Private lending, defaulting, repair phase questions?

[Jacob Thompson]

New investor here (still looking for my first deal) and I’ve got just a few questions...

1.) When it comes to PMLs/HMLs which would be better to utilize starting out? When is a time each is more affective?

2.) Would you suggest using leverage starting out or using your own upfront capital & going the BRRR route?

3.) If an investor does go PML/HML route & things go south and defaults on the loan what happens? Would it affect your credit if you made the deal through a business entity?

4.) Also going through the PML/HML route, how does one make the monthly payment on the loan when your unit is vacant and you're in the repair phase? Credit cards? Own personal capital? Or are there clauses in loan contracts deferring until a unit is occupied?

*** I want to thank you for taking your time and going through these for me, I understand many are busy and have better things to do but the help is truly appreciated!***

[Bonnie Low]

Hey, Jacob - maybe I can help. I'll try to answer your questions in the order you asked them. 

1.) When it comes to PMLs/HMLs which would be better to utilize starting out? When is a time each is more affective? The two are similar in that neither are banks. If you can get private money, that's usually your best option because basically anyone can be a private money lender and the terms can be whatever you both agree to. It is usually more flexible and you pay less interest to use it. But PMLs can be hard to find; whereas HMLs aren't. There are even some who advertise here on BP and usually if you ask a local Realtor, they'll know a HML in your area. They're usually more flexible than a bank, but you pay higher interest rates (we pay 10%, no points and have put 20% down). HMLs will want to run your credit, verify your funds - it's very similar to applying for a bank loan but they have more ability to flexible on any of that and once you qualify and build a relationship they may become even more flexible. A lot of people start with HMLs until you build experience and a network - then PMLs will often find you.

2.) Would you suggest using leverage starting out or using your own upfront capital & going the BRRR route? It really depends on what you have to work with and your personal philosophy. We've done a combination. We put our own capital in for the down payment and rehab costs. The HML finances 80% of the purchase pre-rehab. When we BRRRR, he gets his money back and we get a property that we have at least 25% equity in, cash flow, and if we've done it right we get all of our initial funds back and then some.

3.) If an investor does go PML/HML route & things go south and defaults on the loan what happens? Would it affect your credit if you made the deal through a business entity? Assuming you have a legally binding contract with your PML, they're probably going to be in first position and that means they get the property if you default. Same for a HML. I can't answer the second part about doing the deal through a business entity.

4.) Also going through the PML/HML route, how does one make the monthly payment on the loan when your unit is vacant and you're in the repair phase? Credit cards? Own personal capital? Or are there clauses in loan contracts deferring until a unit is occupied? Again, with a PML your arrangement can be whatever the two of you agree to so yes, it's plausible they could defer payments until the unit is rehabbed and refi'd or occupied. If you were lucky enough to make that arrangement I would guess it's either because you have a personal relationship with the PML and they just really want you to be successful (like a family member) or because they're charging you more for their willingness to get paid later. With HMLs, in my experience you're making payments monthly, just like with a conventional mortgage, but they are interest only payments with a lump sum due at a specified period - usually 6 to 12 months. This is why they care about your income and assets. They want to know you have the ability to pay the note while you're doing your repairs and waiting out your refi or being able to rent it. 

Hope that helps. Feel free to send me a message if you need any clarification.