Investor · Washington, DC · Member since 2017 · 136 posts · 59 votes
What is the smallest amount of gap/renovation funds for which you would seek private money? I suspect that there is a break-point at which it makes more sense to just fund the gap yourself. Typically the commercial banks and hard money lenders (HMLs) have the higher amounts covered, so I'm trying to determine what the low-end values are for folks that would require gap funding to close a deal. Is that a niche market for a money provider, that any deal providers think adds value?
Gap funding in your case is best with using a true private lender. An individual you know or someone you have met that is interesting in putting their money to work. If you borrowed 40K and paid the investor 2 points and 10% interest that’s $333 a month of interest plus $800 in points. If your project last 6 months that’s an approximate 14% return for your investor. That’s pretty good.
Investor · Washington, DC · Member since 2017 · 136 posts · 59 votes
6y
@Kenneth Garrett, Yep, I'm the private money lender, and that deal does sound good to me! Now in your example you used $40K as the borrowed amount. My question is, what's the smallest amount you would ask to borrow from your PML? At what small amount does the "hassle" of getting a PML outweigh the benefits?
I'm not sure there is a limit, but it depends on where the funds are coming from. If my funds I'm leading out are through a self directed retirement fund, which has costs associated with it, the lender may ask you to cover those fees probably $200-$300 or so. I have borrowed as little as 25K on a BRRRR project.
Investor · Owensboro, KY · Member since 2008 · 131 posts · 65 votes
6y
As a PML myself I won’t lend less than $10K, and at that amount it’s questionable unless the borrower is willing to pay 2-4 points plus 10-20% interest.Also what collateral is the borrower going to put up to secure the loan? Just a few of many questions that need to be answered to the lenders satisfaction.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
6y
We only loan first position purchase money,@Greg Moran, but we allow loans behind ours. In fact, we like them. The majority of our borrowers also borrow their rehab money. Understand that you don’t define the demand for your money; your market does.
Randomly determining a maximum or minimum amount you will loan, from a message board, is not likely to satisfy your market. That is, if a typical rehab in your area takes $60k, offering $20k because that’s what you have or that’s what someone else does, won’t solve a rehabber’s problem. You need to do some local research.
After many loans we've found that the typical rehab budget is about 10% to 12% of the ARV. That is, if the ARV is $500k, it's reasonable to expect a $50k to $60k rehab cost. Similarly, a rehabber could expect to spend roughly $100k or so on a million-dollar property. Obviously, there are minimums since the cost of a roof or rewire doesn't change with the ARV. I can't say I've ever seen anything less than a $35k rehab and that was years ago. This is not any kind of rule-of-thumb, just our collected experience. It's an approach that could give you an idea of what a flipper might need to rehab a house and how much you might need for a rehab loan.
Understand that subordinate loans are very risky because you can easily be wiped out. If you’re doing this because you see a market niche, and you can withstand an occasional loss, then that’s fine. We know, individuals who specialize solely in subordinate loans for rehabs. If you’re doing this because you want to get into lending seconds because don’t have enough money to do firsts, then you’re taking a dangerous risk and can easily be wiped out.
Lending in second position is not for the faint of heart.