Frequently Asked Questions
Below are some frequently asked questions and their answers. If you have any additional questions, click here to contact us.
Investor Portal Overview
In this short video, Senior Director for Investor Success, Larry Hickernell takes new and seasoned investors through an overview of our Appfolio platform. This platform is our investor's portal to review, manage, and explore current and new investment offerings.
How does DLP mitigate risk?
How we mitigate risk when acquiring multifamily assets
The demand for apartment communities is very high. Investors are often willing to pay low-fives to low-six cap rates for Class B and C communities. Bidding frenzies can make it easy to get caught up in “the market” and overpay – even for sophisticated institutional quality investors who other investors are consistently outbidding. Our discipline ensures we never get attached to a deal. We also believe in a conservative investment approach to factors we control and even more conservative in the expectations we do not control, such as interest rates, rent growth, etc. We believe that when we buy assets that generate strong double-digit cash flow based on current market rents, we will be in the best position to weather market changes.
STRONG IN-HOUSE MANAGEMENT
DLP Property Managers provide DLP Capital with the significant advantage of having a top-notch, in-house management team whose interests align with investors and the fund. DLP Property Management has drastically beaten industry benchmarks regarding physical occupancy, effective occupancy, tenant retention, and collected revenue.
LONG-TERM, NON-RECOURSE DEBT
A key factor in real estate investments in the utilization of debt. DLP focuses on utilizing debt relatively conservatively, typically with a maximum leverage of 75% of costs at the time of purchase. As a whole, DLP’s real estate holdings have an LTV of about 55%. In addition, to utilize leverage conservatively, DLP focuses on locking in long-term debt with no recourse to investors. This allows cash flow and investor returns to have no direct effect from rising interest rates.
HOW WE MITIGATE RISK WHEN LENDING CAPITAL TO REAL ESTATE INVESTORS
LOAN TO VALUE RATIO:
When originating real estate loans, one of the most important metrics is the loan to value. Requiring significant equity in the investment allows us to account for unforeseen economic or property changes. We limit the LTV to 65% or less for most of our loans, with an average LTV of 54%.
CASH INVESTED BY BORROWER (LOAN TO COST):
Arguably, the #1 determination of the success of a loan is the cash invested by the borrower. We believe strongly in the “old school” principles of lending: 20% down by the borrower drastically decreases the risk of default. On average, DLP funds 73% loan to cost, requiring the borrower to invest 25% of the purchase price plus 25% of the renovation costs out of pocket at the purchase of the property.
One of the risks in real estate investing is a “clouded” title. Investors want to be sure the title is free of any outstanding litigation or liens. When investing in private notes, it is important to be in first position, so no other lenders have a claim to the property before you. Working with a reputable title company and a partner who can help with all the administrative work can be beneficial if you do not have experience doing this yourself.
Private note investors are secured through hazard insurance if anything happens to the property, such as a fire or flood. The insurance payout goes to the investor before the property owner can receive the funds.
ESCROW OF REHAB FUNDS:
When DLP Capital lends money to any borrowers outside of DLP Capital and its executive team, all rehab funds are held in escrow with DLP Capital and are only released after each stage of the renovation is complete.
PROFESSIONAL PROJECT/RENOVATION MANAGEMENT:
DLP Capital controls the renovation by employing professional project management and/or third-party inspectors to oversee the renovation, ensuring the work is completed to our satisfaction and that our investors are exposed to minimal risk.
A thorough financial and credit analysis is performed when DLP Capital lends capital to investors. DLP Capital focuses on lending to experienced, seasoned, and financially stable borrowers.
Are there any hidden fees in your stated return rates?
Our return rates indicate exactly what you will earn with no hidden costs.
Can Interest be compounded?
Investors can take monthly distributions or let interest compound and grow. You can switch at any time and/or do a combination (e.g., take a $1,000 distribution each month and allow the remainder of your returns to compound).
Do I need $50,000 or $100,000 of additional capital to add to my investment?
You may add any amount to your existing investment if you've met the minimum amount required with your initial investment. DLP Capital also offers a quarterly Auto-ACH option, where you can add to your investment automatically from the bank account of your choice (minimum $10,000 per quarter). Please contact one of our Investor Success Managers to learn more about this option.
How will interest rates affect DLP Capital and our returns?
A rate increase would be a positive for DLP Capital in many ways. First, higher interest rates charged by banks would make it easier to charge the typical 13-15% interest rates by Direct Lending Partners. In addition, typically rising rates are a sign of a robust real estate market which, of course, is good news for DLP Capital. Lastly, and maybe most importantly, we expect that when rates rise, many investors will be in trouble as their fixed rate periods end, and we expect an increased volume of distressed opportunities. Many investors right now are purchasing multifamily properties at 6% cap rates. You can generate an 8 to 9% return when you have a 4% interest rate, but when rates go up to, say, 6%, suddenly, these investments no longer make sense, and we expect banks to end up taking back a good volume of assets that we will, in turn, pick up at significant discounts. We focus on buying at the north of 9 cap rate at stabilization which puts us in a strong cash flow position. Also, most of our debt has fixed terms of four to six years remaining or more.
If 2008 happens again, how will that affect DLP Capital and will our principle be at risk?
Two key factors that led to the 2008 real estate collapse were loose lending practices that failed to verify Borrowers' income and high LTV terms, which allowed Borrowers to purchase real estate without contributing much equity to the acquisition. DLP Capital follows a strict underwriting process that evaluates the cash flow and repayment capacity of all Borrowers and restricts lending amounts to 65% of the ARV of the real estate. The low LTV nature of DLP Capital loans allows an additional level of security if the real estate market is too slow/declining. In addition, DLP Capital Partners focuses on owning cash flow-positive assets. If there was a market collapse, and property values saw a steep decline, DLP would not be "under the gun" to sell its assets at lower prices, as the assets would produce strong cash flow, which would be mostly unaffected by the decrease in property values that a "2008" collapse would bring. Also, a collapse like 2008 would create tremendous investment opportunities for DLP to capitalize on.
Why do flippers borrow from you if rates at banks are lower?
Securing funding through banks is often a challenge for flippers since banks typically only fund 75% of the purchase price of a property, while the borrower needs money to cover the purchase AND rehab. DLP uses a common sense approach in addition to the same underwriting standards banks follow in granting loans based on the speculative value of the property after repairs. Also, the typical loan duration for DLP Lending is only six months, so higher interest rates aren’t a significant factor for borrowers.
Why does DLP invest in short term real estate loans?
We focus on making loans backed by real estate, primarily residential real estate. Our loans are short-term (six to 24 months) and are made to real estate investors. We believe this strategy allows us to mitigate market, economic, and borrower risk in many ways. First, we are experts in housing. Having sold thousands of homes and having an in-house real estate brokerage ensures a comprehensive understanding of the home market, supply and demand, and cycles. Second, our short-term loans prevent us from being tied to long-term loans when the market is shifting, and values are declining. Because of the size of our portfolio, one loan can have a limited effect on our overall yield. Additionally, most of our underlying assets (homes and apartment communities) can provide solid returns as rentals in the event of default or foreclosure. This rental option assists DLP as the lender in mitigating risk, in addition to providing an exit option to the borrower when selling the asset isn’t an ideal option.
A TYPICAL LOAN…
A borrower finds an excellent opportunity to purchase a single-family home for $145,000, which requires renovation. Based on comparable sales in the area, the borrower estimates that the property would be worth $240,000 if it were completely updated. The borrower’s contractor estimates the rehab cost to be approximately $35,000. The borrower must settle on the property in 30 days. The borrower obtains a loan from DLP for $156,000 (65% of the after-repair value (ARV)) based on an appraisal and/or broker price opinion to purchase and rehab the property. At settlement, the borrower buys the property for $145,000. $121,000 is provided by this private loan, and $35,000 is held in escrow by the Direct Lending Partner for the rehab. As the rehab progresses, the work is inspected, and funds are released based on a pre-arranged draw schedule with the contractor. If the borrower plans to sell the property, s/he pays off the loan upon the sale. If the borrower intends to retain the property as a rental unit, the borrower refinances the property and obtains a long-term conventional mortgage. Banks are much more likely to refinance an existing mortgage on a rehabbed property when the tenant is paying the mortgage.
|Expenses – e.g. closing cost and commissions:
|After repair value:
|Direct Lending Partner loan (65% of ARV):
|Amount of loan released at closing:
|Amount of loan retained for renovations:
|Amount capital buyer invests at closing:
Can I invest with my IRA?
The Individual Retirement Account (IRA) is one of the most powerful long-term investment vehicles available to investors because of the tax-deferred or tax-free nature of either a traditional IRA or a Roth IRA. Either type of IRA can be invested in our Funds, allowing your high-yield returns to add up even faster. While the concept of investing IRA funds in real estate-related investments has been around for more than 30 years, it has not received a great deal of attention. Most custodians that offer IRAs (banks and brokerage firms) focus on mutual funds and CDs because they have a vested financial interest in having you select those investments. Because most IRA investors focus on stocks and CDs, there is a misperception that these are your only investment options for retirement plans, but this is not the case. A self-directed IRA is unique because of the investment options available. Most IRAs only allow approved stocks, bonds, mutual funds, and CDs. A truly self-directed IRA allows those types of investments along with real estate, notes, private placements, tax lien certificates, and much more. The process is easy; we handle the paperwork to get your account set up with a qualified asset custodian company and make your investment into one of our funds. The custodian company handles all the legal requirements to ensure your IRA complies with IRS regulations. The Internal Revenue Code sets high standards for qualified IRA account custodians, including banks, trust companies, and approved brokerage firms. By law, their governing bodies are mandated to conduct regular audits of trust companies performed by state auditors.