This strategy is great for those of us who have a good bit of cash on-hand, as well as good credit and income. For anyone else, this is going to be very difficult, as the refinancing landscape these days is pretty tough. If you attempt to refinance within 6-12 of purchase, the LTV will be based on the purchase price, not the appraised value. So, if you want to refinance within 6 months, be prepared to still have 30-50% of your own cash in the deal.

As an example, if you purchase a property for $50K, put $10K into renovations and then refinance in less than 6 months, you'll likely only be able to pull out about 70% of the purchase price, or about $35K. In this example, you'll still have $25K of your own cash in the deal.

If you have plenty of cash, this may be able to scale; otherwise, not so much.

The reason I say *MAY* be able to scale is that the next issue you'll face is the institutional limits placed on conventional lending. Specifically, no lenders will allow you more than 10 conventional loans these days, and most lenders won't allow you more than 4. So, if you want to scale above 4 (or perhaps 10) total loans, you'll need to find either a portfolio lender or a private lender. Portfolio lenders will go above 10 loans, but they'll want to see a decent amount of skin in the game, and will require a personal guarantee, so again, personal credit, income and assets play a role.

Private money is probably your best choice if you want to scale a rental business, but few private lenders will lend to you if you don't have a solid track record of success in this business. Plus, private money rates will be significantly higher than portfolio or conventional rates. Also, very, very few lenders are going to want to give you cheap money (less than 8% interest) for 20-30 years, as no private investor investor is going to lock up their funds for a long period of time at a low return when everyone expects interest rates to rise over the next 5 years, perhaps significantly.

So again, institutional lenders are your best best, but you need the cash, credit and income, and you will hit your maximum number of loans pretty quickly.

What many of us are doing these days is flipping houses to generate income and then plowing that income into longer-term rentals. Personally, I'm plowing my flipping income into lending, where the money is much easier and returns are much higher, but that's just me.

Anyway, my point of all this is that the purchase, rehab, refi and rent model is a good one, but the financing details these days are MUCH tougher than most people realize, and if you don't have a plan, you'll quickly find yourself in a tough spot.

Can you not share in the thread for everyone? I for one am very curious, as I'm sure others are.

I was already somewhat aware that I could quickly run into a ceiling with standard bank financing, but it's nice to know it for sure. I'll be sure to have multiple backup methods of financing in place though, never fret.

I appreciate you taking some time and sharing your thoughts. If you'd care to share more about lending, I'd love to hear more about it!

Assuming you have read this thread in its entirety imagine a great long term rental property that has a 12% cap rate. This property might be a foreclosure listed for 50k. This property is being bid on like crazy by cash investors but one investor ends up with it for 54k. Even though he represented himself a cash investor he only has 40% to put down and will go to a hard money lender for the rest. So assume the investor brings 20k to closing and the lender lends 34k. (ignoring closing costs insurance etc)

Now as a hard money lender you loan the investor the moneythe 34k with little to no underwriting process for 15% interest and a 1-2 yr balloon on the loan. If the investor defaults it would be really easy to resell the property for 50k again if the demand is that strong for it. Of course you would have to subtract foreclosure costs and unpaid property taxes etc but there would most likely be plenty of profit on top of the 15% you were earning while he was paying.

In my experience the loans with this much down payment and underlying cash flow the default rate is less then 2% over a sample size of a couple hundred loans i have been involved in over the past few year. (only made 3 loans myself though)

I have read the thread, twice now seeing as my first read through was in October of last year and I thought a refresher would be a good idea.

How risky is hard money lending for a newbie investor? I plan on learning about it anyways, but I'd like to know how high to prioritize it. I know you said "essentially no risk", but that doesn't mean no risk, and I want to make sure the lack of experience I, and some of the others, currently have is being taken into account in your assessment.

As always, thanks for sharing!

Use your noggin. Being more highly leveraged = more risk. Taking out loans with higher interest rates = more risk. Your margin for error shrinks the more leveraged you are and the higher your debt service payments. As a novice investor this is not something you want, especially if complex renovations are involved. Could be a possibility if you have a home run investment, but short of that I'd stay away.

On the other hand, gotta get started somewhere. If you have the time, a breakeven project provides invaluable experience.

I'm a huge fan of hard money lending, but for your first few loans I would highly recommend going through a broker. Go to a local real estate meeting and find an established, licensed, hard money broker who is well respected with lots of strong references. A good broker will connect you with a responsible borrower and will walk you through the lending process step by step. This is what I did to get started about a year ago, feel free to pm me if you have questions down the road.

Lol, don't insult me...especially undeservedly. Obviously I was skeptical of his low risk assessment for newbie investors, otherwise I wouldn't have asked. Also, how would I be highly leveraged if I'm the one making the loan? You seem to have misread things...

Sounds good, thanks a bunch!

Do any of you use land trusts to protect the properties you own?

Do any of you use any specific REI software programs to help with assessing investments and/or run your business?

Heyokha, I apologize. I did misread your post and thought you would be the borrower. However, the same principle holds true. If you expect a higher return on your loan you should realize that this corresponds to higher risk. If you don't know why you're achieving a high return, than you need to figure that out.

That's what I figured, but wanted to double check to make sure of.

While this is true is most circumstances in today's environment it's not always the case. I feel that good hard money loans are actually less risk then the loans banks are making right now.

If the hard money is underwritten correctly you should hope the borrow defaults. The last loan I did the only info I had when I agreed to the loan was the guys name, property address, and downpayment. I never even went to the house. I am hoping and praying he defaults. Given he did buya house for 60k and put down 40k which is a somewhat rare LTV loan but I'd rather be in my situation then a bank loaning 80% LTV on full retail value of a house. Even if he only put down 25k on a 60k purchase price I'd like my loan better then a bank loaning 80% with full underwriting.

This is exactly correct.

An HML shouldn't be scared of having to take ownership of the real estate in the case of a default (if he is, he's in the wrong business), because if the loan was made correctly, taking ownership will be more profitable than receiving payments on the note. This is accomplished by using low LTVs and loaning against properties where an alternate exit strategy is clear.

A good HML is rarely at any risk, as he wins regardless of what happens with the loan. That said, a good HML is protected with strong contracts and processes, so make sure you consult with an attorney before making any loans.

It's called self-employment tax and it's double the rate of Social Security because you're paying both sides. (That is, you're also paying the so-called "employer's share" of S.S.)

Local 2 family is listed for 109k.

Rent totals 1700 a month for 20.4k a year. Already has tenants in it that have lived there for awhile, no plans to kick them out so I wont have to deal with vacancy to start.

Expenses (Tax+Heat+Water on my end) + some insurance and other things will run between 9 and 10k a year for an estimated profit of 10-11kish a year.

Seems like a decent deal, house is in decent shape, no remodeling/painting needed now since current tenatas are happy, inspection went well, no major problems. Would eventually need new windows over time as the biggest expense as they are all pretty old.

I will be paying cash for deal, and using the same realtor for both sides, what kind of offer should I make...anything else I should look into for a first time rental property owner?

Sounds like a pretty sweet deal. I would still come in with a lower offer but not too low that will blow the deal.

brit,

did you run the numbers if you finance it? Say you put 20% down. What kind of interest rate could you get? What's your cash-on-cash then? 10% cash on cash is fine, but you might be more interested in using your 110k to do 4 such deals with 25% cash on cash than 1 deal with 10%.