Chapter 25 – CAPITAL STACKS

1. Equity – high in the stack, payout in the last. High rewards, whatever left belongs to equity owner
2. Debt – low in the stack, payout first. Lower rewards, interest payment
3. type of equity: preferred equity, common equity
4. type of debt: senior debt, mezzanine debt – bridge loan, lower priority, high interest, lender has right to convert to equity if late pay

Chapter 26 – FUNDING DEALS WITH EQUITY

1. equity investor can negotiate terms, like more cash flow during holding period and less equity share in the end. It doesn’t have to be equal share on everything.
2. preferred equity: equity investor gets paid earlier than common equity owner
3. common variable:
   1. The number of partners – no limit
   2. Investment minimums – the originating partner can put a minimum to limit # of partners
   3. Equity type – different classes with different payout/equity, etc
   4. Compensation for equity: give equity to contractor, instead of paying them
   5. Buy/sell/reassign
4. PROS OF EQUITY FINANCING
   1. Flexibility – any format/term that partners can agree on
   2. Get started sooner/access to bigger deals
   3. Shared risk
   4. Partner is invested in the deal and may be able to help
   5. Don’t need to divert funds to make loan payments
5. CONS OF EQUITY FINANCING
   1. Giving away more of your profits
   2. More oversight – less freedom, more comm,
   3. Investors will expect more communication – overhead
   4. Breakups can be messy
   5. May be extra legal work and risk
   6. Voting rights – you lose some control

Chapter 27 – TYPES OF EQUITY FINANCING

1. ACTIVE PARTNERS: bring capital, effort, and expertis, usually require a greater potential for returns
2. PASSIVE PARTNERS: usually have limited, or no voting rights
3. SYNDICATED INVESTMENTS: a subset of passive partner. When the pool of passive partners is large and the passive partners are putting in most or all of the capital
4. TRADE PARTNERS: who contribute labor to a real estate deal, , in exchange for equity
5. CREDIT PARTNERS: partners who help the project get more debt, like with better credit capacity, better past loan experience
6. Downpayment Partners:

Chapter 28 – INTRODUCTION TO DEBT FINANCING

1. Pros:
   1. You retain full ownership of the asset
   2. The terms of the agreement are well defined
   3. The financing cost is defined up front
2. Cos:
   1. You absorb all the risk
   2. It takes money from your reserves every month
   3. It reduces your ability to get additional debt financing
   4. Most debt providers will have a cap on the percentage of the deal they’ll finance

Chapter 29 – FORMS OF DEBT FINANCING

1. TYPES
   1. Term Loans – fixed rate or adjustable rate
      1. Conventional Loans – often bought and sold on the secondary market,
      2. FHA Loans
      3. Portfolio Loan – issuing banks keep the loan
      4. Hard-Money Loans – short period of time, higher rate, speed-to-close and flexibility, bridge for flipping and quick refi
      5. Private Loans – from friend, family, colleague, structured in any way
      6. Crowdfunding – many investors with small amount from each
      7. Seller Financing
      8. Lines of Credit
         1. Home Equity Line of Credit – backed up a home or an investment property
         2. Business Line of Credit – backed up existing business’ track of record on revenue
         3. Personal Line of Credit
      9. Revolving Debt – credit cards

Chapter 30 – THE ANATOMY OF A LOAN

1. AMORTIZATION – like 30 yr, 15 yr, etc
2. FULL VERSUS PARTIAL AMORTIZATION (BALLOON) – full: 30yr fixed, partial: most commercial loan, 30 yr amortization, 10 yr term, after 10 yr, pay off full balance (usually refi)
3. INTEREST-ONLY LOANS – lower loan payment, better cash flow

Chapter 31 – KEY DEBT METRICS: LTV, LTC, AND DSCR

1. loan-to-value ratio (LTV)
2. loan-to-cost ratio (LTC) – like loan to a major renovation, a new construction. it is hard to evaluate the would-be value. Evaluating project cost is easier.
3. Debt service coverage ratio (DSCR) = Net operating income ÷ Total debt service, typical >1.2-13. common in commercial loan.

Chapter 32 – LOAN CONSTANT

1. LC = Annual debt service ÷ Loan amount
2. Breakeven loan value = NOI ÷ Loan constant
3. Use case 1: can be used to derive max loan amount that yields a positive cashflow :
   1. use cap rate to derive NOI: NOI = cap rate * purchase price
   2. use purchase price, LTV 100% to derive annual debt service, then calc loan constant
   3. use formula in #2 to find the breakeven loan value
   4. It appears this is an approximation.
4. Use case 2: derive cap rate
   1. surveying lenders to determine the loan constant
   2. surveying investors to determine the returns (CoC)
   3. Estimated cap rate = LTV * LC + Downpay % * CoC

Chapter 33 – LEVERAGE (AS A CONCEPT)

1. Benefits
   1. Leverage allows you to use less of your own money for the purchase of your investments
   2. Leverage can boost your returns on an investment
2.  Drawbacks:
   1. Leverage adds cost to your investment each month – a drain on your cash reserves during vacancy, it eats your cash flow every month
   2. Leverage can destroy liquidity – in downturn market, it is hard to get the cash you needed. You might have way until it is above the water
   3. Leverage can cause bankruptcy – balloon payment
   4. Leverage can reduce your returns on an investment – reduce your ROI

Chapter 34 – POSITIVE AND NEGATIVE LEVERAGE

1. Leverage = Cap rate – Loan constant
2. If you have a positive leverage loan, it will be positive leverage for any loan LTV, up to 100%