Foreclosure investing with hard money Q's?

**rynophiliac** · 12-03-2007, 03:38 AM

I would like to get the expert advice and opinion of the members here on the forum of an idea I have been throwing around in my head for about two months now.

I am 24 years old and will be buying my first home here within the next two months. I have applied for convetional financing and have been approved and will be submitting my offer shortly on a REO property.

I am in a position, being in a large city and having many friends my own age where I can rent individual rooms of my home to other college kids. I will be purchasing a 4 bedroom home, and from what I have read can legally have up to 4 others in the home. At the going rate I will be able to rent the additional rooms for a total of $1420 a month in rent. The quotes I have recieved on my mortgage are around $1200-1280 a month. I will be living in the home for free and having my mortgage paid and making a small amount per month (assuming that I keep it fully rented, and assuming all operation costs because this is my primary residence). If I were to lease the home to a single family the home would only bring $1000 per month.

Juggling this idea in my head and having friends who are currently investing in foreclosed real estate I started thinking, hm... what if I could own more then one home, what if I could get them below market value, what if I could rent the second home to college kids as well rather then a single family... the more I started to see the potential to make make money, build and create equity (thanks for the tip John).

However I have a few limitations that would keep me from acquiring several homes, mainly Im only 24, have a low income job, and limited credit history with mortgages.

After I purchase my first home I think it would be hard to get financed for an additional mortgage on my salary, but I started thinking about hard money loans and the idea that it wouldnt matter if they were high interest as long as I could obtain a high enough rent from the property to cover the mortgage including the high interest and operation costs. Obviously with higher interest I would have to find more favorable deals (hence the foreclosure thinking) to make the mortgages affordable and profitable.

There are a few questions I have for you guys that would be helpful in my understanding the risk involved in such transactions.

1. What is the going rate for a hard money loan? I have read on websites 10% interest, but have heard of up to the 20's? What can I expect from these types of lenders?

2. Will I run in to the same obstacles with hard money lenders as I would with a bank because of my lack of proveable income?

3. Are there any GOOD foreclosure website/databases online that offer useful information from to narrow the search down without going to the recorders office in person and spending hour after hour looking for what could be? If so what website do you recommend? I am in the phoenix area.

4. If I were to purchase my first home, have it fully rented then purchase a second home as a foreclosure with a hard money loan, what can I expect as far as refinancing terms go? Could I expect a bank to refinance the loan after x amount of years of good payment history even with a low income job? Or would I be stuck with the high interest for the entire term or untill I graduated and got a higher paying job?

5. The loan officer I am working with right now for my conventional loan says that in the future I can count the rent as income after it has been recieved for two years? How do I need to document this to provide this as proof for future purchases of real estate.

I appreciate any and all suggestions wether they be for or against this approach of investing to help me understand wether it will be worth pursuing.

thanks
Ryan

**zatanaz** · 12-04-2007, 09:23 AM

Hey Ryan,

Looks like you've been thinking about this a lot.
There is a little bit of risk when renting to students, because most of them will only do a 6 months lease, while a single family will do a 12 months lease.
However, if you think you can have the students for the full year, then definitly is something to look into.

Now, back to your question. My experience with hard money loans is that they only benefit you when flipping a home. Hence, keeping the high interest payments for the least amount of time.
Also, most private lenders with only lend you 80% of the purchase price.
Notice that I said purchase price and not market value. And of course, whenever private money is used the purchase price is much lower than the market value. This is the key word. Even if you find a great value (foreclosure) you will still need 20% down. And if you have 20% down, you might as well do a conventional investment property loan.
Furthermore, many times, hard money loans come with pre-pay penalties.
So make sure, yours doesn't.

I hope this helps.

**jmartin1970** · 12-09-2007, 03:41 PM

Originally Posted by zatanaz

Hey Ryan,

Looks like you've been thinking about this a lot.
There is a little bit of risk when renting to students, because most of them will only do a 6 months lease, while a single family will do a 12 months lease.
However, if you think you can have the students for the full year, then definitly is something to look into.

Now, back to your question. My experience with hard money loans is that they only benefit you when flipping a home. Hence, keeping the high interest payments for the least amount of time.
Also, most private lenders with only lend you 80% of the purchase price.
Notice that I said purchase price and not market value. And of course, whenever private money is used the purchase price is much lower than the market value. This is the key word. Even if you find a great value (foreclosure) you will still need 20% down. And if you have 20% down, you might as well do a conventional investment property loan.
Furthermore, many times, hard money loans come with pre-pay penalties.
So make sure, yours doesn't.

I hope this helps.

Good answer!! However, not all private money lenders are the same. I am direct with a private money lender who will base the loan on ARV or (after repair value). My rate was less than 13% and my first deal was with no money out of pocket.