Hard money leanding

9 Replies

Hi everyone can someone please explain to me the difference between a hard money Leander and a privet lender. I want to acquire a down payment for a 9 unit. Thanks.

yes, the hard money lenders are harder to pay back because they charge more for the money in general.  Hard money can come with points up front, I have seen people charging up to 5 points.  They also charge anywhere between 9 and 15%

Private money on the other hand is whatever you can negotiate.  I have one private lender who is happy to get 3% and no points.  Guess who I want to borrow my money from?

I hope that helps

Josh

A private money lender (in my opinion) is an individual you know personally and who is willing to lend you money.  A hard money lender is someone who is in the business of making loans.  Private lenders are people you know and develop a relationship with. You have to meet folks, talk to them and create the level of trust and mutual understanding needed for them to invest their money with you.  Hard money lender advertise there offerings and respond to ads.

Its very unlikely you'll find a hard money lender who will lend you a down payment. Most want to be in first position only. Some prohibit any additional liens on the property. These loans are short term, less than a year. The expectation is you use the money to fix up a junky property and either sell or refinance so the HML gets paid off. They are not long term lenders. Rates are high. Around here 15% +/-.

Private lenders may lend for what you're wanting.  But there again, they're probably not going to make a 10 year fully amortized loan.

Many lenders won't allow a second mortgage for the down payment.  Those that do are still going to want to see some of YOUR money into the deal.  For example, a 70%/20%/10% arrangement with their first as the 70%, a second mortgages for the 20%, and 10% of your own money.  The most common second lender in that case is the seller.

Being in second position is very risky.  Especially if you have no down payment at all in the deal.  If things go bad, you walk.  If the second forecloses, they still have to deal with the first.  If the first forecloses, the second probably gets completely wiped out.

Wow thanks guys that was very helpful I will use some of my own money. So privait lender is the way to go. I plan to refi in a year and pay back the Leander. This as I understand is a very common method to use.  Again thanks for the info guys

Don't jump in blindly. Values for commercial are based on income, not comps. With a SFR, its possible to buy one, do some repairs, and increase the value enough to get a new loan that allows you to pay off the acquisition debt. That has some limitations. If you're borrowing, say, 90% of the original purchase price, but your new lender will only go to 75% LTV on the new loan, you have to force a lot of additional value into the property. That's not so hard with a SFR, where values are based on comps.

With an apartment building, you have to add that value by increasing rents.  And the lender will want to see those new rents in place for some time.  A few years ago a group I'm in refinanced a mini-storage.  The lender looked at the previous five years to determine the value.  Poor returns in the first two of those five years, right after we bought this property, hurt the value.  Apartments are easier than mini-storage to finance.  But don't count on doing a fixup and adding a bunch of value.

To find private lenders, talk to everyone you know and everyone you meet about what you're doing.  A few will be interested.  A few of those will have money.  A few of those will be willing to lend to you, once you've developed that relationship.  It will take time and effort to find such folks and develop that relationship to the point where someone is willing to hand you (ok, the title company) a big check.

Ok so here's the deal if you were buying it does it look good to you and how would you work the financing I would appreciate your input 

Rent roll.  70,380 and Rent is low for area 

maintenance management and vacancy 14,076 or 20% 

adjustable income 56, 304

 utilities 593 a month equals 11,176 a year

Taxes 11,176 or 932 a month

Waterr 1, 944 or 162 a month sewer is included in the taxes

Insurance 4,567 or 381 a month

total expenses 24, 800 or 2, 067 a month

NOI 31,505

purchase price 370, 000

Cap rate 8.5

please tell me what your input is on this. There is also a laundry room in the basement which they charge for. The amount of income for that is not listed so I will not count it

sorry utilitys are 7,113 a year and 593 a month

NOI is 45% of gross rents, which is low. Does this building have landlord-paid heat? Price to rent ratio is OK. Not great, but maybe OK. My simple analysis gives this an annual case flow of $11,300 and a cash on cash return of 12.3%. My assumptions are:

  • you can get expenses under control and get NOI up to 50% of gross rents
  • 25% down, 6% loan and 20 year amortization.  You may not hit those terms.
  • No rehab

Its not quite that good with the existing high expenses.  But if rents are low, then expenses may be in line with market rents.  Getting all your tenants up to market will take time and will likely produce some turnover, though.

You'll need more local data to see what it would take to push the value up.  As is, you're probably going to be limited to 70% of the purchase price for a long term loan.  Don't expect to do a little (or quite a bit) of rehab and then get a loan to cover the full $370K.  That would require getting the value up to about $525K.  That's a long ways from what you're paying.

Tenants pay their own electric but owner pays heat. But the current owners was talking about converting the heat so tenants pay their own heat. That being said I'm not going to count on that if I bought it I would look in to that and how much it would cost.

Hey thank you very much for the advice.