case stady ilustrator 01

$19,000,000: $10,200,000 “Non-Recourse”

Credit Facility and $8,800,000 in JV Equity Financing
for 9,550 SF Creative Office Conversion with Ground

Floor Retail in Miami, Florida.

Yield Maintenance (YM)

What is yield maintenance?

Yield maintenance is used by lenders as a prepayment penalty. This guarantees the lender all of the scheduled interest payments. Lenders issue yield maintenance to safeguard the loan’s expected return on investment. This is seen as a safeguard as the yield maintenance places the responsibility of lost income from interest on the borrower.

How to calculate yield maintenance?

Calculation variables: (1) interest rate (2) treasury yield (3) remaining balance (4) total payments left (5) number of annual payment (6) present value of the remaining balance.

Example

A real estate investor in San Francisco is looking to pay off his loan’s remaining balance with 3 years remaining. The investor was issued a 10-year at a 7% interest rate with a remaining balance of $1M. The investor goes to the U.S. Department of the Treasury website and sees that the 3-year treasury yield is at 1.5%.

PV of Balance = 1 – (1 + treasury yield) ^ (-total payments left / annual payments) * remaining balance

PV of Balance = 1 – (1 + .015) ^ (-36 / 12) * $1M

PV of Balance = $2,912,200

Yield Maintenance = Present Value of Remaining Balance * (Interest Rate – Treasury Yield)

Yield Maintenance = $2,912,200 * (7% – 1.5%)

Yield Maintenance = $2,912,200 * 5.5%

Yield Maintenance = $160,171

What does a $160,171 yield maintenance mean?

The investor will face a prepayment fee of $160,171 in order to pay off the loan within the YM period.

Why does a 5.5% yield maintenance make sense for the lender?

The investor will only pay a 5.5% interest rate for his remaining balance as the lender will be able to invest the funds into a 3-year treasury to make up for the other 1.5% in interest.

How can investors avoid the yield maintenance fee?

As long as the investor pays off his loan after the agreed upon yield maintenance period, the investor will not be charged any prepayment fees.

Example

A real estate investor from Dubai is looking to pay off a loan’s remaining balance in year 7. The investor was issued a 10-year, $2M loan at a 6% interest rate with an 8-year yield maintenance period. If the investor pays off the loan in year 7, the loan is still within the 8-year yield maintenance period. To avoid the yield maintenance fee the investor should wait an additional year as the loan will then be out of the 8-year yield maintenance period.

Single-Family Rentals (SFR)

What is a single-family rental?

Single family rentals are often referred to as an SFR property. Single-family rentals are disconnected one-unit properties. The 2008 Global Financial Crisis led to a surplus of opportunities for SFR investors as home prices plunged. The SFR industry has been incredibly profitable and demand continues to grow. The SFR industry is large and robust.

Why are single family rentals so profitable?

Single family rental portfolios are notably profitable with robust profit margins per unit. Why? Tenants pay for utilities and high demand in the space leads to property appreciation. The advantage of investors in the single-family rental space is that it’s more customary to pass utility expenses onto the tenant. This allows the landlord to increase his profit margins per unit and his portfolios return on investment. Investors have become more aware of the SFR space which has pushed home prices and homes sales to historic highs.

Single-family rentals are affordable and accessible

The single-family rental property type is the most affordable real estate investment vehicle and significantly more accessible to the average investor compared to multifamily investment properties. Why? The average investor can easily find loans and funding for single-family rental acquisitions. Investors can find a surplus of opportunities for as low as $50,000 in numerous markets in the United States and start cash flowing as soon as the following month.

What are the benefits of being an investor in the SFR space?

The SFR space is growing at a high pace and demand continues to increase continuously. Investors benefit from low barriers to entry: low down payments, access to numerous financing opportunities and affordable investment opportunities. Investors currently in the space benefit from a monthly cash flow, robust profit margins, low tenant turnover, low risk, property appreciation, opportunities for diversification in different markets and the feasibility of selling and managing.

Net Rental Yield (NRY)

What is the net rental yield?

The net rental yield is a metric in the form of a percentage that shows how much cash your rental property generates annually after deducting expenses. The NRY is a percentage indicator of the property’s profitability relative to the property’s value.

How is it useful?

The yield answers vital questions for lenders such as: (1) Is this property profitable? (2) How much will this property cash flow? (3) Should I acquire the investment property? (4) Should I sell the investment property? (5) How much money should be set aside for expenses? (6) Is this a smart investment? (7) Does the owner need to raise the rent?

How do investors calculate the net rental yield?

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Annual profit
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Formula Notes

The property value could be one of two numbers: (1) the purchase price (2) the market value of the property. Both options have different purposes. The purchase price is used when measuring the present-day performance of the property. The market value is used when measuring the future performance of the property.

Expenses to take into consideration: vacancy, marketing, repairs, maintenance, property management, insurance, taxes, and utilities.

Purchase Price Example

Net Rental Yield = 16%

Net Rental Yield = $200,000 / $1,250,000

Annual Profit = $200,000

Annual Rental Income = $250,000

Annual Expenses = $50,000

Market Value Example

Net Rental Yield = 11.4%

Net Rental Yield = $200,000 / $1,750,000

Purchase Price = $1,250,000

Market Value = $1,750,000

What does a 16% and 11.4% net rental yield mean?

Based on the purchase price: the investment properties annual profit is 16% of the purchase price. At this net rental yield the investor will recuperate his investment in 6.25 years. Based on the properties market value: the investment properties annual profit is 11.4% of the properties market value. At this net rental yield the investor will recuperate his investment in 8.77 years. The investor will have to raise the properties rent in order to keep up with the property’s appreciation in the market. Investors will also note that the 8.77% doesn’t meet the optimal rental yield of 1% per month.

What is the optimal net rental yield?

Investors aim to cash flow at least 1% of the properties purchase prices in rent per month. If the market that the property is in doesn’t permit for that minimum return on investment, investors typically seek a new investment market.

Loan-to-Value Ratio (LTV)

What is the LTV?

The Loan-to-Value (LTV) ratio is a metric that helps lenders understand the amount of risk they will be taking on when lending to a borrower.

How is it useful?

The ratio answers vital questions for lenders such as: (1) What is the minimum down payment? (2) What is the interest rate? (3) How much risk does this deal hold? (4) What is the loan amount? (5) How much skin will the borrower have in the deal? (6) How much skin will the lender have in the deal?

How do lenders calculate the LTV?

Loan-to-Value Ratio (LTV)

Disadvantage

Formula doesn’t take into account other liabilities, obligations and loans owed by the borrower.

Example

LTV = 62.50%

LTV = $250,000 / $400,000

 

Appraised Values = $400,000

Property 1 = $95,000

Property 2 = $105,000

Property 3 = $80,000

Property 4 = $120,000

Amount Borrowed = $250,000

What does a 62.50% LTV mean?

The lender will lend 62.50% of the funds needed to acquire or refinance the properties. The borrower will need to put up the remaining 37.50% of the capital.

What is the optimal LTV ratio?

Lenders strive for an LTV ratio between 60% to 75% which means borrowers will need to invest between 25% to 40% of the capital required.

Low DSCR vs High LTV

Loans are identified as low risk when they have a low LTV ratio as the lender will have less equity in the project. The greatest benefit of a low LTV ratio is that the borrower will have access to the lowest interest rates available. Low LTV ratios decrease the interest rate, decrease the deal’s risk, increases the borrowers down payment and decreases the loan amount.

Loans are identified as high risk when they have a high LTV ratio as the borrower will have less equity in the project. These loans will require a higher interest rate as the lender is acquiring more risk. Furthermore, lenders may require mortgage insurance for the loan as a safety net. High LTV ratios increases the interest rate, increases the deal’s risk, decreases the borrowers down payment and increases the loan amount.

Gross Rental Yield (GRY)

What is the gross rental yield?

The gross rental yield is a metric in the form of a percentage that shows how much cash your rental property generates annually without taking into consideration annual expenses.

How is it useful?

The yield answers vital questions for lenders such as: (1) Is this property profitable? (2) How much will this property cash flow? (3) Should I acquire the investment property? (4) Should I sell the investment property?

How do investors calculate the gross rental yield?

Screenshot 2021-02-12 at 14.49.00

Formula Notes

The property value could be one of two numbers: (1) the purchase price (2) the market value of the property. Both options have different purposes. The purchase price is used when measuring the present-day performance of the property. The market value is used when measuring the future performance of the property.

Purchase Price Example

Gross Rental Yield = 14%

Gross Rental Yield = $175,000 / $1,250,000

Annual Rental Income = $175,000

Units 1- 4 = $50,000

Units 5 – 8 = $55,000

Units 9 – 10 = $20,000

Units 11-14 = $50,000

Market Value Example

Gross Rental Yield = 10%

Gross Rental Yield = $175,000 / $1,750,000

Purchase Price = $1,250,000

Market Value = $1,750,000

What does a 14% and 10% gross rental yield mean?

The investment properties annual cash flow is 14% of the purchase price. At this gross rental yield the investor will recuperate his investment in 7.14 years. The investment properties annual cash flow is 10% of the properties market value. At this gross rental yield the investor will recuperate his investment in 10 years. The investor will have to raise the properties rent in order to keep up with the property’s appreciation in the market.

What is the optimal gross rental yield?

Investors aim to cash flow at least 1% of the properties purchase prices in rent per month. If the market that the property is in doesn’t permit for that minimum return on investment, investors typically seek a new investment market.

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