Hard Money- Leverages Time as Well?

Question

My husband and I own several rentals, all of which we have purchased with cash. But we have been re-evaluating how we may fund future deals. One of the major factors that we have been overlooking with hard money is leveraging time.

Instead of using say $100,000 in available cash to purchase a single property, I could take that same amount of money and get 3 or 4 houses with a hard money loan. Therefore I leveraged TIME as well as money, because it may be a little while before I have $100,000 in funds to purchase another house. Assuming the property cash flows, with rents higher in most areas because of a depressed retail market, I can use that extra money to pay down the 15 or 30 year notes quicker.

However, there of course cons when working with HML such as: Amplified Losses, High Closing Costs, High interest in the interm until can refinance and generating a loan rather than owning a property free and clear.

Curious as to what you guys think, thanks. Also wanted to ask for you HML guys what notes do you typically get on your houses 15 or 30?

Joffrey Long · Answer

Samantha, That's a big, huge, "it depends." It would depend on so many things, your other income, your other assets, your financial needs, your tolerance for risk, how hard you're willing to work now and later, your age, your family needs, i.e. kids, aging parents, bla bla, what you're otherwise investing in, your experience in investments, your plans for the next 5, 10 or 15 years, and on and on and on. I will say that for anyone, it's hard to get it exactly right. This means that for most people, you will err to the conservative (not enough leverage) or err to the aggresive. (high leverage) For many years, I erred to the agressive, and had related losses. About 20 years ago, or so, I changed, and since then I stopped erring to the agressive and started to err to the conservative. I've never really had the perfect amount of leverage that I could handle. Having had some more leverage than I've had during the past 20 years would generally would have advanced me further. The darn problem is that real estate has downturns. This one that just happened was my 3rd, and it's the first one that didn't burn me good. And then there could be personal downturns, loss of other income, somebody gets real sick, and if you're highly leveraged it doesn't help during those either. Bottom line, accept that you probably won't get it perfect. If you err to the agressive, it can be quite bad. If you err to the conservative, all you lose is "potential gains" that you never really had to pay for or work for. Feel smarter already? Hope this all helps. Ok, I'm off to the gym to work off some of this "prosperity." Joffrey

Joffrey Long · Answer

Samantha, Here are some thoughts from a guy who has invested in residential rental properties over 35 years, done quite well, but has near-collapsed twice (decades ago) under too much debt. Real estate leveraging always has the seductive pull of being able to do more, more, more if you use leverage. Leverage can be great, but too much can be your undoing. Best recommendation I can give: Talk to some old-timers in your area who have invested for a few decades and will admit to having messed up a time or two with leverage. Then, evaluate the info. you gather and set your own "investment policy" as to how much leverage you will use. I can also tell you my perspective as a lender. I've met a number of people who wound up, after years of investing, being well-off and teling me that having a number of properties paid for was the key to their success. I've yet to meet a wealthy person who said that having a lot of leverage was the key to their success. (They may exist, but I have not met them.) Hope that helps. Joffrey Long

Samantha M. · Answer

Joffrey Long Thanks again Joffrey. Out of curiosity, through all of your personal experience and clients, is there a set % sort of like a LTV that is a safe amount of TOTAL leverage for anyone to have had any given time?

Joffrey Long · Answer

Thanks, Samantha. I guess I should tie together my "two lives" here, speaking out of one side of my mouth as an investor and the other as a lender. I'll clarify that as a hard money lender, I do encourage people to use leverage to buy investment property. Carefully, though. I frequently sell my hard money by selling the investor on using hard money to buy, then working to pay off the debt as quickly as possible. Joffrey Long

Samantha M. · Answer

Joffrey Long Thank you very much for the detailed reply. Thats exactly the sort of information I was looking for. I figured leverage as a TOOL used conservatively can help you in the long term. However once you become over leverages there will be problems. Just look at big corporations such as Chesapeake Energy, they are having problems currently because they are over leveraged. Big or small everyone is susceptible to being over leveraged.

John Chapman · Answer

I'm in your area Samantha M. and I used to buy cash. I switched to HML due to the fact it was the best way to get conventional financing. I would buy with HML, fix the place up, and then immediately refi the note into conventional. (The HML note would include repairs) Even with the all the junk fees, the numbers were still better with this model. I've never had seasoning requirements and it's worked well for me. As for 15 vs 30 years, I've done both. Stick with 30 due to the flexibility if provides. You can always pay it down quicker. Also, once you cap out with conventional financing, you won't have the option of 30 years.

Ziv Magen · Answer

Samantha, your automatic assumption that "investment property = rehab" leads me to believe you may be better off learning a bit more before jumping into this endeavor of yours. I think you may be sold on flip/short sale/reality tv style scenarios and believe this is the only type of investing out there - this is very far from the truth, it's only one small segment of the property investment market.

Glenn Espinosa · Answer

I have never worked with them before but I do know Lima One Capital in Georgia has a rental loan package that could be something worth looking into. I don't think they operate in Texas though... I've done a lot of reading lately on capital growth vs cash flow, and time leverage. A lot of it depends on how fast you want to be totally passive and whether or not you even need passive income in your life right now. Jeff Brown talks a lot about the issue in BP blog posts as well as his personal blog. Very interesting stuff and he makes a very compelling case for increasing your portfolio at the cost of reduced cash flow for better long term results - again dependent on your goals and where you are in life/retirement.

Grant Kemp · Answer

Be sure of your ability to get that mortgage though before getting into the deal. at the very least, you'll need to have multiple exit strategies on something of this nature.

Samantha M. · Answer

Ann Bellamy I do not intend on staying a hard money loan for 3 years, I will refinance out as soon as I can into a 15 or 30 year conventional mortgage.