Make 4 25K loans...... :)
@Gerald- Sounds like a good idea, I don't really know much about those type of commercial properties, I wouldn't even know how to figure the income approach for a CMA. The actual highway isn't going to move, but they are developing the main road that leads from the highway to downtown. The one mile stretch from I95 to downtown is a large pocket of the original suburbs just outside of the small city. This is where the original city dwellers sprawled to when they preferred to live in a single family just on the outskirts of the city. As the sprawl brought people further West with newly constructed larger homes, the older homes just on the outside of the city were left behind. Historically speaking this is a typical sprawling problem. The biggest gamble in this game is knowing the value of this prime real estate, understanding the cities objectives to convert the blighted area back to what it once was and should become again in the future. Right now you can purchase CBS 3/2 homes just outside of one of the healthiest markets in South Florida, just outside of Downtown Delray and biking distance to the beach for $50k-$90k. Mind you, this is around 5 blocks from where homes are selling for $250k-$400k. My broker is very attracted to areas like, applying for section 8 and waiting it out. The city of Miami has went from ultimate blighted areas to a VERY profitable market. All we need is a crystal ball to make sure we make the right choices, but then where's the fun in it!
Completely agreed. Well the articles on here are very informative, I try to check those out as much as possible. I'm going to try to find what I can on the subject, and keep you around for questions :)
Shark week is on, have a good night guys!
Here is the short answer on cost to be a private lender. The cost is $0 (assuming the lender is not borrowing their own $ out of a HELOC, IRA, etc). If you are a lender for a transaction, usually the individual who is borrowing the money is paying attorney fees for the transaction. I have done several deals with private mortgage financing and never has the lender inucrred any charges.
Hi, Alex, if you meant my discounted refi, paying the costs of the borrower and giving an incentive to refi now accounts for the cost as a lender, which was usually alot less than the fees earned on making the new loan, so all in all, not a loss at all.....I didn't expalin that did I...sorry. Later guys.....
With 100k cash? I'd definitely become a money lender. But before that, I'd have to learn the DO's and DONT's of putting up a loan business.
I agree, loan the money. Though, four $25k loans would likely be for rehab only and in second position. Risky, unless you also provided the first position purchase money. Investing this money could be as simple as finding a hard money lender who loans in your area and buying a note secured by a first trust deed. This could be a longer term loan to a homeowner or a short term loan on a flip. If these were on CA flips, your annualized return from an HML should be in the 10% to 12% ballpark fully secured by a first trust deed. There's no need to become a "lender" and no need to agonize about finding borrowers. You're simply a note investor.
On the other hand, you could increase your return to 15% to 20% by forming relations with local full time flippers and creating your own deals, using a broker to originate your loans (in California at least). Spend some time with a lending lawyer in your state before you do this.
No. You’re not locked in. While not immediately liquid, notes can be bought, sold, and even used as collateral. Depending upon the terms you would be willing to offer another note buyer, or lender to you on your notes, you should be able to get out if you want. Short terms notes, especially on flips, would usually not command a discount on the principal. In fact, you’d make money on the spread between the interest on the face of the note and the interest you offered your buyer. Plus, you’d keep the points. Depending upon state law, you could do this over and over.
Jeff
My realtor friend just got wind of :
reo triplex
search says 15 room 2100sqft. 2-3bedrooms/1bath each unit.
for 55% (90k) but probably 41% after 30k of rehabbing (which is way more than i think it needs), closing fees (?) and realtors % 5k
just got the title today it says they backed taxes(2k) no liens.
may need to evict a tenet.
Rent Approx 1,000-1,300 per unit
Area not ghetto but not great.
I figure i could keep it for rent or fix and flip. It needs work. I would LOVE to get into lending but i honestly don't have enough knowledge to begin. Do you think I should collect, fix/flip or abandon all together and research lending.
What I have seen is that the entry to lending is very difficult for someone who does not have a solid business background and finance knowledge behind them due to the lack of specific "how to" directions. While there are many guru books incoporating installment contract financing or buying notes, they are grossly insufficient as to really opening up your own lending business. In fact, most guru stuff simply turns you into a birddog basically, sending deals to others.
IMO, you'll need a good grasp of business and contract law and be able to research and understand the purpose of statutes. If you have to run to an attorney for every little question, prepare to spend big bucks. I have never seen a single comprehensive book on applicable laws for a small lender.
What ever you lend on as collateral, you need to understand the market for that collateral, be it machinery, farm tractors, cars or real estate. You need to understand the market and in real estate, the related laws, regulations and requirements concerning all aspects of RE. You need to be able to not only read an appraisal, but read between the lines and examine the values.
You don't need to be an accountant or a finance major, but you do need to be able to read a financial statement if you deal with any business or self employed borrowers.
You also need to be able to relate to different people, be able to expalin terms tothe rather unsophisticated folks and be able to explain the same terms to an attorney or CPA or other business types. It's nothing that can't be learned, but if you have poor writing and speaking abilities it might be tough to succeed....franlky.
While most can learn the lending business for their own transactions and lending their money, there would be an advanced course for using other peoples money, investors and partners, your knowledge of legal aspects needs to be expanded.
When I began, I had no idea that I would end up lending money. In highschool I was pretty bad in math and my teachers said I couldn't be an engineer...I matured and learned a little more. I majored in accounting and finance (double major and minor in economics) and later grad school. Being in the insurance business was a big help. Working as a bank examiner for FDIC gave me the knowledge, having been in real estate, as an investor, construction and RE sales/broker opened the door wider. So, what I'm saying is that it takes many experiences and time to get there. You can usually find someone like myself to open a lending office for you and teach you enough to get you in the business, (I don't do that BTW) I doubt that anyone off the street will wake up and start a lending operation and be in business in a year. But someone off the street could learn enough to make a loan or do an installment agreement for themselves. There is a difference between being a "lender" as an institution and loaning money as an individual investor.
And, BTW, I suggest any investor type lender do so through their trust and stay away for any business entity as that will put you in a finance company position, otherwise, do it individually as an investor. It's a thin line.
IMO! :)
Bill Gulley I think what makes sense to me the most, would be to work for a lender of some sort first, to really get the ins and outs of the business. I agree, no one really wakes up one day and starts a lending business, it takes times to fully emerge yourself and truly understand the details. Opening any business is difficult and opening one you dont fully understand or thereof lack of understanding will prove to be even more so difficult, because at this point I completely depend on a lending lawyer for everything. To the point where it would be most beneficial to go into partnership with one instead.
Why I feel i have an above average grasp on business, my gut tells me i am not ready and need more knowledge and experience. After reading these forums, and countless people confessing lending is a secure vehicle to success. I too have reached heightened awareness for lending. I really love the concept of keeping defaulter's "stuff" whether it be tractors, cars, or MORTGAGES. :) That makes me foam at the mouth.
BTW your education is opposite of mine, Majored in Economics minored in finance. Got A and B in my finance courses. :)
Thought I mentioned up there about issues of "keeping stuff" that was collateral. You do not buy it with a defaulted loan, you have a collateral interest in that property to the extent of your financial interest, it's not yours, you sell it and get your money back. The only way to keep the stuff is for them to give a deed in lieu of foreclosure in real proeperty or assign title in lieu of collection of the debt.
I think getting with a broker is a good idea, make sure he has a good reputation and actually knows what he's doing. Many are ex-car salesman who took a test types and sell rather than lend if ya know what I mean. Good luck
The way I look at it is when you buy a piece of property for the kind of money you are talking about (VERY LITTLE), you have a concrete investment in which you are the driver. Stocks are controlled by corporations and fickle market conditions that honestly I just can't keep up with. Being a lender sounds great, but sounds like a lot of red tape involved and a knowledge you are not savy with at this point. Real estate is literally a concrete foundation (if its a good builder). As long as you get a general warranty deed and purchase a fee simple estate, YOU ARE IN CONTROL. None of this subject to the mortgage crap, you own it outright. I would figure out the following in order to make my decision:
PGI (potential gross income)
-V&C (vacancies and collections)
=EGI (estimated gross income)
-OE (operating expenses)
=NOI (net operating income)
The NOI will be the income you make per month. Depending on the area, you may have to account for more vacancies, but this is also dependent on your skills in renting. I personally LOVE multi family buildings that are four units or less. Five units or more are considered commercial in Florida. Obviously do an inspection and see if the repairs required are worth it. I would have a roofer look at the roof and get an inspection unless you're a cowboy like me! Best of luck!
I stumbled onto this topic today, and I just happened to be hitting someone up for a $100,000 cash today. So I'll share what I want to do with it. Its similar to Bill's but with a twist.
If I had a $100,000 cash, I would put it into a CD, leverage it with my bank for a $500,000 credit line, and get back into hard money lending. Many of my customers would be my same customers now with my wholesaling company. I'd charge 18% interest, probably broken down to 12% interest and 6 points on 12 month notes.
Let's look at the returns. If I loan out $100K at 18% APR, I earn $18,000 or an 18% yield/ROI/CCR. If I loan out $500,000 at 18% APR, I would gross $90,000. The going interest rate on a line of credit is 2 points over a Certificate of Deposit, so let's say 4% interest on the line of credit. 4% on $500,000 is $20,000 in interest. $90,000 gross minus $20,000 payment to my line of credit is a net profit of $70,000. That's a 70% yield on my money. You can't beat the returns. This, of course, doesn't factor in the latency of my money when it isn't loaned out, but it shows the power of leverage.
In Texas it doesn't require a mortgage broker's license to do non-owner occupant loans. There are some laws to understand but I already understand most of them, and I'd counsel for free with the best real estate attorney in town to find out any new statutes I need to know. He would do it for free because he would be drawing up my lending documents (deeds and deeds of trust) on my deals. I already have several entities to do business through or I could drop $1,000 with that same attorney to set up another one just for lending (he set up my other entities for me).
Obviously there are also basic components of real estate investing that are extremely necessary to understand. I appreciated Bill's description of some of those components. To be a successful hard money lender, you really need to have an extremely strong understanding of the fundamentals of investing yourself. I've seen several hard money lenders pop because they didn't understand the fundamentals of investing and I've seen several pop that understood the fundamentals but they weren't diligent in working them. Understanding and diligence are both necessary.
So either way, if you still don't know what to do with that $100,000, why don't you loan it to me? :)
If I had a $100,000 cash, I would put it into a CD, leverage it with my bank for a $500,000 credit line, and get back into hard money lending. ... I'd charge 18% interest, probably broken down to 12% interest and 6 points on 12 month notes.
Let's look at the returns. If I loan out $100K at 18% APR, I earn $18,000 or an 18% yield/ROI/CCR. If I loan out $500,000 at 18% APR, I would gross $90,000. The going interest rate on a line of credit is 2 points over a Certificate of Deposit, so let's say 4% interest on the line of credit. 4% on $500,000 is $20,000 in interest. $90,000 gross minus $20,000 payment to my line of credit is a net profit of $70,000. That's a 70% yield on my money. You can't beat the returns. This, of course, doesn't factor in the latency of my money when it isn't loaned out, but it shows the power of leverage.
Ryan, IMHO you neglected one major factor into your return equation ... loan losses Not all borrowers that you make will fully repay what they owe and not all borrowers will pay on the dates that the payments are due ... yet your bank still requires you to make payments on your note on the due dates.
If a borrower is seriously late or defaults, your returns diminishes due to legal expenses associated with collecting or foreclosing.
While you may be very good at selecting your borrowers there are no guarantees that your customers will follow through as promised.
* * *
I'd certainly like to know what lender ... especially a commercial bank will fund you with a 5 to 1 line of credit based on a $100,000 CD?
That almost sounds too good to be true, but I will look into it and see if will work in Florida! Thanks for all the info to digest!
I would be scared to lend leveraged money because if they defaulted on me I would still owe the payments for my original loan. The problem with this is it could take an entire foreclosure process to get repaid and who knows how long that could take. I would say land lording is just as risky with not being paid, but at least you only need a couple months to get them out.
I can't imagine that there is a bank that will loan at 4% on a note that is 80% unsecured. (i.e. 5 to 1 leverage on a CD), UNLESS one has the financial strength to support an unsecured line of that amount. They have insufficient collateral, risk pricing would demand a much higher rate.
I tend to agree, if I feel the risk and I'm not an underwriter with potential skin in, I would imagine an underwriter would have a field day with this. But I'll tell you what, no idea is a dumb idea as far as I'm concerned. Thanks for all the ideas and knowledge from everyone, this site rocks!
@Gerald L.- I agree with those who would recommend you pairing up with another investor who already has experience in flipping homes. I would look at someone who has at least 10 or more profitable deals under their belt. (that leaves me out I am on #7)
My brother does this all the time. He currently has a cash investor who fronts him up to $100,000 for projects and my brother locates, purchases, manages project, and sells them and they split 50/50. It’s a great deal for both of them, since it works for them.
$100,000 may not do much in CA, but in my area you can purchase and rehab for $100,000 and still make a nice return.
Good Luck
If a borrower is seriously late or defaults, your returns diminishes due to legal expenses associated with collecting or foreclosing.
While you may be very good at selecting your borrowers there are no guarantees that your customers will follow through as promised.
The beauty of hard money lending (if done properly) is that when you have to foreclose, you make money. When you loan out at 50-65% of ARV, and you understand the business intimately, the risk is pretty minimal. Now will there be expenses in the meantime of foreclosing? Absolutely yes, but balanced out over 6 months those expenses will get covered plus some when you resell the property.
Hard money is not as much about choosing the right clients as it is about choosing the right properties.
There is some basic understanding of collections needed here, too. Legal fees for late pays are charged to the borrower, so if you aren't foreclosing you get paid. If you let a borrower get "seriously" late and THEN have to foreclose, that is your own deficiency. More than 30 days and they go to foreclosure, period. That's how I run my portfolio now.
I have a credit line right now at that. I have been with the bank for 7 years now. I would guess my track record counts for something with them. I've run hundreds of houses through it.
Its not unsecured. You would have to pledge the deeds of trust as collateral, also. All of the properties that go on it are at 30-65% of ARV, so the bank is pretty secure equity wise. I'll admit that most banks don't like the 5 to 1. I have another bank that will do 3 to 1 but I've only found one in town that will do the 5 to 1. Obviously, you're own financial position and track record will factor into it.
It really depends on where you live. Being in Texas, I would find houses in growing areas and buy properties around the $40k with rehabs in the $15k-$20k range. That way I would not be fully involved with my $100k. I would start small so I have some practice. That way, if I break even or lose money, I would still have some in the pot. I would also look into hard money so I could leverage my capital better and have even less skin in the game, although the risk would be a somewhat greater.
WOOOOOOOOOOOOOOOO there. I actually do NOT recommend loaning it out. The question was what would I do with it.
Lending without sufficient knowledge and experience is a great way to LOSE your money. I have seen experienced investors lose $100,000's with hard money lending. Lending is a high risk, high return strategy. Only with in-depth experience, understanding, and due diligence can you adequately decrease that risk to make the high return worth it.
Well for all the people who want to loan it out, loan it out to me. I'd take $100K and buy 3 single-family homes and rent them out, and use the rent money to pay back the loan. The loan can be for 3 years at 6% interest and I'd still do it.
It's funny to read things we would do with our money 3 years later! I wonder if anyone did what they would have done?! I sure wish I did!
Flip houses.
Here is the best idea for you. Put it in gold coins about half. Use the other half as a cushion and buy real estate on terms and sell on terms and never use your own money.