Los Angeles Rehab Projects: Insights from a Local Lender - Secured Capital Lending

Speaker: Sam Chivitchian, CEO, Secured Capital Lending

Sam Chivitchian: The biggest trend that I would say that we're experiencing with rehab projects in our areas is the ADU (accessory dwelling units) projects. The ADU projects obviously are highly attractive to rental portfolio investors also to fix and flip investors, but they're a cash flow machine. And now in, in counties like LA county, you can actually not only have an ADU but they call it, you can actually even have a Junior ADU which is a third unit on a any residential single family lot, where it allows you to have take a house, single family, build an ADU in the back and then convert a portion of the house up to 500 square feet into a third unit which is called the Junior ADU. This way you can rent out to three different tenants, maximize your cash flow. And so this is highly attractive, obviously with the demand in housing the city. And the state is pushing for more of these ADU projects. So rehabbers developers are seizing this opportunity and we as a fix and flip, rehab lenders love financing these projects can underwrite them really quickly and get comfortable with them. So yeah, that's really another big trend that we're starting to see is the affordable housing programs on the multifamily side. We're seeing the state pushing a lot of these low income affordable housing projects for developers and with the price points being so high and the interest rate hikes in the last 12 months, developers are leaning more towards doing these affordable housing since the state has made it much easier to get approved with planning and building quicker turnarounds, less restrictions, less height limits, less density bonus. So this allows for multifamily developers to be able to do more volume of units and ultimately generate more income, more cash flow. So ad us and low income affordable housing on the multifamily are the two most attractive and popular rehab projects that we're experiencing nowadays.

Sam Chivitchian: clients have been facing lately. Some of the main challenges that I see with real estate investors nowadays is a lot of it has to do with inventory. Again, There's very low inventory in the marketplace. Because of all the rate hikes in the last year, there's not too many sellers, regular traditional sellers unless it's like a unique sell, probate or trust sell. You don't see too many traditional sellers, someone you know, downsizing or upsizing because it just doesn't pencil out for someone to leave a 2, 3% interest rate and go to a 7, 8% right now. So again, that's one of the main challenges is lack of inventory. Also, inflation has played a big role. You know, the price points are still high. There's not too much profit margin on a lot of the deals. You know, there's still deals out there, don't get me wrong, but it's just harder to find and you've gotta, you know, really start adding value going vertical. Either buying land development, ADU not, it's not like the, the prior years where you get a lot of these quick fix and flip, cosmetic type of rehabs where you can generate a good rate of return those days I think are over. It's more about getting creative, adding another unit, ADU or, or adding square footage or redeveloping something. but it's about getting good price points, buying the acquisition at the right cost to be able to, to make create some margins. Those are the really challenges that I see real estate investors are dealing with today.

Sam Chivitchian: Fix and flip or we have to rent? I would say our business, our network, we kind of have that split down the middle 50:50. Obviously, the fix and flip is always been popular, has always been our bread and butter. And so we're still seeing a lot of fix and flip, not as much as we've kind of gotten used to the last 5 to 8 years, obviously because of the lack of inventory. but we're not seeing as many fix and flip, but there's still deals out there. Is just about, it really comes down to now more you know, being able to for the rehab or, or flipper to be able to give a good quality product. Okay? Because with the interest rates being high, buyers are a little bit more calculated, more careful and more picky about what they're gonna get. So if you're a rehabber, you wanna make sure you're, making a good product. And so this way, the demand will be there if not, you might have to sit on the market for long or have to drop your price and get crushed on your margins. But yeah, I mean, at the same time, the rehab to rent is always there for us. obviously, nowadays is not like before. because of again, the rate hikes with the banks, properties just buying a single family and renting it out on its own with today's price point is really not penciling out or debt servicing the way it used to. So what, what a lot of our rehabbers are doing is they're getting more creative, they're building ADU's, they're adding a junior ADU or they're converting a single family into a deep duplex or into a triplex. So or doing affordable housing projects where, you know, instead of if the zoning allowance is by right to build four units, you can go and do one of those state low income affordable housing programs and be able to build 10 units on the same lot with less restrictions. So there's still a lot of opportunity there to generate cash flow and good income properties. You just have to be a little bit more creative and get out out of the box a little bit to, figure out which, deals pencil out the best

Sam Chivitchian: Obviously, the cosmetic and the light rehab are the lower risk or easier for us to underwrite and get comfortable quick with much quicker. So we love those. We've always loved those. But at the same time, we don't shy away from heavy rehab deals or ground up construction loans because that's where more of the value add and the profit margins are much greater on those projects. But we have to be more picky on our borrowers. Their experience and track record becomes more critical. The heavier the rehab gets. So again, we love to enter, we do both entertain light rehab, heavy and new construction. But we get a little bit more picky and careful on our borrowers when we enter the heavy rehab stage.

Sam Chivitchian: So our rehab loan program, the best way I can kind of summarize or sum it up for you is we typically will finance anywhere from 75% to 90% of the purchase price. We call it loan to price depending on the borrower's experience level track record. So we do entertain both brand new investors who we will typically want to maximum lend 75% upfront on the purchase versus someone who has a low level of experience or limited experience, maybe we'll go to 80 then someone who's very experienced will go to 85 or someone who's a full time institutional rehabber we can get to 90% of the purchase price. We always, most of the times will finance 100% of the rehab cost no matter what ratio we're going on the purchase, we always cover 100% of the rehab cost. As long as our after repair value, our loan amount, the total loan does not exceed 70% of our after repair value. So we want to keep the loan under 70% of the ARV. Obviously, we want our borrowers to have a decent credit, I would say kind of our, our bottom is 660 we like to 680 plus on that. But again, it, most of the under underwriting and diligence is revolved around the, the project and the property itself. As long as there's no major derogatory with the borrower's credit, we can make some exceptions there. And, you know, we wanna see obviously some sort of liquidity, enough liquidity to cover, you know, five or 10% of the budget depending on the loan size for contingency. So that we know that the borrower is financially capable of in maintaining the loan and the rehab project and, and as far as covering their reserves for their interest payments, that's really kind of what we're looking at and, and we can entertain our fix and flip bridge rehab product nationwide today. So we're actively working with real estate investors and brokers to try to push this product and try to provide financing for as many projects that comes our way.