I bet the headline "Why Paying 50% after paying 10% more+ 0% is Better than Paying 15% after paying 9% less+6%" got you just a little bit confused. A lot of investors with little cash or credit rely on "Hard Money" lenders(HML) to fund their transactions.Let me illustrate a "hypothetical"scenerio using a typical investor formula;
ARV= $250K repairs=$50K. You have to buy at around 60%ARV if you could find a 65-70%ARV HML so you can pay the points and closing costs(or its coming out of your pocket) so lets works the numbers;
Purchase price(pp)= $100K + Fix up=$50K= $150K, but now you have to pay the HML its points and you also have closing costs lets call it 6% which will be usually financed in the loan(note** I am simplifying and rounding#'s) So you end up borrowing around $159K. Lets say that you were really good and from soup to nuts you sold the property in 6 months for $225K(oops the market dropped 10%). Take away about 11% in selling costs(taxes,legal,concessions,commissions) and your net sales price is now $200,250- $159K loan= $41,250.....but wait,in the interim you had to pay $12,000 to the HML in mortgage payments by borrowing $14,000 off of high interest rate credit cards !!! Your left with $27,250, still a respectable sum, but what if you took a year to sell, your left with $10K,what if he market dropped 5% more...Your wiped out !!!
Well What if....
You induced the seller to sell to you for $110K(thats right, 10% more !!!) but only if you can pay them after you rehab and sell(+ 0% financing). Instead of debt financing you get Equity financing for the closing and rehab at the cost of 50% of the profits....Lets do the #'s as in the previous HML example;
Sales price after 6 months=$225K, net sales price=$200,250 - $55K(rehab and purchase closingcosts) - $110K owed to previous seller= $35,250 you give 50% or $17,125 to your Equity partner(62% annualized return ) and you made $10,000 less than if you used the HML ?
You may be asking why I think the second example is more preferable?
1) No Stress of Payments...where and how was I going to get the money to pay the HML, How much time am I dedicating to finding "Bill Money"when I could be more productive looking for my next deal
2) Safer Hedge against the downside.The market could drop an additional 15% and we would not be wiped out !!!
Hard Money Lenders definately have their place ,I am friends with some of them and have occasionally utilized that resource,so this is not a slight to them.
Learn this technique from the "Millionaire Maker" himself; Peter Fortunato on October 23rd
Comments
Good post and explaination. However, most REI's have troble finding "equity" players. Most will go to thier friends and family for the equity funds, but, what if the senario you describe happens? Do you really want you friends and family to take a hit. I don't think so. It's my opinon that its always best to use a reliable HML.