If you’ve purchased a home or invested in a rental property in the past, you may be familiar with the feeling of pride and achievement that comes with seeing the value of your real estate investment go up. The equity you’ve built can take you even further as you consider adding more real estate to your investment portfolio.
Unsure how to leverage equity for new investments? You’re in the right place. Keep reading to learn how.
To start, equity is the portion of your property’s value that you own outright—essentially, the difference between your property’s market value and the balance of any loans secured against it. Now how can you use equity as a strategy to purchase more real estate?
There are several ways to approach this type of real estate investment strategy. Let’s take a look at a few ways to make the equity in your property work for you.
Hard Money Loans
Using the equity you’ve gained to get started on your next real estate project using a hard money loan can be one route to take. These are the types of loans we specialize in.
For example, if you own a rental property without any debt on it, you can quickly pull out cash using a hard money loan with your rental property as collateral. This loan can be used to buy a new property with cash. Underwriting these loans is straightforward and often faster than other loan types.
If you own a property free and clear and it’s worth more than the property you’re buying, it could be easy to use your existing equity to buy the new property. This is a good way to invest in a fix-and-flip opportunity because you can use the equity in your current portfolio to avoid more time-intensive rehab loans. You can buy another piece of real estate and do the repairs all while using the hard money loan on your rental to give you the cash you need right away.
When the new property is sold or refinanced, you’d use the proceeds to pay off the hard money loan, the lien is released, and the equity is available to do it again on another new property. Making your equity work for you in this way allows you to continue to buy more properties, and continue to repeat the process, resulting in more real estate investments in your portfolio.
Bridge Loans
A bridge loan is another way to leverage the equity you have in a currently owned piece of real estate.
If you own an investment property that you’re currently trying to sell, but you’re ready to buy a new property, such as for a 1031 tax-deferred exchange, a bridge loan can loan on both properties to help you close on the new purchase before the old property has sold. This type of loan bridges the gap.
When you finally sell the old property, you can pay some of the loan back to release the lien on the old property only or pay all the loan back to release the lien on both the old and new property. In either case, you’ve added a new property to your portfolio with the help of a short-term bridge loan.
This is a loan type we offer and you can learn more about it here.
Cross-Collateralization
Cross-collateralization is another strategy worth looking into, but many lenders may not have the insight to identify that as an option or be able to execute it. Here at Cetan Funds, our team is ready to help you decide if this choice would be a good fit for you. First, let’s talk about what cross-collateralization is.
With cross-collateralization, a borrower uses one of our short-term hard money loans to purchase a new property and instead of putting cash down, they use a property they already own as additional collateral for the loan. The property they’re buying is used as the primary collateral for the new loan. The property they already own is used as secondary collateral and has a new lien put in place by the lender. This new lien on the rental is usually a second lien behind the first mortgage.
Here is a visual idea of how cross-collateralization works:
Some benefits of cross-collateralization are:
- Higher loan amount, low or no cash down
- Leveraging existing assets rather than having to use cash
- Streamlined application and underwriting process with sufficient collateral
Cross-collateralization can come with some risks though, such as in the events of default or bankruptcy. Working with a knowledgeable team like Cetan Funds is imperative to establishing a real estate investment strategy that can give you the best information and plan for developing a loan that will maximize the equity you have for your next project.
Home Equity Line of Credit (HELOC)
Utilizing the equity through a HELOC can be another way to use the equity you already have to do repairs or updates on your investment property, or to put money down on a fix-and-flip or rental rehab project.
Your local credit unions are great sources for this type of loan, but most only offer these on primary residences. Some banks also have investment property HELOC’s available. We recommend calling several credit unions and banks to see who offers the best options for you.
Cash-Out Refinance
Besides hard money loans, borrowers can get conventional cash-out refinances. In our current interest rate environment, it’s tough to cash flow on a rental with a large mortgage – investors should proceed with caution and do their research to see if this is the best option available to them.
Another thing to consider is if Fannie Mae or Freddie Mac loans are being used. If so, you should keep in mind that you have to have owned the rental for 12 months or more before qualifying for cash-out refinancing on these loans. If you have owned the property for less than 12 months, then Fannie Mae and Freddie Mac conventional loans do not offer cash-out and would only offer rate and term refinances.
When choosing the best way to leverage the equity in your current real estate investment, it can be helpful to talk to someone like our team at Cetan Funds to clarify the many types of loan options you could consider.
Using the equity you have to develop more real estate investments is a great way to grow your portfolio. Whether you want to use the equity you have as a down payment, or increase existing equity through renovations, you have plenty of options to explore.
If you have equity from a current real estate investment, you have a lot of leverage to create more wealth. Come in and see our team at Cetan Funds to map out the way to your next real estate project.
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General Investor FAQs
What is Cetan Income Fund’s Investment Objective?
Cetan Income Fund and Cetan Opportunity Fund (the “Funds”) are real estate debt funds that deliver consistent and attractive risk-adjusted returns to investors who seek preservation of capital and income.
Who Manages The Fund?
Our CEO, Mary Merriman, manages the Fund and lending operation. She has over 40 years of lending experience, holding a variety of executive-level positions at banks and an economic development lending organization. Steven Yett is actively involved in daily operations, fund management, and business development. Zach Smith is also an integral part of the team, leading loan originations and other business development activities. To learn more, please visit our Meet the Team Page or contact us.
Can Anyone Invest?
Cetan Income Fund: This Fund is only open to accredited investors with a net worth of $1,000,000 excluding their primary residence, or annual income of $200,000 for single filing status or $300,000 for joint filing status. This Fund is open to investors from anywhere in the United States.
Cetan Opportunity Fund: This Fund is only open to Oregon residents with either 1) a minimum annual gross income of $70,000 and a minimum net worth of $70,000 excluding their home, home furnishings, and automobiles; or 2) a minimum net worth of $250,000 excluding their home, home furnishings, and automobiles.
Can I Invest with IRA Funds?
Yes. Investors with a Self-Directed IRA account can invest in the Fund. Currently, we are well below our 25% threshold.
If you do not have a Self-Directed IRA account, we can help you create a self-directed IRA (SD-IRA) account and use those funds to invest in the Fund. Please contact us with questions and a list of IRA custodians we have worked with in the past.
Cetan Income Fund also includes a promissory note offering for accredited investors, which many of our IRA investors benefit from.
How Do I Track My Account Balance?
We provide investors a secure online investor portal to access subscription documents, quarterly statements, fund financial information, investor updates, and tax documents.
How Do I Withdraw My Investment?
Every equity investment has a 12-month “lock-up” period where withdrawals are only allowed for hardships and early withdrawal fees may apply. After this “lock-up” period, investors may withdraw at any time with at least 60-day notice.
How is Risk Mitigated?
Management actively monitors our real estate debt fund and mitigates risk by deploying several strategies:
1. We maintain a diversified portfolio of loan types, loan purposes, and geographic locations in Oregon and SW Washington. Our loan types consist of residential and commercial loans with subtypes of new construction, rehab, acquisition and development, and bridge/term. We only finance business-purpose loans that provide funding for purchases, refinances, rehabs, new construction, and development.
2. The portfolio’s weighted average loan size is typically below $500,000, so our transactions are small. Therefore, the projects tend to be more resilient given the high demand for affordable housing and when faced with conditions that negatively affect the real estate market.
3. Generally, our loan-to-value (LTV) ranges are from 60-75% in Cetan Income Fund and 65-80% in Cetan Opportunity Fund, with a portfolio target of a weighted average LTV at 65% or less for Cetan Income Fund and 70% or less for Cetan Opportunity Fund. To determine value we complete an internal evaluation that uses a variety of sources, including an Automated Valuation Model, Broker Price Opinions, as well as our direct sourced market and comparable data. On properties with a unique purpose or for larger loans, we typically order appraisals.
4. Loans are typically secured with first position liens. Cetan Opportunity Fund may also selectively fund loans secured with second position liens.
5. In Cetan Income Fund, loan terms range from 6-36 months with the weighted average asset life in the loan portfolio target of 12-15 months. In Cetan Opportunity Fund, loan terms range from 6-60 months with the weighted average asset life in the loan portfolio target of 15 – 21 months.
6. We use leverage minimally as it is not a permanent funding strategy. Cetan Income Fund has a bank line of credit that is used to meet temporary liquidity needs but rests it at $0 frequently during the year. Cetan Income Fund also offers 6 to 36-month Promissory Notes to investors who prefer to loan their money to the Fund rather than invest in equity or wish to have a mix of both. Cetan Opportunity Fund, on the other hand, was recently launched in 2023 and does not currently use leverage or offer promissory notes to investors. Once the Cetan Opportunity Fund reaches $5 million in assets under management, we may establish a bank line of credit to use to meet temporary liquidity needs. Management will always limit leverage in both Funds to a maximum of 20 – 25% of assets under management.
Why Do Banks Not Make These Loans?
This is because of several factors, including regulatory constraints, banks’ large overhead expense making smaller loans unprofitable transactions, and obtaining a bank loan often takes too long, or the process of obtaining it is complicated and expensive.
Though the typical borrower is creditworthy, they are seeking a loan that is not readily available from traditional banks and credit unions. Cetan Funds addresses this credit and service void in the marketplace by taking reasonable risk while processing applications with speed, transparency, and accuracy.
What Distinguishes Cetan Funds From Other Non-traditional Lenders?
The Cetan Advantage is what sets us apart from other lenders. It provides borrowers superior lending experiences. As a result, our investors are well positioned to realize a positive investing experience as well. The Cetan Advantage embodies the following values:
- Expertise
- Partnership
- Efficiency
- Flexibility
- Integrity
How Are Returns Calculated and Earnings Distributed to Investors?
Both Funds fully distribute net income to all investors on a pro-rata basis quarterly. All investors are treated equally as we do not have a preferred return, classes of shares, or any other preferential treatment.
We close the accounting quarterly, derive the net income, and then our fund management software calculates the distributions to generate investor statements. Dividends may be withdrawn or reinvested in additional shares. Generally, it takes two to three weeks to close a quarter and distribute the earnings to investors.
Are Your Financial Statements Audited?
Yes, our financial statements are audited annually by a qualified CPA firm that specializes in private equity funds that include real estate debt funds and are posted for existing investors as well as available for interested investors.
What Type of Income Will My Earnings Be Considered?
Equity investors earn ordinary income and will receive a K-1 schedule for their tax returns. For IRA investors, Unrelated Business Taxable Income is generated but is limited to the amount of income that is generated from leverage; hence, it is a very small percent. Promissory Note investments in Cetan Income Fund generate interest income, so this income is reported on a 1099 INT statement.
None of the information herein is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product, or instrument. Any projections or targets are aspirational only, are not guaranteed, and do not reflect past or current performance. Any report of past performance is no guarantee of any future performance. As with any investment, an investment in the Company is subject to risks, some of which could be substantial. No investment should be made in the Company by any investor who cannot afford to lose their entire investment. There are also restrictions on re-sale of Company securities and no investment should be made by any investor who cannot afford to hold the investment in the Company for a long period of time. This investment is only allowed and suitable for certain kinds of investors, who must have their investment status verified and confirmed in writing. No investment may be made, and no investment will be accepted unless the Company has received and approved the required written verification of each investor’s status.