Where Do I Find Investors to Offer 6% Secured by 1st Mtg

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Where Do I Find Investors to Offer 6% Secured by 1st Mtg

James Gallagher
Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes

Hi All,

I just got some great advice by a fellow Bigger Pockets and RE leader. Why divest out of good cashflow property- owned outright when I can create a win-win with another investor? I got it!  

So now it is just a matter of learning a little more again and hence my question. Who knows where I can find hands free investors who would like 6+% returns on their money secured by 1st mtgs with 100% capital returned in 3 or 5 years?  

We are talking about ~$40k loan/mtg on one 3/1 SFH and I also have another property offering a duplex coming in at $59K. Loans to be used for reinvestment into business. I look forward to your suggestions. Thanks

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Cory BinsfieldPro Member
Financial Advisor · Duluth, MN · Member since 2012 · 157 posts · 194 votes
10y

It sounds like you own some free and clear properties. If this is correct, I would go to a local lender (no big back with a huge national presence) put on a suit and tie and show them how you would like to take 2 or 3 properties as collateral and use the proceeds to buy, fix and rent over the long term. You would want a slick presentation that shows all your financials. Or use the BP calculator to show your buy and hold cash flow along with dent service, etc. 

Once you stabilize the new rental, you would then go back and pay off the original money with a 20 year commercial loan. On both cares, you should be able to get an interest rate of 5.75% or less. 

While you are doing this to get more deals, you could be working on private investors on the side. Honestly, if you came to me and said you would give me 6%, I wouldn't consider it worth the risk. This is why hard money lenders demand 10% or more plus points and short durations on loans. 

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  • Bill P.
    Investor | Syndicator | Instructor · Cincinnati, OH · Member since 2008 · 435 posts · 198 votes
    10y

    @James Gallagher I'd check into your "circle of influence." Friends and family may buy into that rate for your benefit but outside investors probably won't. We have many types of investors so it depends on the type of project, the length of the project, the aggregate funds needed, payment options and a host of other issues. (Yes, we do make it a little complex) For example, we often pay new investors to our firm up to a 20% rate on their first investment because we really want them to see how the private money process works. It tends to give us longer lasting clients. Kind of like a pet store allowing you to take the puppy home.

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    6% would be a pretty good rate for most investors when talking private money. Most hard money guys are going to ask for 10% +. If you can find 6%, grab it!  Pay timely as agreed and hope to keep that relationship. I would take that today if offered to me.

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  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y
    Originally posted by @John Thedford:

    6% would be a pretty good rate for most investors when talking private money. Most hard money guys are going to ask for 10% +. If you can find 6%, grab it!  Pay timely as agreed and hope to keep that relationship. I would take that today if offered to me.

    Hi John thanks for your reply.  Are you saying you would be lendor for 6% in this case? What would be other necessary details? Would you need properties to be local? As for us we have been owner operating now for over a decade and have maintained an excellent credit rating.  We ran into that 4 mtg maximum thing and this caused me to stumble as well as my 'solopreneur' introverted phase I am now out of. Wish I had expanded sooner as this only means greater cashflow and faster wealth creation, however ... hindsight 20/20.  The point is to act now. The rental market here has never been stronger, job growth is good, and there are several high yielding, discounted and wholesale rental opportunities hitting the market. It's been good to me and so to stay in the game is to step up the game. 

    Creating, giving notes and mortgages is new to me. What are other logistics. As you know I could go to banks however with loans of this size the closing costs have not usually made sense and the onerous process is also a turnoff.           

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  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y
    Originally posted by @Bill P.:

    @James Gallagher I'd check into your "circle of influence." Friends and family may buy into that rate for your benefit but outside investors probably won't. We have many types of investors so it depends on the type of project, the length of the project, the aggregate funds needed, payment options and a host of other issues. (Yes, we do make it a little complex) For example, we often pay new investors to our firm up to a 20% rate on their first investment because we really want them to see how the private money process works. It tends to give us longer lasting clients. Kind of like a pet store allowing you to take the puppy home.

     Hi Bill,

    You said new investors can be paid up to 20%? Is this on a note secured by a first mtg? Regarding types of projects, I would like to know more, can you give examples?  What I mean to do is simply to follow our already successful strategy of accumulating additional discount or wholesale property for high yield residential rental income to hold at least through the term of the x% note.  There might also be an option to offer a premium to the note buyer at the end of the term where subject property is then sold at premium or else continue to recieve the yield x. 

    Any suggestions on simplest logistics. The reason this is needed in this market is most of these notes would be under $50k.   

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  • Bill P.
    Investor | Syndicator | Instructor · Cincinnati, OH · Member since 2008 · 435 posts · 198 votes
    10y

    @James Gallagher

    The best example I can give is a project that we are currently getting ready to close on in early December. Bought the property at $155, 000 and will have an ARV of $260,000 after $35,000 of rehab. We positioned ourselves to accept 3 new investors giving $10,000 each as a preferred equity LLC member and receive 20% per annum on their funds from closing to the eventual resale. 1) It attracts new investors who never thought about using real estate as an investment; 2) It is a relatively small amount to be involved; 3) Our overall margins allow to do this for a portion of our capital structure; 4) We treat it as a substitute for advertising as this really does get us some great "word of mouth"; and 5) It allows us to quickly capitalize on closing on deals with additional funding received quickly.

    We treat our projects as joint ventures as we only have a couple of investors in each project. Always equity investors instead of debt, although it is easy to see that preferred equity members are really a hybrid. Hope this info helps. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Gallagher  these are bank rates. With what sounds like 100%. Ltc.  You may want to structure a jv deal with pref. Return and upside on sale otherwise 6% is not attractive to most if not all note investors.  You can get 7% or better on prime ca assets for example

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Bill P.  how do you handle security issues with your deals.  What set up do you use for your equity investors?

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  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y
    Originally posted by @Bill P.:

    @James Gallagher

    We treat our projects as joint ventures as we only have a couple of investors in each project. Always equity investors instead of debt, although it is easy to see that preferred equity members are really a hybrid. Hope this info helps. 

    Yes thanks Bill that clarifies greatly and is informative information helping me to expand my understanding. I like what you are doing and would like to run this fix and flip strategy myself as well sometime soon in the future. Currently I seek to just expand my buy, rehab and hold- rental business here in N. Texoma and pref jv could also be an option. Not sure which is best however as we already own the properties. And, I do feel we would actually hold longer (>3 yrs) than what it seems you are doing. 

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  • Cory BinsfieldPro Member
    Financial Advisor · Duluth, MN · Member since 2012 · 157 posts · 194 votes
    10y

    It sounds like you own some free and clear properties. If this is correct, I would go to a local lender (no big back with a huge national presence) put on a suit and tie and show them how you would like to take 2 or 3 properties as collateral and use the proceeds to buy, fix and rent over the long term. You would want a slick presentation that shows all your financials. Or use the BP calculator to show your buy and hold cash flow along with dent service, etc. 

    Once you stabilize the new rental, you would then go back and pay off the original money with a 20 year commercial loan. On both cares, you should be able to get an interest rate of 5.75% or less. 

    While you are doing this to get more deals, you could be working on private investors on the side. Honestly, if you came to me and said you would give me 6%, I wouldn't consider it worth the risk. This is why hard money lenders demand 10% or more plus points and short durations on loans. 

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @James Gallaghersorry ..I am saying if you can find money at 6% (private) in my opinion that is a good deal. I both lend and borrow. I am paying 7% to some people at this time and am happy with that. Others wanted 10%+.

    2Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    Simply put -- I think it's unlikely you'll find those types of rates from professional lenders or from amateur lenders who don't know you personally.

    I've done deals as both lender and borrower with lots of people on this site, and 10% interest tends to be the floor on both sides...

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  • John Arendsen
    Homeowner · VISTA, CA · Member since 2015 · 727 posts · 340 votes
    10y

    I agree with most commenters on this thread. Money like anything is competitive. When an investor has opportunities to realize upwards of 10% ROI vs 6% what would be their motivation for taking less unless it was more of a family member, good friend or perhaps money partner. But even as a partner I would want 50% and would insist on holding the deed/note as collatteral. Just my 3 cents worth adjusted for inflation.

    1Reply
  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y

    Thank you all. Yes I have been contemplating this and feel it does come down to equity and balanced consideration also of the sweat equity (ideally, however not always). After all who is the one generating the deal and 'productivity' in the first place. 

    That said, because of the nature of money the cure should be balance, somewhere around 50/50. Which in most cases according to my current experience and deals to which I am referring, i.e. rental returns would be for instance 1/2 the CAP, or 1/2 of ~16%. So 8% would be this split on 100% to ARV and some points or perks could be added to be competitive. Thoughts?

    I would be curious to know more about what other more higher yielding and less involved deals look like.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @James Gallagher:
    That said, because of the nature of money the cure should be balance, somewhere around 50/50. Which in most cases according to my current experience and deals to which I am referring, i.e. rental returns would be for instance 1/2 the CAP, or 1/2 of ~16%. So 8% would be this split on 100% to ARV and some points or perks could be added to be competitive. Thoughts? 

    I would never make a long-term loan in the current climate at 8%.  Here's why:

    - Interest rates.  In 2 or 3 or 5 years, it's possible that interest rates could be at 5%, 6% or higher.  That means I may be able to get long-term CDs paying 8%.  Why would I want my money tied up in a relatively risky investment like real estate (relative to government-backed instruments) when I could be getting risk-free 8%?

    - Higher returns.  Why would I want to accept 8% passive income when I can buy rentals generating more than 8% with essentially no work on my part.  I'm still finding passive buy-and-hold deals (i.e., managed by a professional company) generating 10%+ cash-on-cash without leverage; and closer to 15% with leverage.

    - Opportunity cost.  If I have money tied up in a deal at 8%, what happens when interest rates rise or lending gets tighter, and I'm now able to find significantly more lucrative deals with the same risk?  It's unlikely rates are going to go lower, so there's little upside, and lots of downside on the opportunity cost front.

    - Actual returns. While this can be mitigated, the returns on this type of investment are hard to compound. The 8% is cash-on-cash, and the trickle of monthly payments is hard to re-invest. I'd rather have an investment where I can get an IRR of 8% versus a cash-on-cash of 8%.

    -  Risk.  If you're buying deals at a 16% cap rate, my guess is that these aren't low-risk deals (you don't see many all-cash deals generating 16% cash-on-cash these days).  8% isn't much return to take on anything other than low-risk deals.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Gallagher@J Scott  hit the nail on the head.. even though your deals have high Cap rates once you split them your talking about marginal returns with high risk.

    if there was a chance at rise in value as well that could be a game changer.. but I would submit that what your buying probably has little to no chance of any significant rise in value and that the value to other investors given risk reward is to back into the same cap rates your buying at.. so unless rents went up substantially your values will never rise. Its not like your going to sell these to home owners ( or I doubt you will I could be wrong but those cap rates and owner occ areas usually do not run together)

    @Cory Binsfield  has great advice as well. If you meet a local community owned business banks minimum requirement of being an outstanding local business man with good credit some cash reserves and experience owning these rentals you could very possibly get a nice 20 due in 5 type of loan in the 6% range with maybe 1 point.. that's about what my commercial bank will do for me.. And for bigger investors they will go down to 5% on multi and maybe out to 7 years.

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  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y

    @Jay Hinrichs and @J Scott Sorry somehow the first part got lost. These would be ARV 1st mortgage secured- short-term note (i.e 3 yr) to which I am referring. These are existing properties.

    I fail to see how this is more risky than money put in a bank. If you do not understand what I mean by this go ask a Greek investor to explain it. And consider how money is withdrawn from a bank during a bank "holiday."  

    All this is the beginning of my examination process and may be a mute point as I do have yet to confer with bankers. However the rules had been onerous in the past, limiting to 10 and then to 4 mortgages... I am actually at 3 mtgs currently but have yet to fully know how certain people obtain mortgage after mortgage after mortgage. My LLC is now seasoned however without separate established credit, personal credit excellent, lots of equity. just needing to convert equity into additional cashflow. Thanks again for all your input.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Gallagher@J Scott  what J Scott and I are referring to is ELEVATING you up from the ranks of a basic part time investor to a full fledged buy and hold investor doing this for a living...

    Ergo the recommendation of a local community owned business bank that does not have the 4 home rule or 10 home rule.. they hold all their own paper.. and they look to loan to those with deep roots in the community and are successful.

    I know many who are just starting in the industry do not realize how much a local community bank can help you.. Unless you have been a small business and owned your own company and have used a business bank before.

    I started with my bank and banker 24 years ago with a simple 100k line of credit to buy standing Timber in Oregon.. it was a hybrid model that not many small business would get.. very common for Werehouser or Williamette industries or Boise Cascade or LP or GP. but for private guys.. NO major bank would even look at us.. we were small potatos of course.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by :
    I fail to see how this is more risky than money put in a bank. 

    Let me recommend that you never, ever try to argue this point with a lender...if you don't understand how an investment into a real estate deal is more risky than depositing money in an FDIC insured financial institution, then this entire conversation is fruitless.

    Here is another thread that's currently going on that will explain to how having the property as collateral is not necessarily going to make the deal secure:

    https://www.biggerpockets.com/forums/311/topics/25...

    And again, if you truly think that putting money into someone else's real estate deal is more (or even equally) secure as putting it into a bank, I'm fairly certain you won't find any lenders to take you seriously, as you have a lack of understanding of the (small but real) risks around real estate.


    If you do not understand what I mean by this go ask a Greek investor to explain it. And consider how money is withdrawn from a bank during a bank "holiday."

    Sorry, but that's like arguing that my money is unsafe in my pocket while I'm typing this.  If you don't understand, just go ask a guy who just got his house broken into and robbed at gunpoint to explain it.  

    Just because something bad happened somewhere to someone doesn't make it likely that it's going to happen here or to me anytime soon.  There's a big difference between Greece's economy and ours.  

    Not to mention, having had money in a Greek bank was still more secure than having it in US real estate...not a single Greek depositor lost money in the past 4 months:

    http://www.bloomberg.com/news/articles/2015-08-14/...

    I'd be willing to bet that the same can't be said for all US real estate investors.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Gallagher@J Scott  I hit send before I was done.

    So we started with this little 100k line of credit.. now 24 years later same banker same we have grown those relationships based on deep roots in the community and success .. I even had this bank lending me over 5 million dollars to do hard money loans in the deep south... ( which was a stretch for a community bank)..

    Point is go find one.. it will be a small one to 5 branch bank.. find your personal banker.. explain your model and grow your relationship..  now you may be to new or not experienced enough they may turn you down.. but chances are if your doing well and come in with a good business plan showing how these cash flow cows work they will give you a credit facility to ramp up your business. the 4 mort and 1`0 mort will not even com into the conversation.

    So go fishing in the correct pond... conventional lending will never get you were you want to be

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  • James Gallagher
    OP
    Buy / Hold Investor, Property Manager · Ardmore, OK · Member since 2015 · 19 posts · 2 votes
    10y
    Originally posted by @J Scott:
    Originally posted by :
    I fail to see how this is more risky than money put in a bank. 

    Let me recommend that you never, ever try to argue this point with a lender...if you don't understand how an investment into a real estate deal is more risky than depositing money in an FDIC insured financial institution, then this entire conversation is fruitless.

    Here is another thread that's currently going on that will explain to how having the property as collateral is not necessarily going to make the deal secure:

    https://www.biggerpockets.com/forums/311/topics/25...

    And again, if you truly think that putting money into someone else's real estate deal is more (or even equally) secure as putting it into a bank, I'm fairly certain you won't find any lenders to take you seriously, as you have a lack of understanding of the (small but real) risks around real estate.


    If you do not understand what I mean by this go ask a Greek investor to explain it. And consider how money is withdrawn from a bank during a bank "holiday."

    Sorry, but that's like arguing that my money is unsafe in my pocket while I'm typing this.  If you don't understand, just go ask a guy who just got his house broken into and robbed at gunpoint to explain it.  

    Just because something bad happened somewhere to someone doesn't make it likely that it's going to happen here or to me anytime soon.  There's a big difference between Greece's economy and ours.  

    Not to mention, having had money in a Greek bank was still more secure than having it in US real estate...not a single Greek depositor lost money in the past 4 months:

    http://www.bloomberg.com/news/articles/2015-08-14/...

    I'd be willing to bet that the same can't be said for all US real estate investors.

     Point well made and however I do understand the risks in property management. The greater risk to which I am referring is with cash in general. That not only is it when in a bank, out of your control but it is as well a NOTE, fiat- ultimately backed by nothing.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    Not sure I understand... When my money is in the bank, it is completely liquid and within my control. Unless there is a complete collapse of the financial system, I don't see where you think there's a risk. Is your concern a complete collapse of the financial system?

    BTW, the bigger risk to the lender is inflation. If inflation occurs, they are getting paid back money that is valued less than the money they lent you.  That is why investors these days would prefer to borrow money than to lend it, even when they don't necessarily need to borrow.

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    10y

    @J Scott

    If i could have voted for your explanation of why you would not lend at 8% twice I would have.

    I don't want to speak for @James Gallagher but I think what he is referring to is a general mistrust of bank deposits by the statement that it is backed by nothing, am I correct? 

    I see this a lot after 2008 and I think is mostly based on a few misconceptions namely:

    1) Many people confuse money markets which are backed solely by the short-term instrument (normally commercial paper) that they invest in. There is no FDIC insurance on it though many firms label this as cash.

    2) The FDIC insures only up to a certain amount so there are some lucky folks who do have a possible issue if a bank goes belly up. Clearly they are in the minority and clearly there are ways to spread cash if that is really your concern that are probably safer and easier than lending it.

    3) Like any insurance company the FDIC prices risk. Price the risk wrong and you end up broke. This was a very real concern during the crisis.

    Of course, in a crisis like that the real estate you lend on would be next to useless because you couldn't sell it for anywhere near 100% of ARV and a very large number of RE would go belly up so I don't see how this is better collateral than a bank fiat guarantee backed by its credit and than the credit of the FDIC.

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