Last week one of MyPropFolio users contacted me to review a hard money loan that she was reviewing. It was a 4 unit in Arizona and it looked like a good deal but I took the time to write up my philosophy on doing personal Hard Money Loans (HML's) secured by properties..
Here are the key areas that I review before moving forward with the deal:
1) It is all about the property - I go into HML deals with the belief that I will have to take over the property and I decide if that is ok with me - the way I look at this is
a) Where is the property - am I happy with the properties location and demographics?
b) What are the Economic Projections - Solid job growth and employment outlook?
c) What is the local Real Estate market appreciation?
d) What are the Crime Rates?
e) Does the area rate high in national quality of life surveys, growing in popularity?
f) Is there good population growth and density?
g) What are the current RE Market Conditions?
h) Is there any redevelopment going on in the area?
2)If I take over this property will it be able to pay its monthly expenses and give me a profit at the end of each month. You can use MyPropFolio to do this analysis for you.
Due-diligence --
a) What are average market rents?
b) Are Rental rates on the upward move (at low point)?
c) Do income properties sell for 10 times annual rent or less?
d) What is the average vacancy rate? (I prefer 7% or less)
e) Contact local Property Management Companies
f) What are the local Section 8 Laws?
g) What are the local Rental Laws?
3) Is there equity in the property - If I am giving a prom note of $100K, just like the bank I require that the property is worth $120K - $125K. If the property is in an area that I am not savvy about I require a appraisal on the property. (I do not pay for this expense)
4) Interest rate - The reason that I am doing this mortgage is because that banks find it too risky... As such I need to make a larger spread than the bank does...
5) The investor - what is their track record and their current Personal Financial Statement? This is very low on my radar as I assume I will be taking back the property..
These are the 5 points that I review before investing in any HML - I hope that this helps you out and please tell me what you do....
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1 comments:
First of all I want to make sure that you're all familiar with the term Hard Money.
Hard Money is Money Loaned to you by private investors, these private investors can be from anywhere but normally the Hard Money lenders would want to work within their own state, so if you're from California than you want to find an investor in California.
So what type of Hard money loans the Hard Money Lenders will do?
The First type of Hard Money Loans lenders are offering is Construction Hard Money Loan.
In construction Hard Money Loan the Hard Money Lender will loan the borrower the money in stages, example: You own a land in Los Angeles California, on that Land you want to build a house, you have the Plans approved by the city of Los Angeles and you're all ready to go, now you need a Hard Money Loan because it will be easier to qualify and get the money you need for the construction.
You will call a Hard Money Lender and give your information, the approved plans, your financials, your budgets for the construction(you can get it from your contractor), then lets say the Hard money Lender agrees to Loan you the money you need, but the way the Hard Money Lender will Loan you the money is by stages, and the stages are:
When your Contractor will finish the foundation, the contractor will get paid after inspection that is done by the Hard Money Lender $10,000 for the foundation work. Than when your electrician finishes the electricity in the house, than the electrician will get paid after inspection done by the Hard Money Lender another $7000.
You understand the concept?
Everybody by the completion of the construction will get paid by the Hard Money Lender.
Why the Hard Money Lender do that?
Because he want to have control of the money, private investors know the risks they're taking but they're still willing to take these risks only if they have 100% control of the money.
Why Hard Money Lender will choose to Loan money to Investors and not Homeowners?
This is a very good question that a lot of people should know the answer for.
The Hard money Lenders wouldn't want to have to take a homeowner out from his home because he didn't make the payments, but with investors it's different, it's 100% business and that's what the Hard money Lenders want- Business.
What type of properties Hard money Lenders will Loan money on?
A Hard money Lender will Loan money to many type of properties: Single Family Residents, Condos, Townhouses, Apartment Buildings, Hotels, Motels, Office Buildings, Shopping Centers and many others.
What hard money Lenders don't like, it's Land. It will be very hard to find a Hard Money Lender that will Loan you money on a Land, and the reason is because there is no income to Lands, maybe you can get a Hard money Loan on a Golf Course or maybe a Land that you about to develop something on, but raw Land- Forget about it.
Today Hard money Lenders Loan more money to Commercial Real Estate investors rather then to residential investors and the reason is Less risk.
Today the Residential market is not going up, Values of Homes are actually going down by more than 30%, and every day more foreclosures are coming out on the market, so the Hard money Lenders are smart enough not to participate in taking risks with homeowners.
Commercial Real Estate is still very competitive, investors are still buying properties, remodel properties and build new properties.
The Commercial Real Estate market is still alive just like it was in the residential market 3 years ago, and Hard money Lenders are still in the game, and now they're busy more than ever because the Banks don't Loan money that easy to borrowers.
So it's Commercial Properties rather than residential properties, and Construction Loans.
Good Luck
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