Hard Money Commercial Loan

A hard money commercial loan is an advance for any commercial endeavor in which conventional money just isn't available. Put simply, it can be money that's difficult to acquire somewhere else. The particular functions for which this kind of financial products can be had consist of investments, house products, design, enterprise as well as sector, re-financing and many other people.

Ideal equity is essential for receiving a tough money commercial loan. Vacation value determination around the security might not be required since the financiers

tend to be seasoned ample to assess the value. The loan to benefit (LTV) ratios are usually approximately 75% but some loan companies perform go beyond this specific. Also next liens are possible if sufficient fairness is still accessible.

The majority of bankers contemplate apps for the bare minimum amount simply. The entire process of software is straightforward as well as the financing selection and funds payment are generally speedy. There are numerous instances of the money staying through in a single morning!

You will find short-term (six months to three years) loans and loans for extended terms, plus credit card business loans. A person's eye costs vary. Currently, a hardcore money commercial loan could be achievable in a curiosity band of 10% to18%. Even tho it's a flying price or a fixed price. A number of loan companies provide the use of 'interest lock' abbreviated times. This is often beneficially employed if you find the actual requirement regarding costs getting larger. At times the money is applied being a connecting loan even though waiting for a regular mortgage loan. Particular creditors enforce the per-payment punishment if the loan is refunded in front of the arranged routine.

Lenders can be greeted right on-line or via brokers. In any event, shopping around and also researching the particular costs and expression will be sensible. The main consideration inside choosing a hard money commercial loan is whether or not it would make sufficient money for you to pleasantly program the borrowing.

Residential Hard Money Loan

A residential hard money loan is a variety of loan the place where a customer will get funds in line with the price of a unique commercial or residential real estate investment. The term hard money refers to the difficulties in obtaining any loan. Hard money loans provide high rates of interest minimizing loan-to-value ratios, while there is no federal government institution which backside the loan originator. The loans are given from the importance of real estate property guarantee.

Residential hard money loan are generally loans offered by private loan providers on the basis of the need for the particular property or even home rather than the conventional bank requirements of credit ratings ., taxation statements, and earnings claims with the customer. Residential hard-money loans are usually non permanent bridge loans that happen to be ship to expenditures, replacing, home foreclosures and those that declare themselves bankrupt. The interest rates for these loans are generally higher, but it's cheaper than dealing with a financial companion or declaring for bankruptcy.

Generally, hard money loans offer awareness rates and also factors that happen to be 50-100% greater than conventional bank loans. It has led to the sense that they are difficult to pay off. However, hard money loans are viewed as to be beneficial for individuals searching for resources to help them acquire loans, one example is, for you to renovate house just before promoting as well as leasing this.

The actual hard money lenders usually take into account income-producing properties for example rentals, store or shopping malls, commercial, offices, motels, motels, medical corporations, and restaurants. They also provide loans for non-income creating activities such as terrain order, advancement and construction, bank workouts, foreclosures and also bankruptcies.

Nearly all eco-friendly locate a safe and secure expense with a return that is much better than what they will get from the standard bank. Since residential hard money loan are usually collateralize using a home with usually 30% - 50% collateral, the investor is actually well protected along with gets the benefit of the more expensive interest rate come back.

Recommended Reading

In the comments to my last post, Jason asked me what books I would recommend. I'm assuming he was referring to real estate investing books. That's actually a fairly tough question. I've been investing in real estate for 8 years now. I started out by reading a bunch of books, but looking back, I realize I've gained the majority of my knowledge from experience and from reading other people's experiences via blogs and forums on the internet.

But if I had to pick a couple books for a real estate investor newbie, I would pick these two:

Rich Dad, Poor Dad by Robert Kiyosaki. This was the book that launched his empire and really, the only one of the series that is worth reading now. (The rest of the Rich Dad books start repeating the same stuff over and over) There are questions about how true his story is and if "Rich Dad" was one person or an amalgamation of multiple people, but that doesn't really matter. There are two things to take away from this book: the difference between passive and earned income and the idea of having your money work for you. (And those two are really the same thing, when you get right down to it.) The book is almost completely bereft of practical, step-by-step instructions for investing in real estate and that frustrates some people. But I look at this book as more of an inspirational book than an instruction manual. Nowadays, Kiyosaki has moved on and his preaching has changed quite a bit from when I followed him 7 to 8 years ago. Back then (and this was way back when he would give presentations wearing Hawaiian shirts instead of suits), his persona was that of a rich guy trying to help the poor masses think like and get rich like millionaires. The last time I looked at what he was doing, I got the sense he was just another massively wealthy guy trying to convince his followers the standard Republican Party line of lower taxes is always better.

Freakonomics by Steven D. Levitt and Stephen J. Dubner. I wrote about this book previously and there is a chapter or two specifically about how to increase the price you get for selling a property by carefully wording your listing. The thing to take from this book is that people don't behave rationally and there are all sorts of cause and effect relationships between events that you might not expect.

You'll notice both those books were originally published several years ago. I've stopped reading real estate books, for the most part. I read a bunch in the past and came to the conclusion that books about real estate investing, almost by definition, have to be somewhat generic. You won't find a book with step-by-step guides on how to do it. This is mainly because real estate laws and procedures are different in each state. If you are interested in buying properties at foreclosure auctions, for example, the methods vary wildly from state to state. The standard real estate contract varies by state and you need to become familiar with what is in the contract used in your state (or state where you investment property is located).

This isn't to say I think my real estate education is complete. I simply find I get more value from following blogs and discussion forums on the internet than I do from books. I list the blogs I follow in the sidebar. I'd start there. See if you can find some blogs written by people in your state or area and follow them for a while. Learn from their mistakes. Ask questions. The reason people blog is because they want to share their knowledge and experiences. They are usually happy to answer questions (within reason, of course).

The corollary to the above, of course, is you have to be careful whose advice you take. Like all things on the internet, you have no idea of the person's true knowledge or experience level. You don't want to end up following a Casey Serin. So be a lurker for a while. I read forums and blogs for a year before I bought my first property. Keep your BS-detector finely tuned.

Of course, the quickest way to get an education in real estate investing is to buy some real estate. That's the quickest, but not necessarily the cheapest :-)

Rents On The Rise Nationwide

This article from Reuters says apartment rents are now the highest they have been since 2007 and vacancies are at a 10 year low. This seems to be consistent with what we are seeing at the Houston apartment complex.

New California Foreclosure Law

Because all my hard money lending is done in California and to people who buy, rehab, and sell foreclosures, this news story caught my eye. The California legislature recently passed a law making it harder to banks to foreclose on property owners. According to Reuters, the bill prohibits banks from "dual-tracking" loans - proceeding with the foreclosure process while also in loan modification negotiations with the owners. The bill also lawsuits against robo-signing. The bill still has to be signed by the governor before it becomes law, but he is expected to sign it.

On the surface, this law sounds good to me. I will freely admit the first I heard about it was from the above linked article and the facts in that article are the extent of my knowledge of it. I do think robo-signing is a big problem. When your actiosn can result in people losing their home and being forced out onto the streets, you need to have someone carefully look over the documents before foreclosing. This just stands to reason. As to the prohibition against dual-tracking, I'm OK with that as well. Yes, it may result in longer times to foreclose on a property. But if a borrower is in talks with a bank to modify their loan, I think they would reasonably conclude that the bank would pause foreclosure proceedings while they are attempting to work out a settlement. Further, without this restriction, the bank has a huge advantage at negotiating - they would be able to drag out the talks until foreclosure was a day away, leaving the borrower with no choice but to either accept the terms the bank offered or lose his or her house.

How will this affect my lending? I expect to see a slowdown in houses for sale at auction for the 6 or so months after this bill becomes law. This will represent the time banks have to wait while they attempt to reach a loan modification deal before proceeding. There is nothing in this law, to my knowledge, that requires the banks change what loan modification terms they must accept, so they will still be reaching the same decision on modifying loans or not, resulting in about the same number of houses going to foreclosure. There will just be a delay lasting the length of those negotiations.

May Apartment Update

I received the May financials for the Houston apartment complex and I'm pleased to see the numbers continue their improvement. Last month's record income was exceeded by almost $3,000, setting another new record for the highest income since 2010. Also, as mentioned last month, we received a reimbursement from our insurance company for some electrical work that was done last month. Just as the expense depressed our monthly income last month, the refund inflated our monthly income this month. However, if we exclude that amount, the property actually showed a $1,200 profit this month! That's the first time in a long time the property has been in positive territory. Looking at the entire year so far, it's still underwater, but it's possible the property  may be emerging from the red sea.

Will this trend continue? I hope so. In what may or may not be an ominous sign, management did not give an indication of how June was shaping up.

Security At Houston Apartment Complex

Last month, I noticed that the financials for the Houston apartment complex showed the security expense had dropped from between $1,500 and $3,000 a month to zero. My concern was that management eliminated some security measures as a cost cutting move. I was worried that this might result in an increase in vandalism and crime-related expenses. I emailed management about this and, it took a while, but I finally got a response.

It turns out, management was able to cancel the private on-site security patrols they were using because they were able to install security cameras owned by the Houston Police Department at no cost. In the couple of months these have been in operation, there has not been in increase in criminal activity, so it seems to be a positive move.

April Apartment Update

As hinted at last month, the April numbers for the Houston apartment complex were good. Revenue hit $184,000, which is the highest since 2010. The water conservation program management implemented last year is working well - costs this year are running about 25% below last year's numbers. That's an annual savings of over $24,000.

The property still showed a loss this month, but that was due to an emergency repair that was needed. A high voltage line went out, causing half of the property to lose power. This happened on a weekend, so the emergency repair bill was $30,000. The good news is that the full amount will be recovered from insurance. Unfortunately, the expense shows up in this month's numbers and the insurance reimbursement won't show until next month's numbers, so for this month, we show a large loss. We also had slightly higher legal expenses due to working out a payment schedule with some vendors we owed money to. That expense should also be gone next month. Excluding these two one-time expenses, the property lost about $3,000 in April. This is down from a loss of $9,000 in March, $10,500 in February, and $30,000 in January. Clearly, things are moving in the right direction.


Management projects May's revenue will be slightly higher than April and the property should reach break-even in a couple of months and continue improving from there.

asnoticiasdoseutime

asnoticiasdoseutime

Prosper.Com Class Action Lawsuit

I received notification today of a class action lawsuit against Prosper.com. It's been several years since I loaned money through them and, in the end, I decided it wasn't for me. I know a couple of my readers also loaned money through them. I just wanted to make people aware that, if you loaned money through Prosper between January 1,2006 and October 14, 2008, you may be a member of the class action suit. Full details can be found at http://www.prosperclassaction.com.

Loan #24 Started

Last week, I took my money from the close of HML #21 and put it to work in a new loan. The new property is a single family home in San Pablo, California. the property was purchased at a foreclosure auction by one of our best clients, who is also personally guaranteeing the loan. The purchase price was $111,600. My partner estimates the current as-is value to be $120,000 and the after repairs value to be $140,000. Our loan is for $74,000, giving us an LTV of 61% of the current value or 53% of the repaired value.

There are a fair number of comps for this property, ranging from $120,000 to $165,000, so our after repair value is smack in the middle of that range.

The property is a 3 bedroom, 1 bath home of 958 square feet. It was built in 1950. It's got a one car garage and sits on a 5,000 square foot lot. My partner's assistant rates the neighborhood as a C-, which is typical for most of the loans we make. He rates the loan safety as a B, given the low LTV ratio.

The exterior appears to be in average condition. There are no readily visible problems with the roof or foundation. The condition of the interior is unknown. There was at least one other bidder at the auction for this property.

Houston Apartment Turnaround?

I finally got the March numbers for the Houston apartment complex. Numbers were generally comparable to February - rent income in both months were up $10,000 over January numbers. Admin expenses were up $2,000 over February due to some legal bills incurred in working out late payments with vendors. Net income continues to improve, going from -$30,000 in January to -$10,500 in February to -$8,000 in March.

But a closer look reveals things may not be as rosy as they seem. One line item expense went from $2,000 in January to $3,000 in February to zero in March. This item? Security Services. No explanation was given and I've emailed management to ask what happened. If they got rid of security services, that might help the monthly bottom line (if you put it back in, we'd have basically the same net income as February), but we could get hit with vandalism repair bills in the future. I'm interested in hearing management's explanation for this.

But the better news is, because this report was so late, they were able to look at preliminary numbers for April and things look much better. April's total income looks to be $10,000 higher than March's and the highest revenue number since November 2010! Additionally, for May, the apartments are 95% occupied and 99% leased. This is due to increased marketing efforts and, according to management, an improving economy in the property's market area. Marketing costs in March rose $1,000 from February and rent concessions rose about $3,000. We'll see how those numbers compare to April. I should also note that, while rent concessions rose, the total amount is still $1,000 under the budgeted amount. This was pretty much offset, however, by the marketing costs being $1,000 over budget.

We've seen strong months come and go with this property. Things seem to improve for a couple months, only to fall back down again later. Hopefully the improvement will be sustained this time. That 99% leased number is quite encouraging.

Loan #21 Paid Off

HML #21 was paid off last week so those funds are now looking for a new home. My other three loans are paying on time.

Still haven't received the March financials for the Houston apartment complex. They seem to be coming later and later these days. I know the management company reduced staff to help with the cashflow and I'm wondering if this is a result of that.

February Update

Things are looking better at the Houston apartment complex. Of course, the previous times I’ve said this it’s usually turned out to be a short-lived turn-around, but still, a good month is a good month. Rental income increased in February by almost $10,000, mainly due to decreased rent concessions. This month saw the highest rent revenue since April 2011. We had t pay out $3,800 for some repairs to the roof and access gate, but other expenses are running according to budget. Management implemented  a water conservation plan and that has resulted in significantly decreased water and sewer bills. They are now moving forward with a gas billback program. This means the residents will start paying a portion of the gas bill. They currently pay a portion of the water bill and with the reduction in that expense, management feels the gas billback will be accepted by the tenants. They should still have an overall lower billback cost than they had prior to the water conservation program. They also installed a separate water meter for landscaping so they can begin a billback program for landscape water usage.

Now, it’s been a long time since I lived in an apartment – at least 20 years. Maybe things have changed since then, but I know I never paid any sort of utility billback for general landscaping or anything. I paid my rent and that was it. If I recall, the units were individually metered and all the utilities were in my name, so that might be part of the reason. Off hand, I can’t remember how the units in the Houston complex are metered. It just seems strange to me to bill renters for water used for landscaping. Of course, this might also be a regional thing too. If that’s how things are done in Houston, then it makes sense that we do it too.

Last month, management asked the investors to inject another $250,000 into the property to help it get through the current rough financial situation. I opted not to contribute and apparently, I wasn’t the only one. They raised $140,000, well short of their goal. However, they are using this money to catch up on payments with vendors who we still owe money to. Management is also using the funds to make ready more units to help improve the occupancy number. They didn’t give an occupancy percentage with this report, but if I use the gross rent and vacancy numbers from the financial report, it looks like we are at about 91% occupancy right now.

On the hard money lending side of things, I didn’t blog about it, but my partner said last month that things seemed to be picking up and he was short of funds. Well, a lot can change in a month and things have now reversed and he has money waiting for investments. Our main borrower says deals have slowed down a bit, although he is still buying a couple properties a day. A short time ago, he was doing two to three times that amount. As my partner says, the business is often cyclical and he has learned to be patient and wait for good deals rather than invest in questionable deals just to get funds invested in something. That's how you go 20 years in this business without losing a penny of your investors' principle.

On a more personal note, I got my taxes back from my accountant this weekend and I got hammered on my federal taxes. I owe a couple thousand. I wasn’t sure how that could have happened until I remembered that in 2010 I converted a traditional IRA into a Roth IRA and elected to report the income over two years. I should have adjusted my withholding rate last year to help alleviate this, but I guess I forgot. The good news is that next year, I won’t be hit with another big tax bill (hopefully), as that conversion has now been fully reported. The Houston apartment complex gave me a roughly $7,000 passive loss I can claim. Unfortunately, it can only be used to offset passive gains, of which I have none. So that loss will just get carried forward until I have some passive gains I can use it against. I had thought that the interest from my hard money lending was passive income, but my accountant reminded me it is not. Based on my current investments and future outlook, I think this loss will probably end up being carried forward until the Houston apartment is sold. But that’s OK. It just means I’ll be getting a nice surprise in the future, as I’ll probably forget about it. That actually happened to me this year on my state return. I had a $400 credit from 2009 that  was carried forward, adding to my state tax refund this year.

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Hard Money Loan #23 Started

I started a new hard money loan this week, bringing my current outstanding loan count to 4.

This one is on a single family home in San Pablo. It is currently occupied. It's a 2 bedroom, 1 bath, 856 square foot home built in 1950. The roof and foundation look to be in good shape and, other than the garage, the paint is in good shape. We were unable to see the inside of the home, but pictures of the interior on MLS show it seems to be in good shape. The landscaping is in good shape too. It appears to have newer windows and the kitchen has been redone with granite and stainless steel appliances.

The property was listed as a short sale on the MLS at $175,000. There is another property down the street, similar in size and condition, that is also listed as a short sale for $175,000. It sold in seven days, but we don't know what the actual contract price was since it was a short sale. The neighborhood is just OK. My partner's helper rates it a "C". The property is near a large regional park, so there aren't many nearby houses for comps. The original owner bought the property in 2004 for $378,000. There was competition at the auction for this property, so other investors wanted it. Our borrower got it for $129,000. Our loan is for $105,000. We conservatively are valuing it at $160,000. That makes our LTV 65.6%. My investment in this property is smaller than normal, since it's being done with funds from my daughter's UTMA account, as I mentioned a couple weeks ago.

My other loans continue to pay on time. Ho hum.

A Handy Tool For Landlords

I came across a handy little website the other day that I though might be useful for landlords or anyone else who needs to send certified or return-receipt letters. Send-certified-mail.com provides an easy way to send out a certified letter. You can also get an electronic proof of delivery or electronic copy of the recipients signature.

If you want to use the service, you simply upload your letter as a PDF or Word file and enter the mailing address and your return address. The accept Paypal for payment. There is no monthly subscription fee to use the service. You only need to pay when you actually mail something.

I found their prices to be reasonable. It may cost a dollar or two more than if you took it to the post office yourself, but being able to send a certified letter from your computer sure beats having to trek down to the post office.

I believe the company is based on the East Coast, so that is where your letters will be mailed from. If you upload your document and pay prior to 11 AM Eastern time, it will be mailed that day. I did experience a quirk that briefly caused me some worry: When you upload your letter, it will appear for a while on their website under a section titled "My Uploaded Letters." Once, it is printed, it will disappear from there. Don't worry - the next day it will reappear in the Letter Tracking section.I've heard from their customer support that they will be revamping their website soon to make things more clear.

Apartment Update And 3 Year Outlook

As Another Investor predicted about 2 hours before it actually happened, investors in the Houston apartment complex got a request to contribute more cash. The management company is asking for a total of $250,000 more from investors to make it through the year.

Management sent out budget projections for 2012 through 2014. The projections assume the complex will be sold at then end of 2014. (The original plan at purchase was to look at selling the property after 5 years, or in 2013.) Also, buried in a footnote, it says the projection also assumes no distributions of cash flow will be made to investors during 2012, 2013, and 2014. The monthly projection for 2012 shows the property losing money each month until June, when it returns to profitability for the remainder of the months of the year. Still finishes the year with an overall loss though.

The analysis also includes a look at the Houston economy and apartment market. In short, its been a very bumpy ride. Unemployment drops for a few months, then shoots back up one month, then drops for a couple more months. Occupancy at the property has consistently trended about 3 percentage points higher than the Houston apartment market in general, so that's one positive. However, that appears to be a result of having rents about $10 to $35 lower per unit than the market average.

Management predicts 2012 will be a turnaround year and the property should achieve breakeven status mid-year and return to profitability for 2013 and 2014. Management continues to defer their management fees to help keep expenses down. (Their contract gives them a percentage of the profit when the property sells, so they have a vested interested in getting the property back in the black.) The property itself is in good physical condition and should benefit from an improving economic environment.

Looking at selling the property at the end of 2014 using a 6.5% cap rate, they figure investors will get an annualized ROI of 10.77% on their initial investment. Just for the heck of it, I went back and looked at the original projections made at the time of purchase. The sale price after 5 years was $2 million higher than the current sales price projection and the investor's ROI was 20%.

Of course, management is trying to paint a rosy picture. Everything pretty much depends on the Houston economy picking up again. It looks like it is on the mend, but it is a very slow process which seems to be subject to frequent setbacks.

So.. Where does that leave us investors? Management says the property is operating very close to break even and with an additional $250,000, should be able to make it through 2012, after which they see the economy picking up. Investors are being asked to contribute a pro-rata share of $250,000 based on their initial investment amount. The investment was sold in $50,000 blocks, so they are asking for an additional $4,545 per block that you own. Investors are not required to contribute more, but if they do not, management warns that "alternative financing sources will be considered," which may or may not be available and will probably come with high interest rates and/or investment participation (meaning the lenders would become part owners of the property in exchange for lending funds). If any members do not fund their pro-rata share, the members that are contributing more will be contacted to see if they are willing to make up the shortfall before any alternative funding is obtained. Of course, everyone's ownership percentage will be adjusted to reflect any additional capital input. And should all that fail, losing the property to foreclosure is a possibility.

I think I'm going to pass on this. I might have contributed had the projections included some cash flow back to investors at some point, but it doesn't. I've always looked at this investment as a capital gains play. While I do appreciate the potential capital gains, over the past couple of years investing, I've realized I enjoy cashflow more than capital gains and I believe I can put my funds to better use elsewhere. That said, there are risks involved with not providing the additional funding. If the other investors do not step up, management might be forced to get a loan at a high interest rate, further reducing profits and increasing the time it takes to turn the property around. Or, they might need to give up some ownership of the property, which would reduce my share and hence, my return on my investment. And foreclosure is always a possibility, although I seriously doubt it will come to that.

First Update Of 2012

Wow.. I can’t believe I haven’t updated this blog since December! Truth be told, there isn’t much happening. My three outstanding hard money loans continue to pay on time. I haven’t received an update on the Houston apartment since last time, so there isn’t a whole lot to tell there. I’m assuming performance of that still sucks or we would have heard something. I did make a decision to go a bit further into hard money lending. I’ve got some money in a UTMA account for my daughter that has been languishing in the stock market for the past 5 years. I finally got fed up with seeing it sit there doing nothing and have liquidated the stocks and will be switching those funds to HMLs as soon as the trades settle and my brokerage can get me a check. I have noticed in the paperwork I get for some of my existing loans (trust deeds and recorded docs and such), other people I lend with have done the same thing.
In somewhat-related news, my self-directed IRA is getting up there in value. I think in the next couple of months, I’ll split that investment into two loans just to provide a bit of diversity. It’s not diversity in the stock market sense of the word, as both loans will be in the real estate sector and the same geographic area (probably), but the loans will be on two different properties, possibly with two different borrowers. I need a couple more months of interest payments before doing this though, in order to satisfy the minimum balance requirement for my bank account before I withdraw the funds.
The market seems to be picking up in the California Bay area. My partner says for the first time in a long time, he has more requests for loans than money to fund them.