The biggest bottleneck in most investors’ businesses is continuing to find money to purchase more deals.
We (my dad and I) have been investing in mobile homes with land since 2011, and our local banks have had very little appetite to make loans to investors on these types of properties. We’ve used a variety of sources to fund deals (HELOCs, personal loans and lines of credit, business loans and lines of credit, and private investments from family). With these creative sources, the majority of our properties are owned free-and-clear.
It would be nice to place mortgages on many of these properties and pay down our lines of credit so that we would continue to be liquid and could act quickly when we came across desirable properties.
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Using Hard Money Lenders
In mid 2014, I started looking at hard money lenders (check out BiggerPockets’ list here). Most will not touch mobile homes or make loans that are longer than two years (I preferred five or more years to keep the monthly payment reasonable). After a lot of searching, I found a broker who worked with an investor that was comfortable with the mobile home and land collateral as well as a term length of five years.
We decided to package five of our nicer mobile homes with land (all doublewides) that were all in the same county. Let’s discuss the terms.
The lender was willing to loan up to 50% LTV of the appraised value of the homes. Like I mentioned, these were our nicer properties, and even though we purchased them for about $20k a piece, they appraised for $180k, or $36k each. With the 50% LTV, the lender was comfortable with a $90k loan on these properties.
We were quoted a $90k loan with a five-year length and 15% interest that comes with a monthly payment around $2,100. The loan’s total length was five years and included principal and interest (no balloon payments).
After all closing costs (broker, attorney, and appraiser fees), we netted around $82k.
If you’re thinking that we must be insane to accept these terms, you’re probably right, but we felt confident that we knew what we were doing. At that point in our business, we had around 25 homes and knew our numbers well enough to know whether we could still cash flow on an $82k investment with a $2,100 monthly payment.
As luck would have it, we purchased 13 units from a retiring investor for $85k just days after the loan closed, which has produced an average of $5,000 per month in revenue.
I wouldn’t recommend hard money to anyone who’s done less than five deals in a specific niche. There’s not a lot of room for mistakes when the terms are as unfavorable as this to the investor.
From start to finish, it took us about three months to close this loan. We did another loan with the same broker and lender a few months later (similar terms as the first one), and it took about three months to close. We were lucky that the first hard money loan closed just days before our closing on the 13-unit package and were not even aware of the package of properties until about a month and a half into working with the hard money broker. I had no idea it would take that long.
This broker claims that he can close deals in as little as seven days on his website, just like many of the other hard money guys. Try to get the money before you need it.
Hard money was clearly a worthwhile endeavor that’s helped us grow our business when there were few lending options available to us. We’ve used it twice. I hope that we can continue to find cheaper sources of money but will turn to it if need be.
Have you used hard money to grow your business?
I’m curious to hear your experiences. Please leave a comment below!