Borrowers, mortgage lenders, and trust deed investors should pay close attention; why? You may find yourself questioning why a borrower would choose a private money lender over a larger financial institution. While the reasons are numerous below, I have listed 10 micro case studies on why a private money loan could be the answer, and how all participants will benefit.
- Consolidate debt: SFR owner-occupied home in Newport Beach, CA needed $ 350,000-second trust deed. The combined loan-to-value was 56%. The borrowers were self-employed and made enough income to service the monthly obligation. By taking out equity from the borrower’s home they were able to lower monthly payments, retire liens and debt. They raised their fico score from 690 to 826. Borrowers refinanced with a large bank. Consolidating debt could lower monthly payments, raise fico scores, and help make borrowers become more credit worthy to get bank financing.
- Property is not creditworthy: A good borrower with good financials, who owns a single tenant Rite Aid building in a major city in North Carolina, had a short fuse left on the lease. The first Lien came due and no bank financing was available. The borrower agreed to new first Lien of $1,650,000 with appraised value of $3,875,000, with a 43% loan-to-value. The borrower intends on leasing to a new national credit tenant, thereby making the income producing property worthy of a long-term institutional bank loan. Note: bridge or gap financing may be necessary and good for all participants.
- Borrower almost but not quite creditworthy: A commercial property in Costa Mesa consisting of 12,544 rent-able square feet near South Coast Plaza, 73 freeway, and the 405 freeway. Borrower needed to pay off loan coming due and get $200,000 cash out for business development. The bank would not allow cash out and the borrower was the 100% occupant with interest in multiple businesses. A first trust deed loan was made for $2,100,000 on an appraised value of $3,000,000 reflecting a 70% LTV. The borrower got cash out, mortgage broker got paid and a trust deed investor made 8% per annum.
- Leveraged equity: 2 free and clear 4-unit buildings in La Habra were leveraged into an additional 115-unit apartment complex in Kentucky. Borrowers wanted to keep all properties in the family trust. They borrowed 2 first trust deeds of $550,000 or $1,100,000 as a down payment and rehab cost of the Kentucky apartment complex. The loan-to-value of the first was 57%. Both first trusts deed loans were made at 8.5% amortized over 30 years, due in 5 years. There real estate holdings increased from $2,000,000 to $6,200,000. Their monthly cash flow and equity growth were greatly enhanced by owning and operating all three income producing properties. Using equity can multiply real estate holdings and overall yield.
- Sweat Equity: The borrower has been the owner of his auto body and collision shop for over 25 years and occupied the property for the same amount of time. Their shop is conveniently located in the center of Los Angeles on a high traffic street. 25 years of paying rent provide a great deal of sweat equity, providing that the property can be purchased for 50% of the value. The purpose of the loan was to provide 100% of the purchase price to exercise a lease option to purchase. This is a $750,000 loan with a maturity of 24 months and an investor yield of 10%. The appraised value was $1,500,000 reflecting an LTV of 50%. The borrower was thrilled, the mortgage brokers earned a fee, and the trust deed investor yields 10% per annum with monthly payments.
- Property Inheritance: 2 brothers inherited multiple properties. One property as a multi-tenant commercial office building in Abilene, TX. The property consists of 43,000 square feet of total rentable space on a 4.7-acre parcel. The property generates $20,000 and is 70% occupied. The borrowers requested a loan to improve the property, lease up the remaining vacant space, and sell the property on the open market. The appraised “as-is” value was $1,200,000, first trust deed of $550,000, or 46% loan to value for 24 months. Borrowers were happy, the mortgage broker was happy, and the trust deed holders yielded 10% per annum on invested capital.
- Developer needed an interim land loan: The property was a multifamily parcel in Compton, CA. The property was zoned for an LR3 which permitted construction of a 19-unit apartment building. The borrower held the property in a single purpose entity. A $400,000 was made on a value of $790,000 reflecting a 51% LTV. The borrower was happy, the mortgage broker got paid and the trust deed made 11% per annum.
- Second Trust Deed on Rental Home: A single-family residential property in Saint Helena had a value of $1,300,000. The borrower obtained a $ 147,000-second trust deed loan reflecting a 63% combined to value. The purpose was to provide cash for the borrower’s business enterprise in the agricultural industry.
- Purchase of Automotive retail business center in Bellflower: Property consisted of 10 rental bay units with a total of 20,000 square feet of space on 1.68 acres. The borrower was an opportunity purchaser who planned on cosmetic repairs, filling two vacant units, and increasing rents, before refinancing with an institutional lender. A first Trust deed was made $2,130,000 at a maximum of 60% loan to value or $3,550,000. The loan was made at 10.5% interest only for 36 months.
- Purchase of Commercial Retail property in downtown Redlands: The borrower was a long-term operator at a Hair Salon who wanted to purchase a property to move her growing retail business. The property has 4,060 square feet of leasable space and sits on a 10,790 square foot lot. A loan was made for $756,000 on a value of $1,080,000 for 70%. The borrower wanted a 3-year interest only loan. With 3 years of stabilization, she will refinance with either an SBA loan or an institutional lender.
There are 100’s of reasons that borrowers obtain loans from private money sources rather than banks or other institutional lenders. The idea of borrowing short and an intermediate-term allows the borrower to solve problems, and create opportunities such as property improvement, increase tenancy, credit stabilization, debt consolidation, enhance the overall financial condition, and fix-up for the purpose of selling at a higher price. Next week I will have 10 more case studies that identify why taking a private money loan may have advantages over the drudgeries associated with the bank lending and approval process.
Business and Private Money Finance Consultant
Cell 949 533 8315