HML and MFH

[Eddie Starr]

Howdy, BP community.

I've been looking over various MFH in my area, and looking at funding options, and am trying to figure out how to make it happen.

MFH is higher costing, with most being at least $200k, with the higher NOIs being $500K - +$1M.

I was thinking HML would help me make this happen, but the probs I've run into are:

They will only cover a certain percentage of the amount I need to purchase the prop. I initially didn't think it would be too hard, but the problem is, is they all want first position. So, even if I could get seller financing, or somehow a conventional, to cover what the HML wouldn't, there's still the issue of no one seems to want to take 2nd. My thought was, from the property's cash flow, to use the vast majority of that, to pay them both off, simultaneously, but what makes sense to me, and many not in the REI world, won't work.

Then, the terms to pay back the HML. It's generally 1 - 5 years. I've seen a few that offer longer periods, but with much higher interest rates, and more burning hoops to go through. The question I have, is that for HML, how would I even pay it back? I have yet to come across a property, where the NOI would allow me to fully repay the HML, in that time frame. Would, near the end of the term [for those offering at least 3 years?], I be able to go to a conventional commercial lender, and based off the business's credit [D&B, Equifax Business], be able to get a loan to pay off the remainder of the HML, and then, pay on that mortgage?

[Chris Winterhalter]

@Chan K.

The money is definitely more expensive and can range wildly on rate and points. Pretty much all HML's are going to require 1st position on their loans. If you are looking at 1-4 units then hard money can make more sense depending on your experience and the project. However you need to fully understand your exit strategy and the ARV of the project. Let's say you purchased a 4 unit and let's assume you accurately forecast the financials and rehab:

• 50k purchase w/30k rehab (+ soft costs, holding costs etc.)
• ARV is 100k
• Purchase and rehab funds come from hard money
• After your rehab, stabilization, and seasoning you refi in 1 year @80%. You could potentially get out of the project with little money invested after refi. Make sure you have the proper amount of reserves to allocate WHEN things go wrong though.

Also I'm not sure what house is going to have a positive cash flow of 1k especially leveraged with hard money however the deal isn't possible because a HML isn't going to bring 10% and take a 2nd position. Also a lot of commercial banks won't allow a seller 2nd. Especially if you are new to the game. You are getting more into a partnership/private money situation when wanting to structure a commercial loan with outside funds. You could partner with someone that has capital and utilize your credit and expertise to locate, rehab, and stabilize properties. Make sure to seek proper legal counsel.

@Maurice Miller

I don't really borrow hard money however it looks like the market is tightening up on their end as well. Spreads are thinning out as more capital is entering the market. Are you seeing the opposite happen in FL?