$100,000k High Interest Loan to Invest in Real Estate ?

Question

would it be a good idea to borrow $100k at an interest rate of 3% /month? I plan to either buy a few properties (at a discount) that need rehabbing via hard money lenders. I would then use the monies from the loan for down payments and other expenses. I already have a couple of friends with very strong credit that I would flip the properties to them for a profit once the rehabs are completed. They intend to hold them long term as rentals. I plan to pay the $100k loan back by June/July of this year. Does this sound like a solid plan even though the interest rate is 3% per month? I welcome any and all thoughts.

-Derek

Account Closed · Answer

Derek,

The concern is that if you annualize the 3% monthly, the rate is 36% APR, which is really high and leaves you with no room for error.  There are a number of hard money lenders who could lend at a percentage of the ARV of the property and allow you to put very little cash into the project initially.

Also, if your wife makes $55K annually and you are currently unemployed, you don't want to pour all of your hard earned emergency funds into real estate projects.  If the market shifts at all or your friends decide they find a better option while you are rehabbing, you could be stuck.

One other idea would be to partner with your friends who you will be flipping the properties to.  You act as the project manager/general partner and they can provide some of their initial equity and possibly sign with you on a hard money loan.

Do you have any equity in your home or the rental property you hold?  Can you tap into one of those for cheaper debt?  Otherwise, you might want to wait until you actually have the money from your settlement instead of taking a 36% advance.

Hopefully that helps!

Zach

Damon Gibson · Answer

@Andrew Johnson at this point I'm leaning towards using part of my savings as a reserve for fixing and flipping with the use of hard money lenders.  I plan to do 1 flip/month or every other month until my credit improves and I'm able to refinance future flips into conventional mortgages and hold them for rentals.

The $100k would have been used as security in case something went wrong with my initial investment and I needed to cover living expenses.  However, from what I understand if I use Hard Money I don't have to put up all of my savings (only origination and down payment).  Also, I was originally thinking about using the $100k to invest in a small apartment complex (40-50 units).

At this point I will decline the advance and go the flipping route via hard money lending.   This will give me more time to learn and improve on different strategies. Thank you and others for helping me think through this.

Account Closed · Answer

Derek,

I am a portfolio lender by day and a beginning investor by night, so from my personal discussions with hard money lenders, I do think it's doable.  A lot of those places tend to not worry as much about credit, but more about the property and the deal itself.  The only issue is that, as you know, they are short term (6-12 months) at the most.  Once you hold for longer than that, it becomes very expensive.

I actually found a lot of luck on the "Marketplace" tab up at the top and "hard money lenders" page.  There is a lot of good information there and some links as well for online hard money lenders.

Also, some of the newer hard money lenders have rates around 10%-13% and are very transparent with fees and equity that is necessary.  I spoke with some of the people at LendingHome and they were very helpful and transparent, so that might not be a bad place to look.

Damon Gibson · Answer

@Marc Kelly I will contact you today.  Thanks!

Damon Gibson · Answer

@Zachary Goldman I will definitely check out the Hard Money Lenders page.  Thanks for your suggestions.

Damon Gibson · Answer

Zach that helps a lot.  We have about $60k equity in our home, and about $25-$30k in the rental property.  However, I suspect we would have a hard time pulling cash out due to the credit issue (wife 660, me 600).  Is it possible for me to get a hard money loan to acquire and rehab (setting aside $30k from savings for down payment).  Once I sell the home repeat that process again.  All the while we'll still have around $60k in savings?  Our cars are paid off, and the only debt we have is the two houses.  Would a hard money lender do a deal with me?  Or could I use my wife since she has stronger credit and is working?

Damon Gibson · Answer

Thanks for your response Dave.

I'm in the process of repairing my credit as well as my wife's credit.  We had some hiccups about 6-7 years ago (foreclosed rental properties).  We currently own our home (17 years) and one rental property (12years).  My wife makes about $55/year, and I'm currently not working.  We have about $90k in a savings account.  The $100k would be an advance on a substantial settlement that I will be receiving in July.  I'm also thinking of going straight to multi-family investing (currently studying and networking).  My only concern is the interest rate, poor credit, and no job.

Dave Van Horn · Answer

Hi Derek,

It's not that I don't think this plan could work (although I do think 3%/month is high) but my question to you is: What's your plan B if something goes wrong? For any deal like this I would recommend an investor have reserves in place (and maybe you do?) but they're necessary when borrowing money.

I also think instead of this high interest rate loan, it may be a better idea to  find a money partner to get cheaper money. Or, why not do a JV deal to get some capital to cover the down payment on the properties?

Just some initial thoughts.

Best of luck

Dave

$100,000k High Interest Loan to Invest in Real Estate ?

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