Homeowner · Bay Area, CA · Member since 2010 · 29 posts · 2 votes
Hello, I'm a newbie in the learning stage of investing. I've always been interested in investing in real estate and just bought my first house and will be renting it soon. I though that was the end of buying until I saved up more cash, but when I learned about HML, I got so excited! I've been reading these forums for a couple of days now and have learned so much and I'm so grateful and excited that I found this site.
Ok, so my question is about getting a HML. What are the general requirements for getting a HML these days? I know you need certain equity in the home etc. but what about credit score, and debt to income ratio? Do they check the debt to income as well or are they mainly interested in how you will secure the loan?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
That's unfair. I've both borrowed and lent hard money. Its a win-win for both people involved. Without the lender, the borrower couldn't do the deal.
If you think hard money is expensive, do your research. If you are trying to fund a business, hard money, even at double digit rates and a handful of points, are one of the cheapest funding sources around. Getting a "money partner" on a real estate deal is almost always more expensive. If its not, you have a crummy deal. Look at the rates on equipment leasing. Those are up in the 20-30% range. Factoring receivables is a way some small business fund their operations. Also north of 20-30% once you include the up front fees and the discount for the receivable. If you get into equity financing (angles, venture capital, IPOs), you can easily get into what are effective interest rates over 100%.
After doing some research on funding source for small and start up businesses, hard money doesn't look bad at all.
Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
16y
There are two kinds of HML loans that I have come across.
The first type is a real hard money loan which means they will loan based on the property only. The good ones will have money to you in 24 hours. They do not advertise and typically harder to find. They will charge around $900 processing fee, and then flat 18% interest rate for a 6 or 12 month loan.
The second type is the "tweener" between a real HML and a regular loan. They want credit checks and all that crap. They drain your profits with points and charge an arm and leg and usually spend a lot money advertising for your business. Stay away from these jokers.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
If your intention is to keep the property, you'll need to find a lender and get pre-approved for the refi from the start. Plan on holding at least six months before you can refi, maybe a year.
Yes, the refi lender will look at your DTI, credit and reserves. You'll need to speak with your lender about their specific criteria. After two years, you should be able to include the rent as part of your income. Lender's formula for "net rental income" is "(75% * rent) - PITI". They generally won't look at the payments on the hard money since they're making that go away.
Homeowner · Bay Area, CA · Member since 2010 · 29 posts · 2 votes
16y
If I understand correctly, I would find a lender for a refi, secure a HML, hold the property for 6mo. - 1 yr, and refi out. But is the holding period because you need to wait before you can refi due to bank policy?
That means changing property value could be a risk and will change your ability to refi depending on market conditions. So even if you have 30% equity in a house to secure a HML, it's even better to have more equity in the house to reduce risk.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
When you do the refi, the lender will establish a value. One way to do that is to use the price you paid. That probably doesn't give you the amount you want. Some lenders will add on the amount you spent on rehab, with documentation of the expenses. Probably still not enough. What you typically want in this situation is to get a new appraisal and use that for the value. AFAIK, all lenders will make you wait at least six months, and some will require a year before they will use the new appraisal. You'll still need to document the work.
This assumes you're just refinancing the hard money loan and not taking any cash out. If you want cash, its almost certain that you'll need to hold for a year.
Be VERY conservative in determining your value. Find all the comps you can, and pick the ones at the lower end. Don't even use the top comps as a value. No appraiser will. If you find five good comps, use the lowest three. If you find 10, I might throw out the bottom one or two, then use the lowest ones. If you can't find five good comps (recent sales, same beds, baths, style, garage, condition), then you're in trouble because an appraiser will have problems, too, and who knows what you'll end up with.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
That's unfair. I've both borrowed and lent hard money. Its a win-win for both people involved. Without the lender, the borrower couldn't do the deal.
If you think hard money is expensive, do your research. If you are trying to fund a business, hard money, even at double digit rates and a handful of points, are one of the cheapest funding sources around. Getting a "money partner" on a real estate deal is almost always more expensive. If its not, you have a crummy deal. Look at the rates on equipment leasing. Those are up in the 20-30% range. Factoring receivables is a way some small business fund their operations. Also north of 20-30% once you include the up front fees and the discount for the receivable. If you get into equity financing (angles, venture capital, IPOs), you can easily get into what are effective interest rates over 100%.
After doing some research on funding source for small and start up businesses, hard money doesn't look bad at all.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
16y
Great post Jon...and I agree with your assessment. Who cares if you are paying 18% on money if you only hold it for 6 months or so. Absolute numbers trump relative numbers when the time horizon is short. So what...you paid 18%...if it only amount to several thousand dollars and you make $50k or so it is cheap IMO!
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Making loans to investors should be viewed as any other commercial lending activity, they should be sophisticated borrowers and understand what they are getting into as a cost of doing business. By the fact that a property is a SFD, state laws may trump that with usury laws, you won't be getting 18% APR in my county!
I had several individuals who I introduced lending to, mostly friends who were not getting what they could get on a well secured RE deal. I think that most new investors just don't search out the olocals like they should. In just about every town of any size, there should be a few people willing to get twice what there are getting in another investment in a short term RE deal. Transactional funding can be an absolute no risk transaction! While the HM lenders are in the business of lending, they can charge that $900 processing fee, not so with an individual who is not in the business of lending!
The HMLs are a cost of doing business. By the way, I have provided leased financing as well, but I never leased anything, well, longer than about three days from the local tool rental store! If I need a backhoe for six months, I'll buy one and sell it when I'm done with it! Good luck, Bill
Homeowner · Bay Area, CA · Member since 2010 · 29 posts · 2 votes
15y
Trying to revisit this topic again...
For HML, the advantages seem to be only that it's quick and you can finance properties that conventional banks will not. It seems to be more geared for fix and flips rather than buy and hold strategies...
Are there any ways to leverage for buy and hold? Seems like HM will not be an option for me either.
I have preapproval for a small loan amount which is not enough to get properties where I am. I need to wait a couple of months before rental can be counted as income. I am too antsy!!!Plenty of opportunities around, but not enough cash.