we can come to a value estimate on the property as follows:

FMV = NOI/Cap Rate

FMV = 100,000/7%

FMV = $1,428,571

From these two examples, we can see what a large difference in value a seemingly small difference in cap rate can make.  A 1% difference in cap rate indicates an almost $200,000 spread in market value for the above mentioned property.  Again, this example stresses the importance of having accurate information when making your calculations, as a small discrepancy can make a big difference.

Hard money is a collateral based lending platform.  Although credit, ability to repay, financials and the borrower’s overall package do play a part in the lending decision, the largest consideration is given to the loan to value of the property.  Loan to value is a ratio, and for hard money it usually needs to be a maximum of 65-70%.  If you have a property worth $1 million, you should not expect to be able to encumber that property with more than $650-700k total debt.

Hard money lending offers the flexibility needed in today’s market.  Creative structuring of transactions is common.  With hard money, you are able to encumber multiple properties, provide alternative forms of income and overcome even major credit issues. 

One big advantage of using a hard money lender is the personal relationship involved.  You are not dealing with a large institution, trying to fit into a pre-determined qualification box.  You have the opportunity to be underwritten on a personal level.  Because there is no minimum credit score required, hard money lenders will look at all credit situations, giving you the opportunity to explain past issues.  A good hard money loan is one where the investor and borrower are both on board with a solid game plan that leads to the take out of the hard money loan, usually through a refinance or sale.

Working with a hard money specialist is ideal when trying to obtain a private money loan.  Not only is it important to have the correct structure and complete package, but it is just as important to be sure the professional you choose has the resources to fund your transaction.  With the recent shakeup in the mortgage industry, many brokers who used to do only conventional financing have started to look into hard money.  While you can learn how to structure deals, it takes time to build the relationships needed to fund hard money loans.

I am a hard money specialist, with access to direct money in house and a large database of private and hard money investors.  Feel free to contact me today for more information on hard money programs, or to discuss your loan scenario.

This home ownership accelerator program was brought to the U.S. in the early 2000’s from Australia.  Modeled after what is called an all in one loan, or an offset loan, it works to use your assets and income to reduce the amount of interest you pay on your mortgage.  By reducing the amount of interest you pay, this home ownership accelerator loan can allow a borrower to pay their home off earlier than a conventional 30 year fixed mortgage would allow.

The foundation of the program lies in it’s structure.  The loan is basically a line of credit, secured by your home, that becomes your financial base.  You use this line of credit as your checking account, paying bills and expenses and depositing your paycheck into it.  It has the same conveniences as a typical checking account.  You get a check book to write checks from it, an ATM card to use and online banking services.

By depositing your paycheck directly into the account, you are reducing the principal balance of the loan.  Your interest is figured on a daily basis, so every day the money is in that account, you are saving on interest due.  Even if you write a check on day 15, you still get half a month with a reduced principal balance in your interest calculation.

This loan is not a loan for everyone.  If you live paycheck to paycheck at a W-2 job, this is probably not the right loan for you.  Likewise if you have a low credit score.  This loan works best for people with a positive cash-flow expectation.

A good candidate would be a self employed borrower, or someone with a commission based job, or even a salaried type job, who expects to save at least 10% of their average monthly income per month.  The larger the deposits, the more money that runs through this account, the better.  For a better illustration, let’s look at some numbers.   If you deposit say $15,000 on the first of the month, and wrote checks totaling $10,000 on the 12th, you would have reduced your daily principal balance by $15,000 for the first week and a half of the month.  Make those numbers larger, and you can see how this could cut down on interest due in a big way, even if you spend what you put in.

The downside to this loan comes when you are not making more than you are spending.  You use the loan as your checking account, and it is set up as a line of credit.  That gives the potential for borrowers to end up paying for their groceries over a 30 year period.  If you are spending more than what you are saving, well that’s never a good thing to be doing in any financial situation.  This one is no different.

For a well qualified borrower, this loan is a pretty good option to look into.  It is a unique product, and you do need to be well qualified.  A mid fico score of 680+ is needed, and you will need to have some equity in your home.  These loans cap out in the 75-80% loan to value range. 

If you would like more information, or would like to look into obtaining one of these accelerator loans, please feel free to contact me today.

This is the latest casualty in the subprime and overall lending meltdown, and could be a precursor of more to come.  Not long ago, Bank of America stopped taking wholesale business from brokers as well, and there seems to be no real end in sight to the troubles in the mortgage lending world.

Looking to the future, there are still many wholesale lenders conducting business, and loan programs to fit the needs for various homeowners and potential buyers.  This new development, however, highlights the depth of the lending industries troubles.

The expanded FHA guidelines do give some hope to a liquid mortgage market.  With more expansion of FHA programs in the works, many in the industry anticipate FHA loans growing to a much larger percentage of overall loans funded in the coming months and years.

While conforming loans are now requiring 5-10% down in many markets, FHA programs are available allowing up to 97% financing options, including down payment assistance programs and gift programs that sellers can participate in.  If you are in the market for a home loan for a purchase or a refinance, you should definitely inquire about FHA programs and what they can offer to meet your needs.

With all of the troubles in the conventional lending world, we are seeing a lot more borrowers turning to hard money lenders for loans that are no longer available through institutions.  While the loan to value ratios typically need to be lower, the credit and income documentation is not as stringent, and many times this avenue can offer a solution.

For more information on FHA, conventional or hard money loans, please feel free to contact me directly.  Check back in often, I will be talking more about FHA programs and hard money options in the coming weeks.

In addition to the rate reduction, Fannie Mae and Freddie Mac won government approval to reduce their required capital reserve by 10%.  Fannie Mae and Freddie Mac are subject to larger reserve requirements than other purchasers of mortgages.  They had been required to keep an additional 30% of the required amount in reserve, but that has now been reduced to an additional 20%.  This may not sound like much of a big deal, but it is just as important, possibly more so when talking home loans, than the rate cut.

By reducing the capital Fannie Mae and Freddie Mac (the two largest purchasers of mortgages) must keep in reserve, it effectively is pumping $200 billion into the mortgage world.  By not being forced to hold this money in reserve, Fannie Mae and Freddie Mac are free to use these funds to purchase more loans.  This reduction should add some liquidity to the mortgage market, which is very important when talking about making loans available at the best rates possible.  If the market that purchases loans on the secondary market is not very liquid, less loans can be written, and they will have to be written at higher rates in order to ensure buyers. 

Speaking of rates, 30 year fixed mortgage rates are again on a downward trend, again, available in the mid 5% range at wholesale rates.  Mortgage rates had been much lower early in the year, but have been creeping up over the past month or so, due in large part to an illiquid secondary market.  With the additional action taken this week, rates have been falling again.  I expect this to continue, with rates hovering near historic lows for the foreseeable future.  Additional help could come with more action on the governments part.  We are not out of the woods by any stretch of the imagination, and additional action could continue to add liquidity and help restore confidence in the secondary market.  With all of the uncertainty in the market and large institutions failing, Additional action seems certain.

Now is an excellent time to look into financing options, whether for a purchase or a refinance.  Feel free to take advantage of my online loan calculators, whether comparing the cost of renting versus buying or to see if today’s rates could save you money.   There are still many loan options available, and terms are again near historic levels.  For California home loans, or financing questions of any kind, please contact me.

Also, many closing costs can be financed with an FHA loan.  With most conventional loans, the borrower must pay these closing costs.  If they allow the seller to pay the costs, they usually cap this concession at a maximum of 3% of the loan amount.  FHA programs allow the borrower to finance many of these charges, and also allow the seller to pay a larger portion.

Some fees are limited under FHA rules.  FHA has limits on some of the fees that can be charged in association with your loan.  These fees are capped at a level that is reasonable and customary, as determined by the local FHA office.

Finally, the limits that are in place for maximum loan amounts under FHA loans are fixed.  These have been raised, however, through the end of 2008, making it a great time to ask about an FHA loan.  To see the new limits by county for California, take a look at my conforming loan limit post, which breaks down these limits county by county.

If you would like to contact me regarding your California home loan options, please feel free to do so.  I am always happy to discuss the options available to you.  Additionally, with the increased limits, now is an excellent time to revisit your existing loan, or look at purchasing a new home.  Remember, these limits are currently only in place through the end of 2008, after which they are anticipated to go back to the old limit of $417,000.