I would like to know the opinion of one of the expert investors on this forum about hard money lending.
I have contacted several Hard money lending institutions and they are pretty much alike in terms and pricing. The charge about 8 points plus regular closing cost, on top of that the interest rate will be 15-18% anualize. That means that if you borrow $100,000 to buy a property, fix it and sell it in 4 moths it will cost you $14,000. Let’s just say for the sake of argument that the property will be worth $140,000 after being rehabed and that it will cost you about $15,000 to get it back into shape, the total amont of expenses (repairs and lending fees) is $29,000 plus a minimum of $3500 for the real state agent who sells the house. The total amount of money left for you is $6,500, I was told that an average investor will not pay more that 70-75 cents on the dollar, so $100,000 is about 70% of the $140,000 that it will sell for after repair. As you can see, either hard money lending is a scam or you need to get properties at a deeper discount of 70 cents on the dollar and that is very difficult to find.
I would like to have one of our pros explain this one to me.
Thanks in advance
I am finding money with 5 points and 14% interet with a 4 month mininum. They loan 70% LTV and you are right in that you need a deeper discount to make a HML work. In your example of $140,000 retail value the 70% would have to include the repairs and hard money expenses. The sales costs including commission, extra carrying costs over the 4 months, other closing costs would come from the sale of the property leaving a nice profit hopefully.
I may add a few examples later of what I have done recently but have to run to job site now
After the repairs are done, your buyer is not likely to be another investor (unless it is a landlord, or someone who does lease options), but an owner-occupant, who will probably pay closer to the 140k ARV, especially if it is a quality rehab.
Nothing against HMLs, but another option to avoid them is to find a motivated seller who will do short term seller financing, (possibly even with little or no down payment), repair the property with your own funds, then sell or refinance at a better interest rate once repairs are completed. Of course, this route requires you use your own money, but if you can swing it, you end up saving money and a have potentially higher profit margin in the long run.
About HML…yes they do cost a great deal. The trade off is having money when and where you need it. Think of it as a means to an end, not an end in itself. You will have to get deals that make sense using HML, build up your volume and then go after the Cadillac: Working Line Of Credit. You can, of course also work on getting private lenders as another option. In my mind you should have more than one source of funding in order to accomodate the various deals that you will come across. Just my thoughts.
Being in the lending business I do understand that…Yes, Hard money is a very expensive way of getting a property under your control for a project. The key is like others have said that the money is easy to obtain, and can get you on the road with little or no money out of your pocket. The fees are costly but you have to do what you have to do to get yourself going in the business. One other thing to remember is that when doing rehabs it is important to try to buy these properties minus your fix up costs. So for example that same house that you mentioned should be purchased at 70% minus the fix up cost. Then you finance the entire project with HM, and put the profit in your pocket at the end. It is sometimes hard to find… but trust me, they are out there, and you can find them just keep at it. My partner and I always use the pipeline approach to our projects. When the pipeline is empty… we are willing to take on projects that make a smaller profits, but when the pipeline is full, and times are good… we pick and choose the projects that turn the most profit. Good luck to you.