How do you feel about using a hard money loan for your investment?

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How do you feel about using a hard money loan for your investment?

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Residential Real Estate Agent · San Diego, CA · Member since 2011 · 29 posts · 2 votes

Hello,

I have a investor who says it is ridiculous to pay 12% interest on a hard money loan. I tried to explain to them that leveraging your funds is a great way to protect yourself from further risk and that using hard money loans will allow you to do multiple deals at the same time- not putting all your eggs in one basket. So I am wondering how do you feel about using a hard money loan? Do you prefer it for the reasons I stated above or is a maximum profit your number one goal? I appreciate the discussion.

Thanks!

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Sharad M.Pro Member
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by Mitch Kronowit:
I find them impractical for buy & hold properties. The terms are usually too short.

I agree with Mitch. I think it's very important to have some sort of permanent financing in place before using HML, because a HML can get very expensive very fast if you don't have permanent financing in place for the long term.

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    Hi Raymond,

    I think 12% is a pretty good for a hard money loan. Are there any points in addition to the 12%, because if you have to pay 5-8% points and get a 12% loan for maximum 9 months, then it's not really a 12% loan. At least that's what I am noticing in my market.

    IMO, whether or not to use HML depends on the ROI you are getting on your own money. If you have $100k sitting in your saving account earning 1%, then I wouldn't use HML and I would use my own money to invest. Because instead of paying a HML 12%, I would rather make the additional 12% on my money. OTOH, if you have your money invested in high ROI projects, then by all means I would use HML.

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  • Keenan Jones
    Dallas, TX · Member since 2011 · 9 posts · 0 votes
    15y

    12% really is pretty good, what are the points? How long of a term?

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  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    15y

    I find them impractical for buy & hold properties. The terms are usually too short.

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    Residential Real Estate Agent · San Diego, CA · Member since 2011 · 29 posts · 2 votes
    15y

    In San Diego I am seeing 12.5% quite a bit with 5 points down and 65% ARV. Is this normal in your markets as well?

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    15y
    Originally posted by Mitch Kronowit:
    I find them impractical for buy & hold properties. The terms are usually too short.

    I agree with Mitch. I think it's very important to have some sort of permanent financing in place before using HML, because a HML can get very expensive very fast if you don't have permanent financing in place for the long term.

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  • Jared RineBusiness Member
    Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes
    15y

    For HML, if you are getting 5 pts, 12.5, based on 65% ARV, is solid...I know groups that charge way more than that and they are lending on ONLY the Purchase price, or LTV, not ARV, which usually means you should be getting more money...

    Agree with Mitch too - they are usually used for a bridge, and terms are usually short term, so one can close and then rehab, stabilize, etc., and then refinance.

    Just my .02

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  • Keenan Jones
    Dallas, TX · Member since 2011 · 9 posts · 0 votes
    15y

    Our regular HM loans are 16%, 2 points, 6 months, and 70%. We just released a new loan that I love though. We call it the land lord loan. It loans at 100% ARV same terms as above, and the down payment is 10k, or half the repair value, which ever is higher. Will pay the repairs back out of an escrow 5k at a time, but that down payment is also placed in an escrow. Once the buyer refinances into a conventional loan we will then return that original down payment. I'm sure we aren't the only ones doing this. You should look into it.

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  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    Raymond,

    How long of a term is that HML for? 12.5% with 5 points is very similar to what I find in my market and usually the loan term is 6-9 months, so at that term, it ends up being a very expensive loan.

    If I borrow $100,000 at 5 points at 12.5% for a 6 months loan, by the end of 6 months, I will end up paying $11,250 in points and interest. Annualized that comes out to 22.5%. Like Mitch said above, HML very rarely makes sense for buy and hold, but you can be OK using HML with a flip.

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  • Burt L.
    Real Estate Investor · Steamboat, CO · Member since 2010 · 295 posts · 34 votes
    15y

    I went to a presentation tonite by a HML in denver who with rates of 10.5-11%, 2-3 points, but a LTV of 60%. The length was 30 months or five years. He has investors who get the interest and he gets the points.Inestors who do their own work are even better as they don't get caught up in legal delays over contractor skirmishes. Residential only, and he prefers investors to owner occs, but says there are lot of self employed out there with credit scores over 700 but can't get loans anyway; thats not really big news. He prefers to lend in his own backyard of colorado.

    He also mentioned to get references from others who have closed loans with a particular HML, as some are less capable, etc. Other presentations I've been to usually have rates of 15%, but a higher LTV.

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  • Danny Day
    Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
    15y

    Hard money makes sense for certain types of deals. If you're going to hold the house, then obviously you would go a different route.

    That being said, the lowest HML in Houston I've found is at 13.99% with 0 pts down lending on 70% LTV on a 6 month term.

    The highest I've seen here is 16% with 3 pts down lending on 70% LTV on a 6 month term.

    I just did a rehab using hard money, but here is what paid off more: Making friends in the lending community. I've been offered an unsecured line of credit with a 5.5% interest rate with 20% down on everything I do now.

    If it were me, I would try my best to avoid paying the hard money fees. They can add up quick. It is good to have a relationship with a hard money lender, as if the need arises, I can make a move on a property quickly.

    Danny

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    15y
    Originally posted by Raymond Pistilli:
    So I am wondering how do you feel about using a hard money loan? Do you prefer it for the reasons I stated above or is a maximum profit your number one goal?

    Feel about using hard money?

    Feelings have nothing to do with any of it, Raymond. Your goal is not to minimize the profits of your lender, but to maximize your own and those of your investor. It’s about numbers, not feelings – a conversation you might have with your investor.

    Do you have specific investment criteria or goals that your investor understands and agrees to? These take the emotion out of the decisions.

    You weren’t specific what you’re doing, but 12% plus points is pretty typical right now in southern California for flips. Longer term money for buy and holds is cheaper.

    Some advocate talking to your dentist and others you believe have cash earning 1% and offering them 8% on up. I don’t view this as viable if you’re doing many deals, and turning properties on a monthly basis, but of course I don’t know your dentist :-). Plus, maybe you’re not there yet. Good luck.

    Jeff

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  • Toni D.
    Rehabber · Fillmore, CA · Member since 2011 · 116 posts · 11 votes
    15y

    Hi Jeff,
    I did my research for HML in Souther CA, but have not met you or spoken to you yet. 12% is a good rate, 3 pts is also good. We have cash to do only 2 props at the same time, so we are looking to buy 3, this is where the HML will come in handy for us. If we net 20-30K each deal with HML, we'd be happy! What would be great is to find one who gives 100% & split 70/30, plus interest & points. I dont mind spending no money to make money!
    Toni

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    Raymond, I would guess the investor you mentioned has not done very many retail deals. If you can buy at 65-70% of ARV you should be able to pay hard money rates and make a healthy profit.

    I assume you are speaking from a real estate agents shoes. So why not break the profit down with him and show him he can make money at 12%.

    For the first deal, if he has cash, he should use cash and not try to scale his business.

    That being said, I think your logic is incorrect if he is a brand new investor. Doing a hard money loan is not safer. He creates an extra 10k in expenses (at least) that he needs to make up by getting a better deal.

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    15y

    What do I care what my investors make as long as I am making a fair living in the process?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    15y

    If the investor has money then of course they will not want a hard money lender.

    I have a few sources who I have relationships with for private money.

    I agree there is a lot of money sitting in the bank with miniscule returns.You can get your cash private investor much better returns on their money but you have to culture a relationship with them.

    Hard money lenders have to charge certain rates to make their spread to pay off their funders returns.

    Individual hard money lenders have more leeway but big companies usually have set guidelines to follow.

    The bigger deals for hard money are for sure in commercial deals right now. Much bigger spreads and forced appreciation upside.

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  • Silver A.
    Real Estate Investor · Select a State · Member since 2010 · 79 posts · 17 votes
    15y

    As long as the numbers work, it's all good. HML seldom makes a good long term investment but it is ,more often than not, priceless (or very expensive and still worth it, hehe) for flipping.

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  • Account Closed
    OP
    Residential Real Estate Agent · San Diego, CA · Member since 2011 · 29 posts · 2 votes
    15y

    Thank you everyone for your responses.

    @Jeff When I said "feel" I was not literally asking how you "feel" about it. It was a simple way of asking for your opinion. Please keep the thorough analysis for your investments and not post topics.

    I asked this question because right now I am working with several investors and each tends to have their own opinion on which is the better method to invest. I am refering to HML in the fix and flip area and not holds. I was curious to see how the members here felt about HML's in their own markets because it seems there is a ever growing number of all cash investors and obviously this topic proved that loan terms have a wide range from market to market.

    Right now I am trying to convince my investors that investing all cash is the better way to go, however, I do explain to them how a HML works and the pros and cons to each method.

    Thanks everyone for sharing your input. Greatly appreciated!!

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  • Jason Davis
    Rehabber · Powhatan, VA · Member since 2011 · 190 posts · 21 votes
    15y

    I am a newbie and am using HML on my first flip. As for feelings, I like it, less risk to me.

    From a money standpoint, I feel thisnis a good option for short term, mine is for 8 months.

    I am glad I found my lender. I meet him at the houses and he has provided me with great insights and ideas.

    I figure he has much more experience and if he likes the deal it might be a good one.

    Also did I say less risk to me?

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    15y
    Originally posted by Toni D.:
    What would be great is to find one who gives 100% & split 70/30, plus interest & points. I don't mind spending no money to make money!

    For the deal you propose Toni, your lender will make substantially more than you. I don’t like working like that and know you can do much better. “Spending no money to make money†doesn’t account for the amount of time, stress, and effort we both know you put into your deals. Eventually, you’ll become resentful. We’re completely happy with the points and interest alone but sincerely hope you make a killing. That’s what brings you back!

    What you’re really proposing is a partnership. You find the deal, do the work, and your partner pays all of the expenses. In this case, you’d split the profits 50-50. I find this arrangement quite fair, equitable, and with relatively low risk -- as long as you buy right and get along with your partner.

    Alternately, you might run some numbers. I can see you’re very conservative, but instead of using 100% of your money to do two deals you might leverage yourself and borrow against the three you want. This is typical of the borrowers we work with, who tend to be a bit more aggressive.

    Jeff

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  • Jeff Michaels
    Developer · Raleigh, NC · Member since 2011 · 4 posts · 1 vote
    15y

    Raymond, if you perform detailed financial analysis on your prospective deal and run the numbers at a realistic worst case scenario and the deal supports the 12% then it is a deal worth doing. That said, try to get the loan points lowered both on the front and back-end because those can eat you alive. I could be preaching to the choir but never base your lending capabilities on what another investor says works. Only realistic financial analysis can tell you if the deal works. Best of luck

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  • Scott Karg
    Real Estate Investor · Jarrettsville, MD · Member since 2010 · 76 posts · 12 votes
    15y

    I will only buy something if it cash flows at $300 a mont, on hard money.
    I am fortunate to have 2 flexible lenders.
    One has a rate of 13/3 for 6 months with 6 month extension at 1 point.
    The other is 5/15 and typically does a 12 month, and you can extend for 12 months for 5 points :wowo:

    BUT if you talk with your lenders they can be reasonable. I am talking with the 13/3 guy about doing longer terms like 12 or 18 months.
    The 5/15 guy just did one for me at 12.5% and 18 months. I place a lot of his properties with voucher tenants through my tenant placement business, and I in turn give him a good deal.

    Talk to your lenders, you never know.

    I started this business last year, and we purchased a business for my wife 3 years ago, so our refi situation is a bit sketchy. Once we have 2010 and 2011 tax forms we should be able to refi the properties we have bought so far.

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  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    15y

    If you are turning your money over several times per year, then your HML terms are pretty high. The points start to add up quickly and your equivalent interest is pretty high. If you are doing buy and hold for a few years then it is not too bad.

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  • Keith Dawson
    Private Money Lender · Alders gate, London · Member since 2011 · 3 posts · 0 votes
    15y

    12% is a great deal!

    0Reply
  • Chris G.
    Real Estate Investor · Irvine, CA · Member since 2011 · 189 posts · 33 votes
    15y

    Hi,
    New member here.
    I am interested in becoming a hard money LENDER, can someone refer me to where I can get more information on how to get started?
    I am in SoCal physically but open to lending in most States/cities.

    Since this is a hard money loan, can I do it on an individual to individual basis or do I need some type of license/permit?
    If I do, how popular are "gray market" HMLs?

    Can someone refer me to where I can get more information?

    0Reply
  • Cheryl C.
    Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
    15y

    I've only had to use hard money a couple of times. As was mentioned by many, it's best to use cash if you've got it and it all depends on the numbers - the individual deal.

    What I did a long time ago (mid-80's), after we had a few deals under our belts, was put together a plan and visit several small local banks to set up financing, lines of credit, whatever I could get. I got some doors closed in my face but eventually established a relationship that has served me well for 25yrs. A quick e-mail and I can close in 7days. I usually put 30% down and get a 5yr - now at 6.25% with 1/2 point. They don't even do an appraisal - just check comps, if anything. These are buy and hold. I used to get 6mos flip $$ from the same bank at similar terms.

    If I were starting out, I would try this avenue. During the 125% heloc days I got a stack of checkbooks from putting heloc's on everything I could. This avoids a ton of closing costs on flips.

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