Hard money lenders in Boston and other big cities are crucial players in investors’ Buy and Hold Real Estate Strategies.
What is a buy and hold (B&H) real estate strategy?
It’s by no means something new or untried. Indeed, it’s a methodology that’s passed through highly volatile economic times and emerged healthy, robust, and continuous. Simply put, investors rely on buying targeted properties to rent for years down the line, eventually selling for a capital gain. The model relies on a leveraged formula that, even with single-digit annual growth in the asset, magnifies the return on investment (ROI) substantially.
There’s no restriction to any one niche when you buy real estate to hold for the long-term. The B&H initiative appears in the industrial sector (i.e., factories, warehouses, and industrial parks with different verticals); residential (single-family owners, multifamily developers, condo projects & townhouses); shopping malls, and office blocks. It also applies to a family living in their house or condo for a long time. Buy-and-hold real estate believers actively participate, as long as the projections indicate steady annual property value growth.
So property appreciation is the key phrase here?
Absolutely, most B&H property investments reside in fast-growing areas. People drive the property prices up because they want to be close to conveniences like:
- Good schools
- A variety of restaurants
- Broad shopping options
- Everyday services
- Vibrant communities
- And other compelling demographics.
Neighborhoods spring up alongside commercial infrastructure to take advantage of these urban features. It’s almost a guarantee that early real estate investors will earn substantial appreciation on their purchases ten years down the track, and beyond as more families pour in.
A popular B&H real estate investing formula involves leasing real estate to retire on rental income. It hasn’t gone unnoticed by big money lenders in Boston and other large cities. As long as there’s some equity in the borrower’s proposition, asset based lending is a highly touted opportunity alongside attractive leverage ratios. Compared to high risk, semi-secured fields like factoring or micro-lending, it’s a lender’s utopia.
The front seat driver of real estate investor wealth – ROI
Real estate profitability depends on three compelling influences:
- The rate of asset appreciation over the B&H period
- The lending arrangement
- The interest rate
- Loan-To-Value (LTV).
Assume a homeowner bought his or her single-family home in 2005 for $300,000 with a $200,000 mortgage (i.e., 70% LTV). Interest rates average out at 4% pa. Today, the house is valued at $719,000, reflecting only an average of 6% compound appreciation over fifteen years. Indeed, if he had bought the same residence after the crisis hit in 2010 (five years later), the compounded return would have registered an average 11% over some ten years. Nonetheless, the results are still startling:
- All the capital growth belongs to the homeowner, none to the mortgage company.
- Therefore, assuming there have been zero principal repayments, the homeowner’s $100,000 has grown to $520,000 after deducting the loan value.
- He has multiplied his investment by 5.2 times or 11.6% return annually.
- Even if you deduct the $120,000 of accumulated interest, it’s bottom-line, a great result.
The example is scraping the bottom of the investor barrel, with no rental income in the analysis. Multifamily operators, office block developers, and other commercial real estate borrowers use leverage far more significantly.
How the lending works for different investors holding real estate long-term – more specifically
Every investor in a B&H strategy where renting the asset is on the cards, should ensure that the rental income can cover: Operational expenses + Interest charges + Principal repayments. If investors want some income, they should add it to the requirement.
There are two mainstream categories of lenders in the B&H funding arena:
- Traditional lenders like regional banks and registered mortgage lenders.
- Hard Money Lenders that frequently double up as a Private Lending resource.
The traditional lenders hold a massive ace up their sleeve, competitively speaking, by granting loans with anything from fifteen years to thirty-year horizons. Also, homeowners’ interest rates are in the very low single digits, and for commercial borrowers, probably a little north of 50% lower than hard money lenders can offer.
In contrast, hard money and private lending companies level their financing term from one to ten years. Both categories will entertain around 70% LTV. So the next obvious question is this – “Why would I ever borrow from a private lender or hard money lenders ever?” It’s a good question and opens the floodgates to a torrent of compelling answers that will tell you exactly why. Here they are, in no particular order:
A. Your FICO score is less than perfect
Banks and mortgage companies are almost a non-starter for poor-credit individuals and business owners (in the SMB sector). Low FICO scores (under 652) disqualifies you from consideration, and even then, the bar is factually at 700 plus to get a fair review. It cancels out millions of prospects who are earning well and can demonstrate the ability to part-fund real estate holdings.
On the other hand, hard money lenders could care less about your credit score, as long as they cover the “skin-in-the-game” aspect.
B. You need your money quickly
Banks and mortgage companies are slow – very slow. Even with enough income and stellar credit, getting an outcome in less than six weeks is a win. There are committees for almost every touchpoint in the process, and committees overseeing committees. Pre-qualification helps a lot, but there’s no avoiding building inspections, appraisals, and insurance. All of it points to time-centric situations imploding if bank lending is in the mix.
Hard money lenders generally have a short hierarchy, and the person you deal with frequently says yes or no. If you approach them on Monday, your bank account could see the money by Tuesday or Wednesday the following week. They work fast and decisively.
C. Interest rates and the term are not “kill-points” to your real estate investment.
There are numerous circumstances where the B&H investor isn’t interested in getting the lowest interest rate, and the multiple years of funding isn’t a priority. The most common cases are when an investor is looking for funding or refinancing of:
- A maturing mortgage with a substantial balloon payment.
- A long-held, appreciating property cash out.
- A temporary rental roll disruption while renovating multiple units.
- Short ownership cycles repeating over many years (wholesaling & flipping)
- Customized construction, not easily convertible for anyone else.
- Outliers like trailer parks, self-storage facilities, and mixed-use developments
In most of the above cases, loan applicants hit a roadblock with the banks. The traditional lenders show little motivation for any applications that deviate from straightforward buy and sells. They have no expertise in:
- Fix and Flip lending
- Bridge loans
- Rehab construction loans
- Private construction lending for unique situations
In all the examples given above, and much more, hard money lenders and private lenders are your tickets to ride. If you have an unacceptable credit rating, they can also help, as long as the leveraging ratio is low enough to cover all costs (as suggested above).
Greater Boston hard money lenders and private lending entities play a significant role in funding responsive investors from enclaves like Dorchester, Sommerville, Malden, Saugus, Roxbury, Mattapan, Jamaica Plain, Quincy, and Braintree. One standout provider of asset based loans, Norfolk Capital, also has a client base in Canton, Pawtucket, Providence, Central Falls, Greenwich, and Rhode Island. The word is out on the benefits gained from arranging private construction lending, fix and flip lending, and a customized rehab construction loan with Norfolk Capital and other reputable hard money lenders. There’s little doubt that they are driving a blockbuster through a diverse real estate investing marketplace that has a place in it’s heart for specialized private lending arrangements.
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