Trying to lean into hard money this time...big questions

16 Replies

We have been investing for a long time and have always used traditional banking.  This time, we had a 3 month flip, and thought we would use a hard money lender, but when I saw the rates and fees, I was astounded.  I knew it would be high interest, but they are not only charging 13.9% but an additional 4 points. We wanted to stay with a local lender (Jet) but we are thinking we should ask a few others to compare.  Any thoughts?  Maybe this is normal? Any others with experience with hard money (and hard rates?)

Thanks for welcoming us aboard!

Dwight and Karen

That would be high for my area, but not totally wild. Definitely keep looking. And ask if this is an "introductory rate" -- meaning will they do better for you once you've done some successful transactions with them (get details- how much better, and how soon?). 

Hard money rates sound insane if you are used to long term mortgages, but when you factor the short holding time (hopefully short term!) it makes more sense. The real questions are: Can you still hit your goal for profitability? Will this lending relationship enable you to more easily do a lot of deals that hit your goal for profitability?

Originally posted by @Karen Cook :

We have been investing for a long time and have always used traditional banking.  This time, we had a 3 month flip, and thought we would use a hard money lender, but when I saw the rates and fees, I was astounded.  I knew it would be high interest, but they are not only charging 13.9% but an additional 4 points. We wanted to stay with a local lender (Jet) but we are thinking we should ask a few others to compare.  Any thoughts?  Maybe this is normal? Any others with experience with hard money (and hard rates?)

Thanks for welcoming us aboard!

Dwight and Karen

There's no doubt that hard money rates and points are stratospheric especially if you're accustomed to borrowing on conventional terms from banks. I too have been looking at using hard money for some deals, and have talked to at least a dozen HMLs over the last sixty days. I don't have direct experience working with this HML but @Chase Maher has made a compelling case in our conversations where I would seek him out early in any deal I was shopping for money. I don't know if they lend outside of So Cal but perhaps he'll chime in here and provide you some additional guidance when shopping for HML money.  

I once talked to a hard money lender I met here at BP, who has a very good reputation. The rates/points he quoted for a deal I was looking at were high in my opinion. I asked him about that. He said, "we (HML) are the lender of last resort," suggesting I get bank or private money if I could. I got a bank loan.

You probably should too, if you can.   

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Thank you so much for your response. When you find a deal and need to close in a very short period of time,   Hard money (or Private) fits the bill.  You are right, I couldn't do this in 2 weeks without them. I will begin taking names from this group for the future. Thanks!

Karen

@Karen Cook

I would compare the rate, the private lender profit, with the profit margin on the property.  If you have a deal with good margin you are more likely going to have a more favorable rate.


Frank

Just because it's hard or private money doesn't necessarily mean it is fast    It can be, but if you are working with a lender for the first time try to temper your expectations.   Also if you have a good working relationship with a bank, especially a local bank, deals can get funded  relatively quickly. 

12% and 2 points is standard for where we are at. We have been able to get 10% and 2.5 points, but the LTV isn't always where we want it to be.

Originally posted by @Jon Klaus :

Just because it's hard or private money doesn't necessarily mean it is fast    It can be, but if you are working with a lender for the first time try to temper your expectations.   Also if you have a good working relationship with a bank, especially a local bank, deals can get funded  relatively quickly. 

 Banks often take 3-4 weeks to turn down a loan. I can do that in 10 minutes.

@Karen Cook As @Christopher Telles mentioned, I do lend in Houston. Jet has a great product, I have seen some of their deals the past. My rates are much lower if you don't mind working with someone outside of the local Houston area. Feel free to contact me anytime when you are in need of a HML or even to analyze a deal with you. Good luck and I hope you have wonderful success in the future.

@Karen Cook I"ve used both institutional money and HML in the past, and in my experience you have to look at the deal in it's entirety, and see if it makes sense at that point, with flips you'll have to pay capital gains so you'll want to factor that into your costs and then can determine if it's worth the amount of profit you'll be making. You could also back your way into the deal by calculating all your costs up front and factor in your profit then determine your purchase price.

1) I think the terms there are about what I typically see.

12 to 15% and 4 points is what I've seen at some of the best lenders I've been able to find.

2) One thing you're missing in terms of value with a hard money lender is the ability to do more deals.  If you had to use regular bank financing and had to put down 25 to 30% and pay rehab out of pocket, how much money would that cost you? Could you do 2 at once? 3 at once?

With the right hard money lender, you can get 100% financing for that 12 to 15% and 4 points.  So they'd pay 100% of the purchase AND 100% of the rehab. You only pay for the points and closing costs. 

You could literally take down a deal for 5 to 10k depending on the size of the deal. Try doing that with a regular bank. 

At the end of the day, though, its all about finding the right deals with the right margins. And i really believe that hard money works best once you get out of the low end of the market. Just not enough margin in those low end deals to pay for the HML fees and still have the opportunity to make a decent profit given the risk you're taking.

150k ARV house that you can buy for 85k and put in 20k (70% LTV). 110k loan. You pay 4,400 in points plus closing costs (2k). 6,400. Then another 1% per month in interest. 6 months would be 6,600. Thats 13k right there. Add in the other holding costs (utilities, taxes, etc) and the closing costs when you sell and you might only be looking at a profit of 15k. The HML is making more than you are......

Now take a house with an ARV of 200k that you can buy for 110k and put in 30k. 140k loan (70% LTV). You'll pay 5,600 in points, plus 2k closing for 7,600. And 1,400/mo x 6 in interest. 8,400. Total 16k.

Add in the other holding costs now and you might be looking at a 25k.

Thats a much more comfortable margin for error to me. 

I haven't done it myself even though I've been tempted. But I look at the flip potential on almost every deal. Some seem to be good candidates and others not so much. For me, I just keep coming up with the same answer though - if its a good deal for a flip, its a great deal for a rental. :-)

But again, if you ever run into a scenario where you find an incredible deal and your money is already tied up on a current deal, then I would definitely look at hard money to take it down. Its far cheaper than taking on a partner where you would have to split the profits 50-50.

I went back to the lender, showed proof of funds, and credit score and asked for better rates.  They came through!  So I guess it never hurts to ask!

Mike H, you are exactly right and I agree.  I want to be able to strike when the iron is hot, so having that option does work so much better! Thank buddy!

Karen

Thought I would pass along a great lender to the group.  He is a hard money lender and has lots of leeway to lower rates. He definitely beat jets rates, but we already had commitment at that time.  His name is Johnathan at Patchofland.com   tell him I sent you. :)

Here is a review: https://patchofland.com/blog/qa-from-the-patch/201...

And I noticed that they have been mentioned in this blog before.  He is 

Hard Money is the way to go. Banks won't finance the major rehabs that maybe the most profitable. Price the HML points and fees into your analysis as holding costs. If your marking your profit numbers after factoring in your hold costs, then you are good.

Also, I was flipping houses during the 2008 crash and bank financing disappears when the market crashes. It is better to rely on private money and HML than banks.

If you have a track record, there are HML rates available as low as 9% and 1 pt usually from private individuals (rather than the well known HML companies). Even when I have access to such low HML rates, I often will go with higher interest at 12% and 2 pt or even 3 pts. What matters to me is if I can get 90% of acquisition and 100% of rehab more than the interest rates. If I get 90% of acquisition and 100% of rehab, then I can get gap funding on 10% of acquisition and flip with. Money out of pocket. You have to find really good deals to get this high of leverage as the acquisition price plus the rehab cost combined must at be less than 65% of ARV. For gap funding ( the downpayment needed on a HML loan for both acquisition and rehab covered), I will pay as high as 20% and 5 pts.

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