12-15% Cash-on-Cash return- too good to be true?

Question

I know a successful HML based in NJ lending mostly in Tri-state area, on creative loans that most lenders turn down. He runs a conventional fund, that lends HM on standard deals, but bunch of deals fall through the cracks, that the fund cannot do for one reason or another. So he has been funding them with private investors, and offered me to join in. There is moderate risk involved, which is why he can charge a higher rate for these deals

He is offering very attractive returns for investors, but it seems too good to be true. 12-15% (annually, usually with monthly payments) returns to investors.

Does anyone have experience with this type of investing?

He is offering very attractive returns for investors, but it seems too good to be true. 12-15% (annually, usually with monthly payments) returns to investors.

Does anyone have experience with this type of investing?

Alex Deacon · Answer

It seems 12-15% is high. For example here in Pittsburgh I pay my private HML 8-15%. If he is paying you 12-15 then what kind of margin is left for him. I just dont trust anyone these days and I would have an attorney look over the documentation to make sure your have a secured loan and what happens on default

Alex Deacon · Answer

@Yonah Weiss I do see this working in other parts of the country. May I suggest do your homework and make sure you check out the operation well before proceeding. There are a lot of promises out there that are not kept so do be careful.

Yonah Weiss · Answer

Are you a lender or a borrower?

These loans are not the standard HML, which I have used as well, between 8-14%, but for more complicated situations, I think some people are willing to pay more 15-20%.

Secondly, the % on HML is usually annual percentage rate. So a lender can lend at 10% for 6 months, and essentially be collecting 20%. With enough of those deals, and upfront points he collects, there is usually enough to pay an investor 12-15% annual return.

Justin Stamper · Answer

I have done both, point I was making is that money is pretty cheap right now, but if its a more complicated situation with a non recourse loan, I get it.

Erik W. · Answer

You already know this, but just as a reminder, "If it sounds too good to be true, it probably is."  Above market returns deserve above standard due dilligence.

At the end of the day, I have no problem asking to explain to me how they are getting compensated.

Do a small deal so if it all goes to crap you don't lose everything.  If it goes well, maybe do 2 more deals, etc.  Let him earn your confidence rather than bamboozle you with spreadsheets and projections.  Any legit business person will understand the risk concern and will do their part to ameliorate your anxiety.  It's when they start using phrases like "can't miss", "sure fired mega profits", "I got this idea from a guru boot camp" that you know they're blowing smoke and are not to be trusted.

Ibrahim Hughes · Answer

My biggest concern is that at those rates, I would think that mostly newbie rehabbers would apply. Hence your default rate will be higher. Maybe much higher. What is his criteria for the rehabbers/applicants? Must they be experienced or just "always wanted to get into real estate since they were young"?

Yonah Weiss · Answer

It seems a little high to me, too (hence the title). His regular loans from the fund run between 9-13%, but these deals are a little less conventional for the fund's standards, so he charges higher. How much? I don't know. The structure is a secured loan, or a deed transfer, buy, with sell-back clause. I will definitely have a lawyer look over the docs. Thanks again for your insight.

Yonah Weiss · Answer

Thanks! I will for sure do my homework. I trust his due diligence, because I used to work with him underwriting deals, and I have done other types of investing with him (fix-and-flips), but never HML. What other things should I be looking out for?

12-15% Cash-on-Cash return- too good to be true?

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