I have recently been presented the opportunity to invest some family capital in HML in the South Florida area. At inception, we have decided to angle our business specific to home flippers (non-owner occupied). All loans would be first positioned mortgages secured by the property as collateral. The current arrangement is that a family member would hold the lending license under an LLC. while we simultaneously lend the money - through another LLC. - to prospective borrowers (please disclose if there is a better way of structuring this).
1- We have been told that 10.75% APR and 2.5 points is a competitive rate - in the current market, would it be feasible to exceed those returns at 60% LTV/6-18 months maturity?
2- I understand this is a very subjective question - but considering the current market situation, would it be in our best interest to issue more lesser-valued loans to diversify portfolio - or should we focus on getting out less higher-valued loans. If the latter, considering usury laws, can lenders get away with charging higher APR's on loans exceeding 500k in the current market. Generally speaking, I understand lending higher amounts typically would attract "better" borrowers, in turn further mitigating risk which should imply lower APR's, just curious?
3- Considering the above, what regulations should be our main concern going in to this?
My apologies for the general questions, we are in the early stages of this - and we are looking to get as much insight prior to approaching a consultant and an attorney. Any direction would be greatly appreciated considering our current lack of knowledge of the lending industry... Thanks in advance and look forward to your feedback!
It all depends on the types of property you lend against. I do private money lending and usually charge between 9.5%-12%, but it is for safer deals. I stay fairly low on the capital stack, and make sure I can exit properly if I need to be take control.
Also, are you looking at LTC or LTV? On house flipping there is a difference. Neither is wrong, just know the risks of lending against the after repaired value. That number is an estimate so you need to verify it with comps and trust the borrower will turn the house into something that can sell.
I think the rate you mentioned is competitive. If you go up or down a point or two, just make sure it matches with the added or lowered risk. Also, you can probably charge another 75 or 100 basis points upfront if you wanted.
Again, I would always prefer to attract the right borrower than make a slightly higher rate. Feel free to reach out if you want to chat at all.
@Evan Demchick Thanks for the feedback, Evan.
We're looking to qualify each individual loan as a play (post proper diligence on the subject property) - then charging a local industry HML rate versus assessing the risk of the transaction and possibly charging a higher interest rate. Against this backdrop, we feel that this would help us focus on quality borrowers further mitigating risk on our end. Of course, the riskier the development/flip the more we are entitled to as a return - but considering we are new to this angle of investment, we want to play on the conservative end of the spectrum at inception.
Any experience with trading these loans in the secondary market? We are having a little dilemma in the sense that we haven't decided if we want to cap our fund out and hold loans through maturity - or try and originate as many loans as possible, then subsequently sell them off. Our current avenue of referrals claims that he can originate our initial investment in 2-3 months - but from what I understand, it would take originating roughly 5x are initial investment to break the even mark if we were to originate and hold the loans through maturity. At first, it would be a challenge to break the even mark - but looking forward it may be beneficial to us considering the amount of capital we could possibly have backing us.
Again, thanks for your time - it is much appreciated.
Most hard money here is in the 12% plus 3-4 points, for 6 months. At 6 months, any extension would require another 2-3 points. Not sure what you mean by your break even point, assuming you're not borrowing the money.
Thanks for the reply, Wayne.
By break-even, I was referring to the amount of revenue we would generate off originating and selling the loans versus originating and holding the loans in our portfolio through maturity.
Ex: For easy computation - Originating 1M of loans at 11% APR + 3 points at origination = 140k of revenue
Ex: Originating roughly 4.6M and selling the loans in the secondary market, keeping origination = About 138k in revenue (before servicing fees)
From what I understand, if we were to originate and sell the loans off, we would be entitled to the origination fee and possibly another .5pt to a 1pt for servicing the loan. Please correct me if I am under the wrong impression.
Appreciate the insight.
@Eric Guasch Yeah, I realized that afterward. I'm not well versed in the supply of money for HML loans, but I think the typical model is putting other people's money to work, using it to originate the loans, with the HML raking off the origination and maybe some of the interest. I'm not familiar with investors "buying" the loans afterward, but it may be common.
@John Thedford does some HML.
a few ways to do HML
1. marry investor to the deal and take points.
2. originate with your own money then sell the paper in the secondary market.
3. Have a credit facility with a bank or investment banker relationship make the loan then collatarlize the loan with your credit facility ( back fill) rinse repeat.. usually you need 10% to 20% of your own money in each deal.. this is how I ran my HML I had bank credit facilities and had 20% of my own cash in each deal.
4. PPM type money raise.
that's what you normally see
I am using my own funds for HML....courtesy of my SOLO 401K. My rates are 12% plus 4 points. I typically write for 24 months but the majority pay off quite a bit earlier. After reading the other posts I am starting to consider writing for a 6 month term. That would guarantee a higher ROI...BUT...you must watch out that your loans are not usurious. I got caught in that trap when I first started. Both sides ended up with attorneys...and they made all the money:) Fortunately, I didn't lose any, but was not able to collect the interest and points bargained for as well as a few months of interest while things were in limbo. That loan was actually written BY an attorney....and obviously, he no longer represents me in any transaction whatsoever. If you write at 12% plus 4 points for six months, that won't fly! That would equate to 20% APR which is usurious. Maybe write them for a year and you will be safe. Or, write at 12% plus 3 points for six months and that puts you at the state maximum of 18%.