I’m a new investor looking at a deal that’s showing a 13% cap rate. Asking price is $129K my offer is $120K. I have $15K to put into a down payment, taxes, closing…etc. I’m preapproved for a hard money loan with 10% down but with fees, closing costs and points I’ll be charged by the lender, that $15K would look more like $20K. Also, this property probably wont appraise out high enough for the lender to consider it even though the property is cash flowing and will be throughout the term of the loan. Should I bite the bullet and go with a conventional lender, stay with the hard money, or does anyone have a better suggestion? I would actually love to find a private lender but I don’t know enough about structuring a deal with one. HELP PLEASE! I dont want to lose this deal!!!
You don’t give enough information to provide an answer.
You mention conventional and hard money. If you have the option of going conventional, you should always try that before Hard Money.
Also, you seem to imply that this is a buy and hold strategy. Hard Money is rarely a great idea for a buy and hold strategy. At only a 13 cap, HML will eat all your cash flow up.
Hard Money should be for short term only. You need a diff plan for the long term.
Private money is a fine option if you can find it. It is very difficult to find for a newbie.
mostproperties,
I would avoid hard money–private money borrowed at a high interest rate, and with points charged (one point being 1% of the amount borrowed) unless you are an experienced rehabber/investor. Just don’t do it. You can lose your shirt since those are short-term loans. How are you going to pay back the HML if you can’t sell or re-finance?
Watch out! When you say things like “I don’t want to lose this deal!” you are already emotionally invested. Take your emotions out, and look at it like the most hard-hearted investor. Which you need to be (you’ve got 3 kids!). I get emotionally invested too, and I’m always fighting that tendency.
Everything you do has to be safe, secure and guaranteed to give you a return on your investment. You need to find a “for sale by owner” property where they would be happy to get your downpayment and they would carry the mortgage without you having to resort to hard money.
There is one sure thing in real estate: THERE WILL BE ANOTHER GOOD DEAL COMING.
The lending industry has terms with specific meanings.
A conventional loan is any mortgage which is not guaranteed or insured by the federal government. Or, any loan that is not an FHA or VA loan is a conventional loan.
“Conventional loan” covers the full gamut of lending sources. Loans from institutional lenders (e.g. banks), private lenders, hard money lenders, credit unions, etc are all conventional loans. In most cases, since the federal government is not insuring the loan, the lender will require private mortgage insurance (PMI).
When the lender is going to sell your loan in the secondary market to either Fannie Mae or Freddie Mac, the lender will need to use underwriting guidelines that conform to Fannie/Freddie rules. These conventional loans are often generically referred to as conforming loans.
Also, this property probably wont appraise out high enough for the lender to consider it even though the property is cash flowing and will be throughout the term of the loan.
For most lenders, the appraisal governs the loan amount. Responsible lenders won’t loan more than the appraisal will support. Loan to Value (or LTV) is the term lenders use to define the maximum amount the lender will loan as a percentage of the appraised value of the property.