As a private money investor it is crucial to be able to evaluate whether your real estate investor has brought you a viable, profitable opportunity. Of course private equity investments all have particular exit strategies designed to make money. Being able to properly identify the specific plan that works for the property being invested in is vital to your success as a private banker. Let's go over some fundamental rules of thumb.
Real estate investors buy properties at a discount and borrow funds below the market value of the property securing the loan. Equity and your maximum loan to value (LTV) is your buffer and your primary detail to calculate for every transaction. Here's how you do that:
First, determine the after repair value (ARV) of the property being considered. The ARV is what the property would sell for in 30 days, fixed up, to a nice family with pets.
The next thing we consider are the repair costs. What needs to be done to get the house in salable shape. Obviously each property will have need different levels of repairs. An experienced real estate investor will have his construction team estimate the work to be done and provide the private money lender with those numbers.
The third number we must know is the purchase price of the investment. Once we know all three numbers we will be able to properly evaluate the total loan to value. An acceptable LTV should not exceed 80%. In terms we can see numerically: If a property has an ARV of $200,000, the repairs are $15,000 and the purchase price is $125,000, your loan to value is calculated by adding the repairs to the purchase price ($125,000 + $15,000 = $140,000) and dividing by the ARV ($140,000/$200,000) your result is a loan to value of 70% making this a more secure, profitable deal.
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