I'm exploring the possibilities of being an HML (starting off on a smaller scale), and I have a few "newbie" questions for those who've done it for a while.
--Is it possible to start off by lending smaller amounts, like $20-$25k?
--Is there a minimum lending term for newbie lenders, say 3-6 months?
--What is the average interest rate (or range) that lenders charge?
--How do you vet someone to make sure they don't run off with or lose your cash?
--What are the typical legal documents and terms that are set in place/signed to protect you?
--And lastly, how do you connect w/ those who you lend to?
-Small lending amounts? Yes, but then you are just a private lender. You might check out crowdfunding sites where you can pool your money with a reputable company that makes hard money loans.
-Lending is up to you and borrower to agree. I have borrowed small amounts with 12 mo terms with guaranteed 6 months interest. This is "slow" hard money but I get a lower rate and longer period of interest only.
-Rates are anywhere from 7-14%. Lower rates often have higher application and origination fees - plus prepaid points.
-credit check (you will be subject to regulatory rules ), but the point of hard money is that the asset being lended on is your primary security - you must be ready to foreclose
-paperwork for professional HML companies is more or less like a standard loan package with some different terms. Too much headache for small amounts, probably.
-Advertise with your local REIA, network with same, use BP marketplace ( after legal advice and understand BP policies).
@Vonetta Booker - I think you will make better use of your available cash by buying and holding investment property. Check out BP forums on Buy and Hold. Also check out the podcasts at www.lifestylesunlimited.com. Whatever you decide, I wish you success.
This thread should give you an answer to several of your questions, @Vonetta Booker , including how to meet and vet borrowers, obtaining legal documents, and protecting yourself from getting ripped off.
Some of your other questions are regional, such as points and interest rates. Here, you'll have to ask a few local lenders and borrowers what they charge or pay, respectively, to get a lay of the land. Don't discount or sell yourself short. Also, a typical 3/2 1500 sq. foot flip can realistically take 6 to 8 months, so that's the minimum term for any reasonable loan. With prices dropping to flat in some areas, one year is not uncommon.
My greatest concern is that you don't appear to have enough to loan the purchase money on a flip and barely enough to loan the rehab money. At best, this would leave you in second position behind a first position HML. On one hand, you can generally charge more for rehab money. On the other, you are in a very dangerous and vulnerable position and, if you don't have much cash in the first place, you can easily be wiped out. Don't do this. If it means you have to wait a while to save more money, well, so be it. You might have a few other options, though.
I don't know if fractionalizing is legal in CT, where several of you loan money using one first position note that contains all your names as the lender, but this could be an option. You also might consider partnering locally with those you know. I'm not a fan of loaning to out-of-state strangers on a property you've never seen, so I'd stay away from Prosper and the like. And, don't even think of advertising in any form whatsoever, even on a business card, unless you are licensed.
My suggestion would be to go to a few real estate clubs in your area, speak to some in the business of lending and flipping, and get a sense of the demand. Here are a few in your area. Good luck, Vonetta.
Thanks for your advice, guys. @Doug McLeod : I am currently looking at potential buy & holds--but I'm kind of nervous about any would-be "tenant nightmares," lol. (I'm trying to offset that by really educating myself about screening, landlord best practices, etc.) I was thinking private lending might be a more hands-off, passive option--I appreciate your insight!
@Vonetta Booker - my mentoring group recommends a "best product, best price" business model along with good tenant screening. Spend a little up front to fix/replace anything that could become an issue in next 5 years (appliances, AC, etc.) - you need to buy well at a discount to leave room for this. Then you rent out at or just below market to get tenants quickly after carefully screening your tenants - including criminal check, credit check, calling prior landlord (or two) and calling employer. That allows you to be as passive as possible once the house is rented.
Great ideas--thanks! :-)
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