Confused about LTV for Hard Money
Park City, UT · Member since 2014 · 45 posts · 18 votes
I've read a lot of posts about this, and am still a bit confused. If I am purchasing property that the asking price is $99500 and the appraisal is at least $155K which makes under 65% LTV, if I am getting a hard money loan, do I still need a down payment? If they loan up to 65% wouldn't that mean I could get the loan for $99500 and not have to put a down payment down, and I could just pay closing? The equity is the down payment? Or am I not understanding how this works? Do I need a down payment regardless, but I just can't get a loan for more than $99.5K, and the downpayment would be 5,10 or whatever percent of the 99.5K of the loan?
I think you're getting some bad advice on here on hard money. Not because its bad advice but because there are simply different types of hard money lenders and the ones commenting above are not the right ones that fit what I believe you're looking for.
There are some hard money lenders that will lend you a percentage of the purchase plus rehab. And there are some that will lend you as a percentage of the ARV.
The former types and some of the people on here that are suggesting they will lend 65% of the 99k make no sense to me either. So you and I are in the same boat. It makes no sense for me to pay the points and the super high interest rate if I'm putting 30% into the deal. Why do i need hard money if I'm putting that much down? Use a regular bank.
Now what I'd recommend you do is find some of the hard money lenders that have the right program for what you seem to be looking for. Find one that will lend up to 65% of the ARV of the home.
So, in your example. if your puchase prices is 100k and it needs 10k in rehab, then your all in price is 110k. The hard money lenders that I use will then have an appraisal done based on what the house will be worth AFTER (hence the term ARV or After Repair Value) the rehab is completed.
They will lend you up to 65 or 70% of that ARV number. So lets say it appraises out at 150k based on the house being fixed up. And the rehab/hard money lender lends up to 70%, they would do a loan for you of 105k total.
They'd pay 95k at the closing and 10k would go into a rehab escrow that they would hold until the work is complete.
That means you'd have to come up with the other 5k to purchase the home PLUS the closing costs and points that hard money lenders charge (typically 4 to 6% of the total loan amount). In this example, you'd probably be out of pocket about 5k for purchase, 5,500 for points, and another 2k or so for closing costs. Or roughly14k total.
But there are two reasons why hard money is such a valuable tool.
1) If you can find better deals, you can limit your out of pocket to just the points and closing costs. With some hard money lenders (there's one I've done a lot of deals with) that will even roll the points and the closing costs into the loan so you truly have a no money down deal. But the deal has to be tremendous to do that.
2) Even at 14k, you're still doing far better than if you were to use a traditional loan.
For those, you'd need to come out of pocket 25% plus pay the rehab and closing costs out of pocket. In your example. 100k purchase (25k down) plus 10k in rehab plus 2k in closing costs. Thats 37k that you would need to do the deal.
And try getting that money back out. In a flip, sure. In buy and hold, thats a cash out refi that is much harder to get. Using the hard money loan, you would have a loan of 105k and could rate/term refi that out so you only end up out the 14k total.....
I think you're missing the key difference between conventional and private financing which is flexibility. We have primarily been a buy-and-hold outfit and use hard money all the time when the equity is in flux and then do a conventional refi when everything is stabilized.
Even if the property needs no work and is turn-key, hard money may be an option to get on title and use conventional financing to refi based on appraisal after title seasoning. This is how we have gotten into many properties without tying up cash long-term.
Private lenders can close very quickly--essentially making you a cash buyer. This may be very important in a seller's market or to get the deal at your price.
I once used hard money to move an existing house onto a flag lot. No conventional lender would touch it because we were dealing with multiple parcels and a non-appurtenant structure.
I spoke with an investor a few weeks ago who has been flipping for 30 years. He still prefers to use private money (albeit at 7%) even when he has a $3M LOC with a bank at lower rates. I asked him why. He said that private money always says "Yes"
Hard money is instrumental to our business as an acquisition strategy while we create or realize the equity. Only then do we pursue conventional financing as a potential exit.
Hard money is not a sub-prime loan for marginal borrowers. It's a bridge loan with lots of flexibility to use while you attain your long-term disposition. It can be a great tool--and sometimes the only tool--for structuring certain types of deals.
Hope this helps,
Wm
How did you find these lenders that will lend on the ARV of a home? Just called around until you found one or were you referred?
Also when you use HML do you use for flips, or buy & hold? I wasn't sure based on your post. The cash out refi option is what I am looking for, but I understand the deal must be amazing from the start for it to be an option. Just was curious on your thoughts and experience. Thanks!
Ha. Had to go back and read the thread here because it was over a year old.
But I do want to be clear.
1) I would clarify that the "lenders" that will lend on the ARV of a home are not simply lenders. These are hard money lenders only. I do have one local bank that actually did lend me purchase and rehab. But only because the numbers were silly.
2) In terms of how I found the good hard money lenders that would lend 100% of the purchase plus rehab - up to 65 or 70% of the ARV of a home. Yes. I just searched the web and called a lot of hard money lenders.
Just like I've done finding end loan financing.
I don't think I can say it enough. But when I talk with beginning investors (from 0 to say 5 deals), the one thing I always try to point out is that the one thing almost noone ever talks about when it comes to being an investor is how much time you're going to end up spending looking for financing.
I'm at 54 properties (with 55 and 56 under contract and closing early next month). And I still do not have one lender that just says "Mike, you get em and we'll finance em". Now my current hard money lender tells me that. He'll do as many loans as I need and he is always pushing me to find more deals.
But in terms of end loans, none of my local banks have come to me and said "we'll take every single one of these deals you get up to 1 million or some arbitrary number". What they tell me is to keep bringing them more loans. But the fact is no one local bank wants to be on the hook for any significant number of properties that one investor has.
It goes back to their "layers of risk" mantra. Thats too big a risk item to them. They'd rather be 20% exposed to any one investor's portfolio for say 3 or 4 investors. Then say, 80% exposed to one investor's portfolio. So I rotate my end loans around.
In terms of what I do, I am strictly a buy and hold investor. When I first started was just barely at the tail end of the boom. I flipped my sister's neighbors house. That was the only flip I did. Ever since its been buy and hold only. And part of the reason there is that the one thing I have always heard from experienced investors is their one regret was they wish they had never sold a single house.
Well, eventually, I will sell some of these houses in the areas further away from me and/or the houses with the lesser layouts, etc, so I can upgrade the portfolio. But my goal is to get to 100 and then continue selling stuff I want to upgrade. I enjoy it to too much to stop.
After all, if I have a 140k house today that becomes worth 200k and my loan goes from 90k to 70k in say 10 years, why not sell, take the tax hit and try to buy myself another 200k house for 140k. I may pay 30k or 40k in taxes and closing costs, but I'll gain 50k in equity and will start the depreciation clock all over again at a higher basis. :-)
At the end of the day though, the key value in using hard money is that it helps you preserve your capital so you can grow a portfolio much much faster. And, as you'll find out, by sticking that 100% hard money loan on a property, it establishes your lending floor and makes it much much easier to do your refi's since they'll be rate/term refi's.
The alternative is putting down 20 to 25% and paying rehab out of pocket and then trying to find a bank that will do a cash out refi. Cash out refi is easier to do today than it was during the bust period. But most banks are still very spooked about doing cash out refi's with no seasoning. So unless you have a boatload of cash you can leave in your deals, its going to be really tough to grow a portfolio with any reasonable speed without using hard money. At least from my point of view any way.
That one bit of insight regarding banks being 20%exposed as opposed to 80% just made so much sense to me. Thank you for sharing that.
What you just described in terms of your goals is exactly the model I am looking to adopt. I want to Buy & Hold long term, to build wealth. Currently I am looking for partners to help me et started, which I have a few in mind. We are all engineers who recently graduated college and have good incomes with good Loan-to-debt ratios. I don't have any equity or tens of thousands saved up to get started on my own so I am looking for creative financing to get started.
May I connect with you and pick your brain a bit about the two scenarios you mentioned at the end?