Owner financing with hard money lending

[Ayana Mingo]

I would like to get into seller financing. I want to purchase a property cash with hard money lending then resell the property using owner financing to an end buyer. Will hard money bite hugely into my profit.

Also how do you calculate hard money lending into your project?

Thanks,

Ayana

[Ellis San Jose]

@Ayana Mingo, I like your creative thinking, but I think you have put the cart before the horse.  A solution seeking a deal hasn't worked well for me in the past. The property & situation will dictate the possible solutions, not the other way around. 

The stars would have to really be aligned for each of these steps to make sense.

@Jared K. did a great job of illustrating them above.

Hard Money is typically most appropriate for short term, high equity spread property in order to justify the high cost of money. Most hard money terms are 12 months or less, so you need a big chunk of cash to pay it off.  MOst likely if you seller finance, the end buyer typically puts a minimal amount of downpayment which is seldom enough to pay off your Hard money lender.

Also, the high interest rates are not suitable for holding for long term because the net income produced by the property has to be extremely high to cover the debt & operating expenses.

The proposed exit of selling your note will be challenging as well because as a note buyer I will tell you, note buyers want adequate equity cushion to protect their investment, and they want a decent yield on their money as well.  

So for this to work all of these things: 

A) You need to find a DEEPLY DISCOUNT PROPERTY

B) The property has to generate INCREDIBLE POSITIVE CASH FLOW to carry the debt & operating expenses.

C) You have to be prepared to PAY OFF the hard money lender in 12 months or less.  

or your end buyer will need to have a downpayment large enough to payoff the loan.

D) If you have made it this far & sold it with financing now you need to have a marketable note with enough equity cushion & yield satisfy a private note buyer.

You may want to run some hypothetical numbers on a spreadsheet: 

What you would need to buy a $100,000 ARV property at to make all of the above work.

What cash flow would be required to support the debt of 18%, 15%, or 12%

Use an expense ratios of 60%, 50%, & 40%. 

What price & terms you would need to obtain when you sell in order to give a note investor a yield of 15%, 12%, & 8% yield with less than say 75% loan to value.

Don't be discouraged, you will find deals that will put cash in your pocket once you learn how to recognize more profitable opportunities.

Best of luck