It’s not that simple and it depends on your investment style as well as your source of funds.
We just offered a great little $455,000 loan at a stunning 52% LTV and the response was minimal. That’s our fault for not explaining the benefits of this loan and for offering so many 12% loans and 20% Equity positions. Just because we haven’t lost a nickel on any loan we made in the last 5 years, doesn’t mean we are offering TBills at 12 or 20% – all loans have some element of risk.
Our 10%, 11% & 12% flipper loans are great business. Great yield, provide jobs, make money. Super. But they take a lot of work, are short term, and produce hidden costs. If you do a 5 month loan at 12% and then get your money back out in one month and then do the same thing again, you have had 2 deals in one year, but 2 months of down time. Your annual rate of return is 10% not 12% because of the down time. You also have two files and two things to put in your tax return. You spent (I hope) at least two hours examining each loan. If you use IRA funds to do these loans, then you probably have a transaction fee to the custodian. If you like doing those things then it may be an advantage to you (I think it’s fun, but not everyone does). Moreover, if something went wrong with the deal, PHF will do all the work as a service to you, but you may have to advance funds to correct for cost overruns. This requires you to have back up funds to protect yourself and perhaps to take action that you did not contemplate.
Now consider the characteristics of the longer term income property loan:
- Once you decide it is a good loan, you are invested for the term.
- I have been in this business for 30 years and for 30 years I have heard “… I don’t want my money out for that long, rates may rise, etc”. Well for 30 years, private money rates haven’t changed much and for 30 years nobody wants their money back as long as they are getting payments.
- You have much less down time which increases yield
- You have much less work
- You have fewer costs if you are using pension funds
- You have more sources of repayment
- You have the borrower who has other assets
- You have the tenants who pay the rent
- You have a guarantor on this particular loan – one of the sons
- You have a family that has owned this asset for 12 years and the sons are contractors who will inherit this asset and they are improving it.
- You have the value of the property itself – just like a fixer – but in this case the asset is worth $870,000 and the loan is only $455,000