One of the more common questions asked by real estate investors is, “When will I receive my principal back?” The principal repayment is dependent on the borrower, who must repay the underlying loan before the investor will receive the principal that they originally invested. When some investors hear that a borrower has been granted a loan extension, they often think that this is a bad thing. While this may delay repayment, an extension can actually be rewarding to lenders.
Real estate has many moving parts and there can often be many variables that arise over the course of a project that may impact the time in which it is completed. Extensions not only grant the borrower more time to complete their rehab, but they provide a greater return to the investor. A borrower must pay an extension fee as part of the extension approval process. This fee is shared between the institution and the investors, providing additional return on the investors’ capital. During this extension, investors continue to receive monthly interest payments as well.
The institution’s number-one priority in these deals should be the preservation of capital, which gets returned to investors. To help ensure this, Fund That Flip has both a borrower success and an asset management team. The borrower success team communicates constantly with the borrower to understand their needs and progress to determine if an extension is the best path forward to achieve a successful exit.
On deals for which extensions are granted, some investors may ask why foreclosure was not initiated. During the extension process, Fund That Flip’s asset management team evaluates all viable options, which could include foreclosure. Foreclosures are time-consuming and costly; whereas, extensions provide time for the borrower to complete the rehab and successfully exit the loan. This gives the investor a timely and more whole principal payment on top of the extension fee and additional months’ interest.
As an investor in a deal, the initial thought of the borrower receiving an extension on their loan may seem scary. The idea of prolonging the time between lending your money and receiving this principal back can definitely be frustrating, but maintaining a long-term mentality on your investments will allow you to see the bigger picture where you are able to earn higher returns than you could have otherwise. Learn more about Fund That Flip here.