Thinking about becoming a hard money lender with a cashout refi

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Thinking about becoming a hard money lender with a cashout refi

Walther Mendez
Charlotte, NC · Member since 2016 · 15 posts · 2 votes

Hey everyone,

My parents are actually looking at this not me. Their primary home is already paid in full (valued at $150k). My parents and I were wondering if taking out a mortgage against their home and using that money to lend to investors is a good investment. They would only take out about 100k that would require roughly a $650 monthly payment. 

First question is what kind of returns could we expect? and what kind of terms are traditional here in the Charlotte NC area. My dad would like to partner with a group of hard money lenders and not really screen candidates himself so he would be more of an investor. 

I have seen this question in the forum before but I was wondering if anyone is the Charlotte, NC area is currently doing this and whether it is sustainable. Seeing how rates may soon start going up it may be best to do this earlier than later if it is in fact a good idea. 

Thank you in advance.

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y

Hi @Walther Mendez,

This isn't a new thing. Usually you use a HELOC ARM, not a 30 year fixed.

  • There will be times when you don't have any money lent out because you just got paid back (the borrowers fixed their credit and were able to do a refinance into traditional financing, etc), but haven't lent someone else money yet (you are waiting for a good deal to cross your desk). You don't want $100k sitting in your checking account earning 0.2% while you are paying 4% for it. With a HELOC, you just pay it off when you get paid back. Interest is typically calculated daily. That way you aren't feeling pressured to make bad loans due to interest accruing while in between deals.
  • The ARM part isn't a big risk. When your ARM goes up, what you can charge borrowers also goes up. If the HELOC goes up from 4% to 5%, great: jack your rates up from 10% to 14%. You still win.
  • There are people that have done all the licensing and regulatory stuff already. If this isn't going to be a full time job for these folks, I'd suggest using these intermediaries. @Shari Peterson is probably a person worth connecting with.
  • Even though I'm suggesting a HELOC here, I actually don't have any competitive stand-alone HELOC products at present, so don't hit me up for that. :P This is an area where retail big box banks, as difficult as they are to work with, are better than independent mortgage brokers or companies.

Good Luck!

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Hi @Walther Mendez,

    This isn't a new thing. Usually you use a HELOC ARM, not a 30 year fixed.

    • There will be times when you don't have any money lent out because you just got paid back (the borrowers fixed their credit and were able to do a refinance into traditional financing, etc), but haven't lent someone else money yet (you are waiting for a good deal to cross your desk). You don't want $100k sitting in your checking account earning 0.2% while you are paying 4% for it. With a HELOC, you just pay it off when you get paid back. Interest is typically calculated daily. That way you aren't feeling pressured to make bad loans due to interest accruing while in between deals.
    • The ARM part isn't a big risk. When your ARM goes up, what you can charge borrowers also goes up. If the HELOC goes up from 4% to 5%, great: jack your rates up from 10% to 14%. You still win.
    • There are people that have done all the licensing and regulatory stuff already. If this isn't going to be a full time job for these folks, I'd suggest using these intermediaries. @Shari Peterson is probably a person worth connecting with.
    • Even though I'm suggesting a HELOC here, I actually don't have any competitive stand-alone HELOC products at present, so don't hit me up for that. :P This is an area where retail big box banks, as difficult as they are to work with, are better than independent mortgage brokers or companies.

    Good Luck!

    4Reply
  • Don Harris
    Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes
    9y

    Yes they Can , Carolina Hard Money, Wendy Sweet 

    1Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    9y

    Definitely, a HELOC is the way to go in my opinion. This way you're maximizing your spread between payments. Unless they're wanting to lock in 30 year fixed money for something else, your HELOC rate goes up, and that's a sign you can charge an extra point or 2 on the loan as well. If they want to stay hands off, Don mentioned Wendy Sweet with Carolina Hard Money. She pays her investors very well from my understanding. Both Don and I know her well if we can help with the connection. As far as rates in Charlotte, for hard money, I've seen anything from 2-5 points, and 12-15 percent interest. Should give them a good spread. I think the hardest thing will be finding solid deals and investors with a track record with 100k to lend. Honestly, given that, I think it'd be worth a call to Wendy, as she already has the deal flow. Good luck!

    2Reply
  • Lisa Hoover
    Specialist · Charlotte, NC · Member since 2016 · 111 posts · 95 votes
    9y

    i'm more hands on (controlling!) and conservative with my capital.

    If their $150k home is their only asset?? i surely wouldn't take out $100k equity.

    Are any of you located HERE in the Charlotte area? 

    There are easier ways to make money in this market without risking the equity in your primary residence.

    0Reply
  • Scott Ryne
    Wholesaler · Kannapolis, NC · Member since 2014 · 19 posts · 7 votes
    9y

    @Alex Franks

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    Why don't your parents learn to become (good) direct investors, rather than borrowing to lend to people who find deals that'll earn an even higher interest than they're being charged?

    (I often wonder why Lenders don't invest directly more often themselves, rather than wait for their customers to fail so they can be foreclosed on - but which doesn't always help the Lender?)...

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Brent Coombs  the goal as a lender is to never foreclose  LOL...

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    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @Brent Coombs  the goal as a lender is to never foreclose  LOL...

    Good one!...

    0Reply
  • Dale Hensel
    Real Estate Investor · corrales, NM · Member since 2008 · 26 posts · 25 votes
    9y
    I suggest your parents pick 1 good rehaber to work with first Watch how they have done deals in the past Watch how often he has to hustle to sell it etc I'm a hard money lender. Doing it. on and off for years With so little money I would suggest being cautious on your first deal. There is a lot of stupid tax yet to be paid on this venture. I'm not discouraging it at all. Just say go slow first time If you would like some advice. Pm me and I'll give you the lowdown Good luck Dale
    0Reply
  • Walther Mendez
    OP
    Charlotte, NC · Member since 2016 · 15 posts · 2 votes
    9y

    thank you all for the replies. Yes we are in the Charlotte area. My parents are small business owners already and that consumes a lot of their free time. So they are looking at an avenue where they can simply be investors. 

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    9y

    Investing should be accomplished with disposable income and cash on hand, absolutely not by by leveraging your own home for the money to invest, that being said for the unsophisticated investor! 

    Your parents aren't your gold mine. Where do they live if things go south and the FBI busts one of these famous mortgage hard money lending operators?

    Do you know enough about lending to perform due diligence on a mortgage broker? I'm sue you don't. Neither does your dad unless he's from the finance world and in that case, we wouldn't have this question.

    Tossing high risk money at some guy who lends it out is a much higher risk than most are aware, especially now with all the laws to comply with. 

    Just having a license isn't half the issue, really is their past performance at making money, a monkey can make money with money, but are they in lending compliance......most don't even know if they are. Others trot along thinking they are. And, there is no one on BP who can assure that they are. 

    I suggest you get with dad, then get to an attorney, then with guidance perform your due diligence, don't just toss money in some pot, you need to own the loan. 

    I suggest you look into transactional funding, the scope of that is pretty narrow and easy to learn with a good title company. 

    Next would be to get with an experienced fix and flipper, partner, use your money, you will have total control of funding, again a title company can help. 

    Again, points may not be charged by private lenders, it is prepaid interest and reserved for institutional and registered lenders, so forget about charging 5 points and 15%. Yes, there are loan sharks out there in the alley. 

    As far as partnering up with a lender, absolutely because you can't learn the game in 6 months, but what you need to look at and understand is the risk and that goes further than just collateral when dealing with brokers. 

    Have to say, putting your home at risk on a whim to invest with someone else isn't prudent at all ! 

    Not what you want to hear, I know, sorry! :)   

    0Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    9y

    Wow, @Bill Gulley, good to see you on here still.  That was a relatively short post by your standards :)

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    9y
    Originally posted by @Account Closed:

    Wow, @Bill Gulley, good to see you on here still.  That was a relatively short post by your standards :)

     Thanks Bryan, I'm still on the green side :)

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    9y
    Originally posted by @Jay Hinrichs:

    @Brent Coombs  the goal as a lender is to never foreclose  LOL...

     So true

    @Jay Hinrichs

     look forward to the call today at 2pm my time

    Alex

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    9y
    Originally posted by @Bill Gulley:

    Investing should be accomplished with disposable income and cash on hand, absolutely not by by leveraging your own home for the money to invest, that being said for the unsophisticated investor! 

    Your parents aren't your gold mine. Where do they live if things go south and the FBI busts one of these famous mortgage hard money lending operators?

    Do you know enough about lending to perform due diligence on a mortgage broker? I'm sue you don't. Neither does your dad unless he's from the finance world and in that case, we wouldn't have this question.

    Tossing high risk money at some guy who lends it out is a much higher risk than most are aware, especially now with all the laws to comply with. 

    Just having a license isn't half the issue, really is their past performance at making money, a monkey can make money with money, but are they in lending compliance......most don't even know if they are. Others trot along thinking they are. And, there is no one on BP who can assure that they are. 

    I suggest you get with dad, then get to an attorney, then with guidance perform your due diligence, don't just toss money in some pot, you need to own the loan. 

    I suggest you look into transactional funding, the scope of that is pretty narrow and easy to learn with a good title company. 

    Next would be to get with an experienced fix and flipper, partner, use your money, you will have total control of funding, again a title company can help. 

    Again, points may not be charged by private lenders, it is prepaid interest and reserved for institutional and registered lenders, so forget about charging 5 points and 15%. Yes, there are loan sharks out there in the alley. 

    As far as partnering up with a lender, absolutely because you can't learn the game in 6 months, but what you need to look at and understand is the risk and that goes further than just collateral when dealing with brokers. 

    Have to say, putting your home at risk on a whim to invest with someone else isn't prudent at all ! 

    Not what you want to hear, I know, sorry! :)   

    @Bill Gulley sound advice , not worth risking their home to invest at all. Not hard money or anything really.  With that amount as well just not worth the headaches.

    Alex

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    9y
    Originally posted by @Account Closed:

    Definitely, a HELOC is the way to go in my opinion. This way you're maximizing your spread between payments. Unless they're wanting to lock in 30 year fixed money for something else, your HELOC rate goes up, and that's a sign you can charge an extra point or 2 on the loan as well. If they want to stay hands off, Don mentioned Wendy Sweet with Carolina Hard Money. She pays her investors very well from my understanding. Both Don and I know her well if we can help with the connection. As far as rates in Charlotte, for hard money, I've seen anything from 2-5 points, and 12-15 percent interest. Should give them a good spread. I think the hardest thing will be finding solid deals and investors with a track record with 100k to lend. Honestly, given that, I think it'd be worth a call to Wendy, as she already has the deal flow. Good luck!

    @Account Closedsound advice especially the part about $100k just not much most folks who are doing deals can do with that amount. Being I am opening a lending company yet just not sure what capacity and where to be exact. Its just not the capital that most folks can do much with. I would also have to say I agree with going to Wendy at this point in time if I was jumping into the game.  @Don Harris Always sound advice coming from you sir . Hope all is well with both you guys. Yet risking your own house to be in this game is the craziest thing I can think some one would do. I always told folks no on that . You home should not be risked as to many thing do and will go wrong in this business. @Scott Ryne thank you for mentioning me.

    Alex 

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    HML is a great business with due diligence.

    0Reply
  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    9y
    Originally posted by @Brent Coombs:

    Why don't your parents learn to become (good) direct investors, rather than borrowing to lend to people who find deals that'll earn an even higher interest than they're being charged?

    (I often wonder why Lenders don't invest directly more often themselves, rather than wait for their customers to fail so they can be foreclosed on - but which doesn't always help the Lender?)...

     I can see many reasons, but one might be that even "passive" real estate investing isn't really passive. Lending definitely seems lower maintenance to me. 

    That being said I'd definitely use it to be a more direct investor. Even if it means partnering with their son :) 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Anthony Angotti  lending simply has its own set of risks..

    and its state specific... some areas are much safer to lend in.. Generally speaking any state that uses Trust Deeds  with the power of sale .. is much safer to lend in vis a vi a default .. then a state that uses Mortgages and Sherrifs sales or court confirmations.. those can take a long time and COST a bunch.

    For instance in Mississippi I can foreclose start to finish in less than 90 days for under 1,200 dollars.

    if I want a judgement against the borrower as well.. ( called dual action ) and done in Texas a bunch that's another 1,500. on top of it as you need to go to court to get the judgement.

    however loans to KNown players who are very good at what they do. and yes it can be quite passive there are many deals I do that I don't work more than 15 minutes on.. and will make 10s of thousands in points and interest.

    there are deals I have done that took 15 minutes and I lost 10S of thousands.. its all about your borrower and your collateral.

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    2Reply
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