2nd Position Investment

11 Replies

Hi all. New to this forum and the RE investing world for the most part. I have done a few deals through a developer/friend mostly on the lending side. Most of the money I'm lending is in "2nd position" with this same friend. I'm curious how safe/smart these investments are and if I'm getting enough return for my money. Look forward to hearing back from some experienced investors to grow my knowledge base and make intelligent investments. Here is the latest deal that has been sent to me. Thanks in advance for thoughts and help:

Here is the situation..

It is on a home we have where the bank would like us to pay down the loan a bit because we are choosing to rent it, so that is what we would use your investment for.

Debt and Equity Stack would look like this:

1st; Bank Loan $650,000

2nd: You, $40,000 @10%

3rd: Equity, approx $360,000 (conservative based on $1M+)

Home value is $1M+, I've attached 3 listings of homes that are arguably worse than ours listed $1.1M-1.3M.

I was looking for gap funders when I ran across your post.....second position is always risky but it sounds like you've been working with this investor and he has a good track record.  The posts I see on other RE websites for second position loans are anywhere from 10-12% and 1-2 points.  Hope this is helpful.

@Bryan C. When you lend in 1st or 2nd position it would be the same process in terms of recording. The title company or attorney will draw up a note and mortgage or Deed of Trust depending on the state and then record it. But first a title search should be done to find out what other liens are on the property. You don't want to find out later you are in third or fourth position. I assume you are lending after the first position is established and recorded?

Originally posted by @Brian M. :

Curious most of all if this is a typical return on my money if I lend in second position. Or too low for the risk?

Right now, any performing note is at risk of default, especially blue states that continue the asinine lockdowns. If someone's work is closed, unless they have reserves, count on waves of defaults...

@Bryan C. you should contact Joe Lucas about your situation if it is in Ohio. I'm sure you have his contact info but let me know if not. 

@brian m. - 10% is low on 2nd position with that small of a loan balance. In California, seconds are typically paying 12%+ If the total LTV is VERY low, you might see 10%. However, are you looking at a 12 month term, interest only or is this fully amortized?

If fully amortized and you know the borrower and they are strong on execution and reasonably strong financially, 10% is probably pretty good. One other thing, it is odd to me the bank is involved with requesting a pay down since they are renting. What kind of loan do they have from the bank?

@Brian M. Curious to know how the 1st Loan and 3rd loan (Equity) worked out/got approved. Are these business loans, or are all buyers collectively under 45% DTI?

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