Long Term Hard Money Loans?

Question

I have been making hard money loans for 12 years.  All loans are interest only payments, one year, renewable for an additional year with additional fees and points.  All secured by commercial property.

I am contemplating adding longer term (15 year) fully amortized hard money loans.  The premise of all the loans I made in the past was that borrowers would pay the high interest rates only temporarily and refinance out as soon as possible.  The premise with a long term HML would be that the return on the investment would have to be high enough to support the interest rate charged.   My question to the BP community is how high a fixed rate can make sense on a HML over a long term?  I am trying to see if there exists an overlap between the investment return I demand and what borrower's are willing and able to pay.

Any comments or thoughts would be appreciated.

Brandon O'Neill · Answer

Don as a borrower, if I present a deal at an agreed interest rate for a long term deal, I've seen offers with minimum hold onto property before able to sell off property and no penalty, to make lender profit from that deal.  Ex: I take loan for a rental project/property...term 30 years at 6%, but if I sell property before 5 years, there are agreed upon penalty fees for doing so. But if i hold onto property pass five years then no penalty to borrower if sold, and all parties make out.... So if you like that and could offer that, I would be your first borrower/ investing partner. Let me know when ready to offer this type of lending. Good luck

Darryl Dahlen · Answer

Interesting thread.

I would think one of the challenges will be offering terms that you can make a good return on, but were they're not so oppressive that you force the borrower to refinance as soon as they can.

That, and if a commercial property can afford to service the debt with hard money terms over the long-term then the reasons why the borrower would need hard money would mostly be due to borrower issues (credit, income, etc.)

You're OK as long as those issues remain in play, but I would think most borrower would look to remedy whatever shortfalls they have to seek conventional financing ASAP.

That said, I believe that while you may not retain too many notes over the long haul you can no doubt find short to med-term success with this.

Bill Gulley · Answer

Don, you have a higher average loan amount (due to commercial) than what we had, but even with over a thousand loans in servicing as we did with limited resources (no secondary market) fully amortized loans will have an issue with the velocity of your money.

I just visited your site as well and it seems you really don't go into credit much.  This really changes some things from conventional management that impacts your maturities and yields. If you are making loans that the borrower can't refi out of due to credit issues that would create a unique maturity distribution and perhaps default rate.

Are you able to borrow on the portfolio and if so those terms would come into play as well.

I guess you're looking more toward the marketing aspects of a program and are crunching the numbers. I assume all collateral will be completed income producing projects. Marketing wise the closer you get to conventional and yet remain unconventional the more market share you'll likely have, if that makes sence to you. If you are not that much different than the bank product down the street and have more lax guidelines, you'll be in tall cotton. But that would mean, IMO, some of those points and initial rates may need to be adjusted, if that can't be, then I'd say your customer base will be rather shaky, only those who can't qualify for better terms. That's to amortized loans, not quick funding, in and out deals.

Have you considered doing adjustable rate loans? They are not that difficult to set and manage, but it depends on the index. Being as hard as you are (lol) Mr. Loan Arranger, you could enter with a more attractive product and use the margin to put your yield where you like and have a floor of the entry rate. Seems like that would help for the longer terms.

Don Konipol · Answer

Thanks Loc R., that is a good starting comp.

Don Konipol · Answer

My average loan size is $240,000.  Loan range from under $100,000 to just over $1million.  The last fund I operated had just under $20 million in loans outstanding at any one time.

Loc R. · Answer

Don,

I think you can use the Norris Group here in So Cal as a reference point, although they don't do commercial...

Their "Rental Purchase" loan program is 9.9% to 12.5%, with 3.5 points and is an 8-year program.  I'm pretty sure that is an interest-only program.

Bill Gulley · Answer

Don, what is your average loan amount?

You'll need a very large loan pool for the principal amounts received to be enough to put bak in circulation. Just saying if you have 25 loans with 2800 in principal received in the month, what will you do with 2800 bucks?

Later on you'll be receiving mostly principal and less interest...look at the average yield as the loan amortizes.

I suggest you consider a longer term amortization and start with a 5 year balloon.....

Long Term Hard Money Loans?

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