Question regarding investment loans

6 Replies

Hi BP experts! 

I heard that there are individuals investors who lend out money for purchasing. Hypothetically, If a traditional lender charged say around 4000 fees/closing cost etc and 5.5% rate along with a mandatory 25% down payment  ; Are there individuals who can lend to the same person at better terms beating out the traditional lender? : Say maybe 4.5 % rate and 15 % down instead? .

thanks!

Private money will always be more expensive than traditional. There is more flexibility with down payments and certain items but they are not stupid people and the rates will be higher. There is a lot more risk for them and their asset portfolio than there is with a large bank considered in some instances "too big to fail." 

@Chris Ellis Thanks for your reply..On the face of it, it sounds logical and I am with you on more risk to Private lenders vs Banks. Correct me if I am wrong, but dont the banks simply turn around and sell the exact same loan again at a higher price as a performing loan to the same private investors ?. then the bank makes money twice for the same loan and is able to offload the loan off its books .

Originally posted by @Krishnan T. :

@Chris Ellis Thanks for your reply..On the face of it, it sounds logical and I am with you on more risk to Private lenders vs Banks. Correct me if I am wrong, but dont the banks simply turn around and sell the exact same loan again at a higher price as a performing loan to the same private investors ?. then the bank makes money twice for the same loan and is able to offload the loan off its books .

 That's true, and that's why institutional lenders can lend you money at 4.5% or 5.5%. Otherwise, why would anyone lend you money for less than they can get by parking it in an index fund on Wall Street? Which in turn is why private/hml charge more - they don't have the ability to sell that $500k mortgage for $505k or $510k, so the only profit is the points/rate they charge you. 

Us institutional guys can charge the going rate plus ~$1500 in fees because we know there's another chunk of change coming our way on the back end. The South Korean Teacher's Pension fund, or the entity managing your Roth IRA, or whatever, that buys the mortgage backed security wants the safe asset paying a steady ROI, but doesn't want to deal with consumers directly at the point of origination. So it works for them, it works for us, and it works for you -- that point or two on the back end translates into a point or two that you don't have to pay upfront. 

The HML guys need to charge 3 or 4 points because they need that profit and they need to put some away to pay for the legal fees associated with foreclosing on you later on. Irony of ironies that folks using hard money loans are paying for their own possible foreclosure, but this is also the reason that frequent repeat customers of a hard money lender typically pay less in points as the relationship progresses.

Hard money lenders in Florida (disclosure I do lend hard money though that is not my primary business) are not likely to lend at below 10% (there are some exceptions) and will generally require 65 LTV (loan to value). Usually expect to see two points to the lender unless there are other people in the mix which can easily drive that number up. That's it. If you want something between a hard money lender and a traditional financing avenue, you'll want to inquire of some creative, honest, mortgage brokers who may have interesting products but they are harder to come by.

@Chris Mason @Eric Jacobs   Thanks for the feedback . besides the borrower doing their numbers, are the lenders they borrow from be like a sanity check on the business plan ? Or is it like as long as the borrower makes a decent case for the reason to borrow and the terms are met/agreed to; the lender usually lends?

Business  plans aren’t what they used to be.  A good business plan is a couple pages long.  Lenders lend on value of the asset, strength of the borrower or both.  The “plan” generally matters more in larger deals.