Have Hard Money Rates Bottomed Out?

Question

J Scott · Answer

Mortgage rates are driven by the Fed funds rate.

Private and hard money rates are typically driven by two things:

1. Supply & Demand:  The more money out there and the fewer deals to serve that lending market, the lower rates will go.  Conversely, the less money out there and the more deals to serve that lending market, the higher rates will go.

2. Perceived Market Risk:  The higher the perceived market risk, the higher you should expect rates to go.

Both #1 and #2 have tipped towards investors (high supply, lower demand and low risk) over the last year or so.

I think we'll continue to see high supply and we'll likely see higher demand (now that the market is softening a bit).  But, I think we'll also start to see higher perceived market risk.

Overall, I would guess that we're at a low for private and hard money rates for this cycle, and rates will start to trend up as the market continues to soften.

Jay Hinrichs · Answer

agreed...  most HML borrow their money from somewhere like the bigger ones on a Reg A offering or wall st.. or wherever.

and then lend making the delta.. profit in HML right now at the competitive rates are at an all time low from my years of doing this since mid 80s.. so much so i would not be in the business personally.. or if you are you need LOTS of money to lend since spreads are so low.

its also highly regional.. in markets were foreclosures are measured in years not in months rates are still higher than in areas were foreclosures are quicker..  but all an all agree J. with your assessment.  also last point is when you basically see teaser rates for 8 or 9% HML that does not include points and junk fee's lenders need to net at least 4k per file to stay in business and they can get that through a combination of income channels.. the interest rate spread right now is as stated extremely low.. in my day of lending at 20% apr which was routine my cost of capital was 7 to 8% and we made the delta.. that's a decent spread and business given the risk.

also for the best rates you need some pretty good experience behind you.. what you can borrow for and i can borrow for is not what someone entering the market or only has done 3 flips is going to get..

i always encourage people to pop on to Lendinghomes site and look at their pricing matrix and you will see how skewed it is to down payment and EXPERIENCE to get the best rates you need lots of down payment and lots of experience..

right now we are paying 1 and 6 for bank money.. no junk fees just title and escrow and appraisal costs.. these are 70 to 75% arv loans.. and you MUST have cash into the deals.. just like most HML require cash or some cash.. paying a 1% premium for no money down is not risk management for a lender by a large margin

Jay Hinrichs · Answer

I think at those razor thin margins. You need a few things

1.  Lots of money 20 million to start

2. Limited to no bad loans. One bummer can put u negative pretty quick

Nghi Le · Answer

On the west coast, I'm starting to see 7.5% rates with 1pt or less for highly experienced borrowers. Also dependent on LTC/LTV. I've seen rates even in the 6's for CA borrowers... They always get the best rates.

I closed on the purchase of a flip two months ago in Seattle, WA at 8.5% interest and 1.25pts financing 95% of the purchase and 100% of the rehab.

Also seeing more 100% financing lenders pop up, but they are still very expensive.

Nancy Zhao · Answer

I've been offered 7.5/1-1.5 here in CA. With 30 year at near 5% I don't think this can go much lower.

Kerry Boyle · Answer

Most HML sell their notes to bigger funds. At 12/2, you can make up to 2% selling the note. You just have to be inside someone else's box (or at least that specific loan does).

Also, fantastic advice from @J Scott.

Selling HML notes (or correspondent lending) resolves capital limitation and can increase your lending box. It might make sense if a fund's cost of capital is significantly less than yours. I.e. their cost of funds might be 5%, so they can spend money to get the notes and earn more on the strips than you would have.

Jay Hinrichs · Answer

with competition came back the 90% of purchase and 100% of rehab.. those loans when they work fine. but as J mentions equity in those deals can go by by pretty quickly.. bad contractor market constriction  missed it on the up front costs etc..

Dustin Lauer · Answer

Fair points.  Risk is higher today for certain.  In my opinion it was very out of balance from 2008-2014 and has normalized to risk since.  Lending below market rates is great proportionate to prior risk levels, but it's equivalent to leasing or selling properties below market risk.  Why earn less, right?

J Scott · Answer

This part I disagree with.  I think risk is significantly higher today than it was a year, two years or five years ago.  While I think rates in the past were too conservative given the risk at the time, I think rates today are too aggressive given the additional risk lender's face.

And when I talk about risk, I'm referring to both market risk (a downturn wiping out equity and putting both borrowers and lenders underwater) and interest rate risk (lenders getting squeezed on margins and not having enough room for losses or write-downs).

As a private lender, my rates are higher today than they were in the past...  In the past, they were below market because I saw little risk (and I experienced zero defaults across about two dozen loans); today they are above market because I believe most lenders are mistaken about the level of current risk being incurred.

Dustin Lauer · Answer

I have recently started my lending company, having been an employee in this space for several larger lenders.  Margins are thinner, and deal quality is lower.  Capital is available, but late to the game.  My 2 cents would be to underwrite conservatively, find niches and be the best in those spaces.  I believe capital is operating efficiently for hard money financing and rates today are proportionate with risks.   My own niches are smaller loans, rental portfolio, and small apartments.  Possibly PHX has good investment condos for example as a niche to finance there better than other lenders.

Have Hard Money Rates Bottomed Out?

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