Working with Private Money Lenders: Possible Loan Term Options

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Earlier this week, my husband and I refinanced one of our rental properties working with a private money lender.  It was the simplest transaction ever.  Our private money lender is thrilled because she’s getting a fantastic return on her investment (using her self-directed IRA funds) and we’re happy because not only is she happy, but we were also able to structure the loan in a way that saved us money on upfront fees plus increases our monthly positive net cashflow.

The experience just reminded me of how great it is to work with private money lenders because there are so many options made available to you with regards to structuring the loan terms. For example:

Available Loan Term Options when Working with Private Money Lenders

Short Term Loans

You can do short term 6-month loans for your rehab flips.  You can pay your lender 1 point on the loan or no points at all.  You can offer to make monthly interest payments with a balloon payment at the end of the 6 months.  You can make no monthly interest payments at all, but rather pay a higher interest rate on the loan and just have the one balloon payment at the end after you’ve sold the property. There are so many options available to you, and it’s just a matter of determining (by asking) what is important to the potential lender.

You may find some lenders who want to receive payments the first time around with you, but once that loan is paid off and they are ready to do another one, they may be willing to wait the entire 6 months without payment for the next round because of the established trust.

Mid-Term Loans

Perhaps your exit strategy is to do lease options and you only anticipate holding properties for 18 months – 3 years.  Or, you have an awesome deal that will cash flow well and you haven’t found a lender willing to hold for a long term yet, but you want to establish a relationship and get a loan started.   In these cases a mid-term length (typically 2-5 years) interest-only loan may suit you.

The risk is that you may be forced to refinance or pay off the property in the short-term, but if you don’t overextend yourself with these mid-term loans by doing too many at once, the risk isn’t all that bad.  You can either work towards a conventional loan when refinancing or refinance with another private lender (like we just did). Don’t be surprised when a lender who originally agreed to only 2 years later decides that he or she wants to continue the loan after the term is up.  The yields that lender is getting from you very likely exceeds what they are getting in the stock market and certainly exceeds the low yields from CDs, bonds, and the like.  Check out the average yields on CDs on November 24, 2010 (source: Bankrate.com):

Product		Yield		Last week
1 Yr CD		1.04%		1.05%
5 Yr CD		2.22%		2.25%
6 Mo CD		0.75%		0.77%
1 Yr Jumbo CD		0.90%		0.88%

Long Term Loans

If you’re a buy and hold investor, obtaining a long term (10 years or more) loan from a private money lender is like finding gold.  While these lenders may be harder to find, they absolutely exist so don’t rule out the possibilities.   Remember that even if you’re offering an interest rate as low as 6% (substantially lower than what you may offer on short and mid-term loans), that rate will attractive to some lenders depending on their current portfolio and investment strategy.

Second Mortgage Loans

Don’t forget about the option of having private lenders hold a second lien holder position on a property.  Let’s say that you are need of a small loan of $10-20K to do renovation work on a property.  There are individuals who will be willing to loan you money for this and hold a second mortgage for you.  In fact, I run into a number of people who have small retirement accounts and want to put their money to work in asset backed investments such as real estate.  These are the perfect types of loans for them.  My only caution is that you want to ensure you have equity in the property and provide your lender with the peace of mind that if the property was ever foreclosed on, there would be enough money to pay them back too!

Again, there are numerous options made available to you when you’re working with private money lenders.  If you’re a rehabber or buy and hold investor, I strongly recommend making it a goal to work on securing them!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.