Earning 9%-12% on any investment nowadays may seem a little far fetched. It does, however, happen all the time with trust deeds for Los Angeles, Orange County and San Diego hard money loans.
We do hard money loans on all non owner occupied residential and commercial real estate in Southern California. We match investors who are tired of getting 1/2 of 1% on a CD with borrowers who cannot qualify for a conventional loan. Everything goes through a fully insured title company and escrow.
How does this work, say, on a Los Angeles real estate purchase?
The borrower would get the property under contract and then come to us for the private hard money loan. He or she would have to put down at least 30% of the purchase price. Then we put the deal out to our investors on who wants to earn 9-12% on a pretty safe Southern California first trust deed secured by California real estate. The first trust deed is instrument which secures the investment in case of a borrower default.
Why such a difference in the rate of return between 9% and 12%?
Well-if the borrower puts down 50% on the property and has decent credit, that just dramatically lowered whatever risk there is and the borrower deserves a lower interest rate in the 9% range. On a cash out refi, if a borrower has a property that is free & clear worth say $500,000 and only wants $125,000, that is a pretty safe California first trust deed investment.
On a short term fix and flip loan or for a borrower who has a low credit score, they will have to pay in the 11-12% range, this, the trust deed investor will earn 11-12% interest. On the fix and flip loan, the investors deserves high interest because they most likely won’t be in the investment longer than 6 months. In a case where the borrower has bad credit, they don’t deserve the lowest hard money rate unless the loan to value ratio is at or less than 50%.
Investors ask me, “how can I lose money?”
I tell them if a borrower put 30% down on your real estate deal that you funded, and the real estate market dropped another 30% (which it already did from it’s peak) the investment would be at risk of breaking even or losing money if the borrower defaulted on the loan and you had to take back the property(foreclose) and eventually sell it.
Investors ask me “I don’t know how to foreclose on someone.”
At least 80% of our investors use a loan servicing company. They usually charge $15-$25 per month and they are well worth it. They collect the payments, send checks to the investor, bill for late charges and handle the foreclosure process if the need arises.
The terms San Diego trust deeds and Los Angeles trust deeds may sound esoteric at first but after you do your first one, you have the opportunity to enjoy 9-12% returns well into your golden years. (My oldest investor happens to be 84)
The Southern California Hard Money Guy