Who are the borrowers that DML capital lends to?
DML Capital’s borrowers are people who are purchasing investment properties for their portfolio and don’t have access to traditional bank financing. However, our borrowers have substantial equity (35+%) that they bring to each transaction making them good candidates for a private money loan. Additionally, we do not lend to owner-occupied primary residences given a large amount of reporting and regulations for that lending scenario.
Why do borrowers go to DML Capital?
When borrowers cannot receive access to traditional bank financing, they come to DML Capital because we can meet their needs. A couple of the primary reasons for this are:
SPEED: DML Capital can fund a loan in less than 2 weeks where traditional bank financing typically takes between 30-45 days. This becomes important when a borrower wants to purchase a property at auction and needs to compete with cash offers. Additionally, if traditional financing falls out while in escrow and the borrower doesn’t want to lose the property they will come to DML Capital.
TIMING: One of the properties that our borrowers are commonly engaged in is Fix & Flip or Rehabs so as multi-unit residences. In these cases, the initial rent rolls or property incomes are not substantial or consistent enough to justify traditional bank financing for the full value of the necessary renovations. Borrowers will come to DML Capital for financing in order to make the necessary improvements, increase their rent rolls, and then qualify for traditional bank financing.
LEVERAGE: Borrowers oftentimes want to increase the number of properties in their portfolios; however, as the number of properties in their portfolios increases it becomes more challenging to receive traditional bank financing. DML Capital will use the equity in the existing portfolio as collateral to finance incremental purchases.
FLEXIBILITY: In the current restricted credit environment loan transactions must conform to strict government guidelines of the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac for traditional banks to extend a loan. A multitude of borrowers don’t conform to these guidelines because they may have insufficient income documentation, credit score, or simply an atypical scenario that doesn’t fit nicely within the provided guidelines. However, many of these non-conforming borrowers have substantial equity, available cash, or alternative collateral that make them good candidates for private funding through DML Capital.
What types of properties do borrowers seek loans for?
Borrowers seek loans for various property types, including commercial, investment, single-family, multi-family, mixed-use, and rehabs (fixer-uppers). DML Capital provides funding for all property types that meet our internal risk evaluation and can provide value back to our community of investors.
Where does DML Capital find their borrowers?
This is one of the aspects that differentiates DML Capital from its competitors. DML Capital is partners with a mortgage banking company and as such has access to more potential opportunities than our competitors. Additionally, we locate potential properties through our network of real estate investors, real estate agents, probate attorneys, CPAs, escrow and title companies, bulk buyers of distressed properties, and retail mortgage professionals.
How are the properties evaluated?
A properties value is evaluated based on a variety of factors such as current and potential income, the potential for loss of income, resale value, current property conditions, environmental concerns, neighborhood trends, conforming use, and the cost to liquidate the property within a 30-day time frame. Considering these factors, the typical DML Capital loan has a loan-to-value (LTV) ratio that does not exceed 75%. Furthermore, funding is not typically extended for non-profit locations, gas stations, dry cleaners, other properties with environmental concerns, or properties that are deemed “high risk”.
What are the typical loan-to-value (LTV) ratios for DML Capital?
The loans LTV typically does not exceed 75% of the current conservative property value.
Where are the properties located?
All properties are currently located primarily in California and Washington, with expansion to Utah.
What types of loans are available to borrowers?
DML Capital offers a full suite of loan products; however, most of our loans have a fixed term of fewer than 12 months with a balloon payment due at the end of the term. Typically there is a minimum of 4 months on any loan. These types of loans are typically referred to as private money loans, bridge loans, short-term loans, transitional loans, hard money loans, asset-based loans, or rescue loans.
What are the benefits of a private money loan?
Private money loans are advantageous to borrowers because DML Capital has a simple application process and can typically make approval decisions the same day we receive an application. Additionally, we place less importance on the borrower’s personal historical financial information such as tax history, income statements, employment history, and credit score and instead put heavier importance on the merits of the specific deal under consideration and the amount of equity. This allows borrowers to spend less time seeking financing and worrying about being rejected by a traditional bank because they don’t meet the specific guidelines.
Why don’t major Wall Street firms invest in this strategy?
This strategy is too niche for the Wall Street firms and other larger financial institutions to participate in. It is difficult for these larger firms to scale this strategy given the smaller investment size and a high degree of manual work involved. Furthermore, one of the major revenue drivers of these firms are collateralized debt obligations (CDO’s) whereby these firms pool assets such as mortgages and sell them to investors. However, given the short maturity of the loans (6-18 months), pooling and securitizing the debt of these investments proves tricky and as a result, they hesitate to enter the market. That is another driver of why DML Capital can provide such strong risk-adjusted returns to its investors because it isn’t getting squeezed out by the free-flowing capital of the big firms.
How do investors learn about DML Capital’s investment opportunities?
DML Capital sends deal prospectuses to our community of investors via email. The prospectus provides information such as the rate of return for the investor, a summary of our internal risk evaluation, property location, type, purchase price, loan terms, loan amount, LTV, and other key decision metrics.
To join, request to be a part of our community of qualified investors, click here.
What are the requirements to become a qualified investor with DML Capital?
Qualified investors must be able to invest at least $200K per year for 2 consecutive years or have a net worth in excess of 1 million dollars not counting their primary residence.
The investors net worth, exclusive of home.
The investor's adjusted gross income for federal tax purposes
What does a typical transaction look like for an investor?
A traditional transaction follows this process:
Investors agree to fund the loan based on terms provided by DML Capital.
A comprehensive set of legal loan documents is drawn.
The loan documents are signed with an independent notary.
The investor is named as the actual beneficiary on the loan documents, ensuring their security
on the property.
The loan is funded by the investor directly to the title company, securing their position on title. Title insurance provides proof of lien position for investors and that all property taxes and non-junior liens are paid off.
The escrow/title company balances out the file and provides a legal closing statement to all parties.
The investor is named as a loss payee with a hazard insurance company on property.
DML Capital sets up the file with a servicing firm for receipt of investor’s monthly payments.
The investor is set up with secure web access to the servicing company to monitor the borrower’s payments.
DML Capital monitors payments and insurance coverage for the life of the loan.
In the event of non-payment, DML Capital will coordinate the foreclosure process with
a local foreclosure attorney.
What types of investment products are available?
DML Capital offers 1st and 2nd trust deeds secured by one or multiple properties.
Investors can participate as:
As an investor in DML Fund, you are part owner of every loan that DML Fund underwrites.
What is a trust deed?
A trust deed, or deed of trust, is a legal document that transfers the title of real property to a third-party trustee (usually an escrow/title company) who holds the deed as collateral for a loan between the borrower and DML Capital. This ensures that if the borrower is unable to perform or defaults on their loan that DML Capital has the right to take over ownership of the property.
What is the difference between a first trust deed and a mortgage?
A mortgage and a trust deed are the same thing in principle. However, trust deeds differ from mortgages in that deeds of trust always involve at least three parties (i.e. escrow/title company), where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. Trust deeds are the favored financial instrument in many states including California, Washington, and Oregon.
What are the key elements I should know about trust deed investing?
Knowledge, experience, and integrity of the Mortgage Loan Broker through whom the transaction is conducted
Market value and equity in the property and the security of the loan
Borrower’s financial standing and creditworthiness
Escrow process involving the funding of the loan or the purchase of the notes
Documents and instruments describing, evidencing, and securing the loan
Loan servicing provisions, authority, and compensation
Recovering your investment when the borrower fails to pay
HOW THE MONEY BREAKS DOWN
What interest rate does DML Capital charge its borrowers?
Interest rates are variable depending on the borrower’s situation and fluctuate with market interest rates. DML Capital typically offers competitive rates in line with the market that ranges between 9-15%.
Why do borrowers pay such high-interest rates?
The rates are higher than traditional bank rates because our borrowers need loan products that the bank can’t offer to them or they need the money faster than what the banks can provide. DML Capital focuses mainly on the collateral for the loan, whereas banks require both strong collateral and usually excellent credit and cash flow from the borrower. DML Capital charges a premium for this which is reflected in our interest rates to our borrowers. See “Who are the borrowers that DML Capital lends to, and why do they go to DML Capital?” for more information.
What rate of return does DML Capital offer its investors?
Due to changing market rates and the unique nature of each borrower, the rate of return is variable by opportunity. Investor returns average between 7% and 9%. However, this return is protected against inflationary concerns due to the short-term nature of the loan.
How does DML Capital make money?
There are two areas in which DML Capital generates income. Fees to the borrower for originating the loan. These fees are charged to cover “typical closing costs” such as loan documents, appraisal fees, broker commissions, points, inspections, insurance, etc. and represent an income stream for DML Capital. These fees are collected by DML Capital at the origination of the loan. Occasionally these front-end fees may be shared with the Investors to increase their rate of return on loans of 6 months or less. Management fees represented by the difference in the interest rate charged to the borrowers compared to the rate of return given to DML Capital’s community of investors. This management fee represents the primary income stream for DML Capital and covers the costs of servicing the loan, collecting funds from borrowers, providing financial reporting to investors, and finding and communicating new investment opportunities. These fees are dispersed to DML monthly with the interest payments to investors as borrowers make payments.
Who collects the borrower's monthly payments and services the loan?
A neutral third-party company performs all note servicing. We have worked with our preferred servicing company, Note Servicing Center, Inc. (https://sellerloans.com), for many years and find them to be industry veterans with over 20+ years of experience.
How do investors receive their investment returns?
Our community of investors receives monthly disbursements of the interest on the loan either by check or direct deposit directly from the servicing company. Furthermore, when the loan is paid off the investor’s principal will also be returned.
Can investors make withdrawals or liquidate their investments?
Unfortunately, the principal is only returned upon the payoff of the loan; however, an active secondary market exists for the resale of trust deeds. DML Capital has an extensive community of investors that we can access to assist with the liquidation of a trust deed.
Can investors use their IRA or pension plan to invest?
Yes! Eligible retirement accounts include traditional IRA, Roth IRA, SEP/IRA, Keogh plans, profit-sharing plans, and defined benefit pension plans. However, DML Capital recommends that you consult a tax professional to ensure eligibility.
WHAT IF ......... HAPPENS?
What if a borrower defaults on a loan?
DML Capital performs extensive due diligence before issuing any loan to make certain borrowers can fulfill their monthly obligations, which is in their best interest and DML Capital’s desired outcome. However, in the unlikely event, a property must be taken over, DML Capital would engage the services of a foreclosure expert on behalf of its investor community. DML Capital typically protects its community of investors by giving investors two options:
Investors could elect to receive their principal back as if the loan had been paid off, thereby protecting their principal.
Alternatively, investors could elect to share in the profits from the sale of the real estate that was secured as collateral. Given, DML Capital’s underwriting standards and a substantial amount of equity secured at the time of origination, the sale of a property often results in incremental returns. However, the monthly interest payments to investors would be suspended from the point of default to the sale of the property.
What if a fire destroys the home that is security for a loan?
All our properties are required to have fire insurance to protect against this outcome. DML Capital is named as an “additionally insured party” on the fire insurance at the time of the investment. This way, in case of a fire, DML Capital and its investor community would receive its original investment back even if the borrower defaults.
Since DML mainly lends in the Greater Los Angeles area, what would happen if California experienced
a huge earthquake?
Investing in the Greater Los Angeles area, there is a possibility that an earthquake severely damages or even destroys an investment property. However, the most devastating effects of earthquakes are often localized, and it is unlikely that more than a few houses in the DML Capital portfolio would be severely impacted. If the property was destroyed, the property value would be reduced to land value, minus the cost to demolish and haul away the remains of the building. DML Capital offers a vast array of opportunities to create a diversified portfolio of trust deeds located throughout California, which mitigates the risk of loss due to a severe earthquake in one locale. Furthermore, even in a strong earthquake, total destruction of a building beyond repair is quite unlikely.
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