In an economic real estate downturn of any size or proportion, how does a single family residence fund model compare to a debt fund model? The results just might surprise you.

Rentrent-to-own-yardsign to Own Fund 

(Single Family Homes)

Debt Broken Piggy BankFund

(Hard Money Lender)

We own our properties. They don’t own their properties.
We have control of our properties. They don’t control their properties.
Our properties are stable, income producing assets from day one and remain that way in a downturn.

 

Their properties are not stable, income producing assets.  In fact, just the opposite. They are assets under distress, which is why they can’t get institutional financing and are having to pay hard money interest rates.
Our properties are in the core rental market. So, in a downturn, they are able to remain income producing assets. They usually don’t have any way to produce income in a downturn, and a downturn will work dramatically against them.
Our investment within our fund is equity. Their investment within their fund is equity.

There is a misconception that the investment in a debt fund is in 1st position.  That is not true.  The investor is part of the equity in the fund.  The loan that the fund creates is in the 1st position, not the investment in the debt fund.  If money is ever lost on a loan, it reflects within the investment because it is an equity position.

We are able to get institutional financing for our properties.  Typical terms: They are not able to get any institutional financing due to the property lacking cash flow and an acceptable DSCR.  Typical terms:
70% to 75% LTV 60% to 65% LTV
5.5% to 7.25% interest 11% to 15% interest
30 year amortization 6 to 12 months
2.5+ DSCR 0+ DSCR
Which of the above terms appears to be the better risk during an economic real estate downturn?

 

 
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