Monday, July 13, 2009

Another Hard Money Investment

I have entered into another hard money lending investment, which seems to be my preferred investment type lately. This is a first mortgage on a property that was bought at the courthouse steps (i.e., at a foreclosure auction). Purchase price was $181,000. The buyer put up $100,000 of his own money and we (myself and some other investors) are pooling our money to create the $81,000 difference and write a first mortgage. This is a 1 year only note, with a 12% interest rate (net 10% to investors after the processor takes 2% for his trouble) with no pre-payment penalty. I am one of three investors on this note.

The note that was foreclosed on was for $532,000, meaning the lender took a $351,000 loss when selling this property. (Of course, that loan was made during the real estate bubble and is not really a true indication of the value now.) The property is a four plex which is fully rented. Total monthly rent is $3,550 and is broken out per unit as $700, $1,250, $900, and $700. Comps are in the $150,000 range. (Technically, the property is a triplex with a 1 bed / 1 bath house in the rear of the property, but we're treating it as a four plex for analysis purposes.)

If we have to foreclose, we have a property that generates $42,600 in gross annual rent for $81,000. Not too bad.

Now this is not normally a deal we (myself and my partners) would do. The property was bought for $181,000 and comps at $150,000?? Why are we even interested? There are several reasons. First, the borrower has put up $100,000 of his own money. Second, he is a broker in the area and my partner has known him for 10 years, so we are comfortable that he knows what he is doing. Third, the total loan on the property is $81,000, so the loan to value ratio is 54% (using the $150,00 comp figure), still darn good. And lastly, if you look at the property from an income standpoint, it's a good deal. $42,600 in gross rent for $81,000 is a 53% ROI. But that's not a true number, since that is gross rent, not net rent. But even assuming 50% of the rent goes to pay maintenance, taxes, etc., we're still looking at a 26% ROI.

This illustrates a good point about rental properties. A four plex is right on the border between being considered a standard income property, like a single family home, and a commercial property. Where SFHs are typically evaluated on their property characteristics, such as loan to value, appreciation potential, etc. as well as their ROI, commercial properties are generally evaluated largely on their cash on cash return, or ROI. Being a four plex, one could look at this either way and it looks like a good deal either way.

I am labelling this investment hard money #8.


Thomas Ott said...

Hi Shaun,
I've been thinking of doing some hard money loans for a while now but I'm unsure how to write the agreements. Do you have any suggestions where I might find some more information on this or any books on the subject?


Shaun said...

There really isn't any specific "hard money" agreement. If you or a group of others are the lender, then your form is just a standard mortgage form with the lender listed as you and your other investors. (If more than one investor, the mortgage should spell out what percentage of the mortgage each investor has.) Just be sure to use a mortgage form that is valid for your state. Most hard money loans are interest only, so it should state that, as well as the length of the loan. Again, typical mortgage document info. Any escrow company should be able to provide this form for you.

The only other form that may be needed is a Loan Servicing Agreement. This would be if one party is collecting the mortgage payment, distributing it to the other mortgage holders, and keeping a percentage of the payment for their services. The version I have seen is just a three page form. Again, your escrow company may have this form available. This is just a document between the hard money lenders though. The buyer does not need to sign, or even see, this document.

It might be to your advantage to join with some other lenders who have done this before. Then you will get copies of all the documents and see how it is done.

Anonymous said...

Hi Shaun. I just spent the last week reading your entire blog. What a ride! I must say, reading your blog from the past 5 years has been more educational than many of the published real estate investment books I've seen. Thanks for keeping us all in the loop.

I have one question. How do you go about finding these HM lending opportunities? thanks.

Shaun said...

Thanks for the kind words! Wow, has it been 5 years??

As for finding HML opportunities, I suggest joining a local real estate investment group or contacting an escrow agent or real estate agent you have worked with in the past. Also, if you spend a lot of time reading deeds of trusts at your recorders office, you might start to recognize the same names popping up a lot. You can try contacting those people. I met my partner through a meeting of people interested in real estate and the "Rich Dad Poor Dad" books.

Archie said...

Hey I have property i own free and clear. I need some Hard money to fix it up and rent it out . if someone knows were i can find some hard money please contact me via my email at or 404-839-2235

California Hard Money lenders said...

Hi Shaun,
Its really a great blog with alot of information about Hard Money Loans. I have California Hard Money Loans Business and I really appreciate your work...Keep it up...

© 2006 Shaun | Site Feed | Back to top