Am looking at buying a small apartment building and using a 50% LTV loan to do it.
Why do I need to borrow money, when I have a loads of cash committed to my fund from investors? Because I’m judged by my investors based on the annual return I generate for them. Because return is calculated by dividing their profits by the amount of their money I use, I’m strongly incentivized to use as little of their money as I can (obviously without taking on so much leverage that I put myself at risk of defaulting!).
Ordinarily, I’d use a bank loan instead of investor cash, but, in this case, I need to close more quickly than any bank can manage.
So, I’ve been talking to some hard money lenders about making the loan. Hard money guys are the people you go to when you need to close fast, because they’re generally just rich guys who make their own decisions about whom to loan their money to.
The first two lenders I spoke with quoted 10-11% / year interest.
On a 50% LTV loan? They’re crazy. This is an incredibly safe loan:
- It’s a great building in a great area;
- I’m putting down half the purchase price in cash, which I lose if I default;
- I’m going to invest hundreds of thousands of dollars in additional cash in the property on top of the downpayment, which I also lose if I default;
- I’m willing to pre-pay a big chunk of the lender’s interest, so they get it on day one of the loan, instead of collecting it in little bits each month; and
- If, by some act of God, I default, the lender gets to own the improved building for 1/2 of the market price
Someone is going to be willing to loan me the money at 7-8% / year. It’s just too good an opportunity for someone with a few hundred thousand sitting in the bank earning 0%. I’ll keep you posted.