Hard-money Profits

Saturday, Nov. 17, 2007

Learn more about overseas investing in International Living Postcards--Saturday Edition

The obvious way to invest in real estate in another country is to buy a piece of property there. But that’s not the only way. In fact, you could make better (maybe far better) returns taking advantage of more creative, less direct ways to play the international property game.

The key difference is that you won’t control (because you won’t own) the property in question. On the other hand, neither will you have to pay the cost of acquiring (transaction fees in some markets can run as high as 12% of the purchase price) nor will you have the hassle of dealing with ongoing management and administration, or deliberate over and determine the timing for the eventual exit strategy. Indeed, your exit strategy is set upfront.

Developers are always looking for cash. And, typically, bank financing isn’t a realistic option for them. These guys are always in a hurry. Arranging for formal institutional money takes time and focus. Also, typically, they’re looking for money short-term…maybe not long enough to get a bank’s attention. Then, of course, there’s the matter of collateral…which can often be a deal-breaker for these guys.

Developers of small- and medium-sized projects, therefore, are far more interested in private money from investors willing to give them what’s referred to as a “hard money loan.” This is a direct loan from an individual to the developer for the purpose of developing or renovating a specific piece of property. The interest rate paid for the use of the money loaned is typically much greater than the going bank rate. The developer is willing to pay you more for the use of your money than he would have to pay a bank for the use of its money…as long as you’re willing to lend according to his other conditions. As I’ve explained, the term of the loan is typically short--which is good news for you. You’re looking to get your capital returned within a reasonable time frame.

The term can be flexible. For example, the developer may have a project timeline of eight months but the goal to repay your loan sooner to reduce his interest cost. But then come unexpected delays…things don’t go quite according to plan…and the developer would like to hold onto your money for another two or three months. Maybe the interest rate for this extended period is greater than for the originally agreed-upon term of the loan. These contingencies should be covered in your loan agreement.

Depending on the country, the type of project, and the term, annualized interest rates for these hard-money loans can run from 15% to 35%...maybe even as high as 50%. Remember, you’re getting that rate over a short period only (usually a year or less), but if you’re able to find another good hard-money loan to roll the funds into, you could be looking at better than a double on your capital in three years (my minimum investment goal).

These kinds of loans were lucrative in the U.S. during the housing boom. In the States, it’s possible to find mortgage brokers who put together these kinds of lending packages. In this case, of course, the interest rates paid to the investor are reduced because of the middle man. One group I invested with years ago was offering rates of 13% then. Its rates have fallen to 8% today, thanks to the downturn in the U.S. market.

Outside the U.S., you can find these kinds of hard-money opportunities from the Philippines to Costa Rica, and from Australia to Panama. A deal in Australia (another one I made through a broker) paid 19% annualized interest. Another that just closed in the Philippines offered 30% for a year-long loan. Greater perceived risk in the Philippines…so greater return.

Finding these deals is the hard part. As I said, developers are always looking for cash. The trick is to find them at the right moment. It’s not possible to wake up one day and decide you’d like, that day, to make a hard-money loan. First, you’ve got to identify the countries that interest you. Then you’ve got to get connected in those markets. Speak with local real estate agents and attorneys and let them know that you are looking for these kinds of opportunities. Mention your interest to any developer you meet. In other words, get the word out that you are a potential investor. These deals happen by word-of-mouth. Once you’ve made one or two, you’ll find that they’ll be easier to source. You’ll be “on the list.”

But understand that this kind of investing comes with a higher level of risk than buying a beachfront lot or an ocean-view condo in another country. It is not for everyone, and certainly not for the novice. You’re responsible for your own due diligence, and, while the loan is typically collateralized by the development property, you could have a difficult time foreclosing if, worst case, the developer, in the end, isn’t able to repay your loan. I’ve never had this happen to me, but I recognize that it’s a possibility with each loan. You should, too.

Lief Simon
For International Living

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