Another Hard Money Investment

I have entered into another hard money lending investment, which seems to be my preferred investment type lately. This is a first mortgage on a property that was bought at the courthouse steps (i.e., at a foreclosure auction). Purchase price was $181,000. The buyer put up $100,000 of his own money and we (myself and some other investors) are pooling our money to create the $81,000 difference and write a first mortgage. This is a 1 year only note, with a 12% interest rate (net 10% to investors after the processor takes 2% for his trouble) with no pre-payment penalty. I am one of three investors on this note.

The note that was foreclosed on was for $532,000, meaning the lender took a $351,000 loss when selling this property. (Of course, that loan was made during the real estate bubble and is not really a true indication of the value now.) The property is a four plex which is fully rented. Total monthly rent is $3,550 and is broken out per unit as $700, $1,250, $900, and $700. Comps are in the $150,000 range. (Technically, the property is a triplex with a 1 bed / 1 bath house in the rear of the property, but we're treating it as a four plex for analysis purposes.)

If we have to foreclose, we have a property that generates $42,600 in gross annual rent for $81,000. Not too bad.

Now this is not normally a deal we (myself and my partners) would do. The property was bought for $181,000 and comps at $150,000?? Why are we even interested? There are several reasons. First, the borrower has put up $100,000 of his own money. Second, he is a broker in the area and my partner has known him for 10 years, so we are comfortable that he knows what he is doing. Third, the total loan on the property is $81,000, so the loan to value ratio is 54% (using the $150,00 comp figure), still darn good. And lastly, if you look at the property from an income standpoint, it's a good deal. $42,600 in gross rent for $81,000 is a 53% ROI. But that's not a true number, since that is gross rent, not net rent. But even assuming 50% of the rent goes to pay maintenance, taxes, etc., we're still looking at a 26% ROI.

This illustrates a good point about rental properties. A four plex is right on the border between being considered a standard income property, like a single family home, and a commercial property. Where SFHs are typically evaluated on their property characteristics, such as loan to value, appreciation potential, etc. as well as their ROI, commercial properties are generally evaluated largely on their cash on cash return, or ROI. Being a four plex, one could look at this either way and it looks like a good deal either way.

I am labelling this investment hard money #8.


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