Hard money lending or cashflowing properties with little or no appreciation?

Would you buy some properties in a historically non or slow appreciating area at a 12% cap rate or lend out that money at 12%?

One is obviously less work, but what are the risks of both?

Let’s say I have $50,000 and I go purchase a house in the mid-west for $50,000 cash.  It has a cap rate of 12% which brings in $6,000/yr.  My PM would be handling all the leasing and tenant contacts but inevitably there will be some vacancies, repairs and maintenance that may eat into that 12% cap rate.  Also, I’m looking at a 6% realtor fee hit when I go to sell, so if there is absolutely no appreciation, I will lose $3,000 at time of sale.

On the other hand, I lend my $50,000 secured by some property at 70% or lower LTV.  This loan would bring in $6,000/yr also.  I would have no property headaches to deal with but 0% chance of any capital gain.

Those are the simple pros and cons of both.  There are many what-if scenarios in either case that can sway you to either side.  I’m not sure which direction to go, but am thinking of doing a little of each.

I like the idea of cashflowing properties in decent low priced areas.  I think that there will be some appreciation in them, maybe up to 3% a year.  Furthermore, if I can purchase these properties at a significant discount (which is definitely possible in today’s market) then I can have some equity built in and cashflow even more.

My concern on hard money lending is what happens when I don’t get paid.  Sure I can foreclose and get the property.  But will I even want the property?  What do I do with it?  What if it’s in mid-construction?

About Kenric

My blog about living life to the fullest by generating passive income through real estate, business and online investments.
This entry was posted in Real Estate. Bookmark the permalink.