First Capital Trust Deeds frequently works with California real estate investors who own high-end rental properties in the $1,000,000 to $10,000,000 range. For a variety of reasons, our clients cannot obtain jumbo bank financing on their rental property (or properties) and they turn to us for help finding the best private money financing for luxury rental properties that suits their situation.
Private money lending isn’t a well-publicized part of the mortgage business so it’s not always easy for a borrower to know if they have found the best terms available including points, fees, interest rate, duration, and prepayment penalty. And it’s also not easy for traditional mortgage brokers who originate conventional loans to know as well since the terms can be drastically different from one private money lender (also referred to as a “hard money lender”) to the next and most conventional brokers don’t know all the lenders in this segment of the mortgage market.
For us, since all we originate is private money loans, we know the California private money lender niches inside and out.
In the luxury homes section of the private money mortgage market, some lenders will offer attractive terms to superior borrowers with trophy properties at lower Loan-To-Values (LTV) while others will charge higher points, fees, and rates while extending a higher LTV to the less credit-worthy borrower.
Which brings me to an interesting loan scenario FCTD had recently on a beautifully staged home in Southern California that had been lingering on the market longer than the owner had expected. In the event that no offers showed up in the next month, the owner wanted to know what kind of private money financing could be quickly arranged if they decided to rent the property for the next 12-24 months.
The owner definitely wanted the lowest payments possible since the home would likely rent for $10-12K/mo. Covering the debt service was essential as was keeping the upfront costs to a minimum since the owner had already invested several hundred thousand dollars into the property since acquiring it twelve months earlier.
Since this property was valued at approximately $2,500,000 and had less than 50% LTV, the pricing turned out to be pretty spectacular for private money lending:
- $1,000,000 — Loan Amount (40% LTV)
- 6.49% — Interest-Only
- $5,408/mo. — Payment
- 24 Month Term
- No Prepayment Penalty (PPP)
- $200,000 — Loan Amount (48% CLTV)
- 11.00% — Interest-Only
- $1,833/mo. — Payment
- 24 Month Term
- No PPP
The blended rate of 7.242% provided a combined a payment of $7,241/mo + taxes, insurance, HOA, etc, which could all be covered by a $10,000/mo lease. The other nice thing for the owner is that they wouldn’t need to provide tax returns and other financial documentation that jumbo bank lenders require. Nor, would they need to have a tenant in place before the loan could be issued like several other private money lenders would require. Instead, the lender offering these terms would do an occupancy check within the next 12 months to make sure that the owner had not moved into the house since the loan was a business purpose non-consumer loan. (FYI – private money mortgage lenders take the issue of occupancy very serious for compliance reasons).
In the end, a nearly full price offer came in and the owner quickly accepted and sold within 45 days. The home was originally bought to fix and flip rather than buy and hold. Even though it would have been nice to fund this loan, we’re happy that our client was able to sell the property for a substantial gain. For the client, it was reassuring to know that if the sale fell through, the financing would still be available and the lender would be able to close within 10-14 calendar days.