Nature abhors a vacuum. As conventional financing sources dried up over the past two years, private lenders have stepped up to fill the void. And with that has come competitive market forces that are driving private note yields south. Many new mortgage pools have been formed this year, and some are offering loan rates on “vanilla” deals as low as 8%.
For years, sophisticated private money lenders have been enjoying rates of 10-12% (or more) on their secured notes. Today, a borrower with one or more compelling factors will find there’s competition for their business. While there still seems to be more loan requests than ready capital to fill demand, the truth is that there’s a lot of private money looking for “good” loan opportunities. I know, because I’m getting calls every week from associates in the industry looking for referrals.
“Compelling factors” include:
• A strong borrower
• Higher quality collateral
• Strong debt service coverage
• Lower LTV’s (below 60%)
Any one of these factors can result in more favorable loan terms.
The good news for the savvy investor is that, competition notwithstanding, there are still niches in the private lending sector that command more traditional yields. I’ll ignore for the moment land, condos, seconds and development deals (the market for these loans is very rough). For example, we’re writing loans with investor yields of 9-11% secured by cash flowing residential rental property in strong rental markets such as the Sacramento Valley and Contra Costa County. These properties are not in rough neighborhoods, and the debt service coverage ratios are anywhere from 1.5 to 2.5!
These loans tend to be smaller – many are in the $50,000 to $150,000 range – but with solid comparables thanks to brisk “fix & flip” sales activity, the target LTV ratios are reliable. And again, rents generally far exceed the monthly interest payment even at 12%!
We have a constant stream of cash-out loan applications secured by fully remodeled and rented homes. These loans are paying investor yields from 9-11%. Contact us for a current list of loan opportunities in our pipeline.