How much to pay private lenders?

In Southern California, I've seen 12% interest-only (rate)and five points (fees) to be typical terms (on the loan amount). Most private money lenders offer 5 year terms

Edited: 06/26/2010 at 11:28AM

Christopher W.

Residential Real Estate Agent · Orange County, California

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Feb 02 '10, 07:01 AM

Originally posted by Brian Brady

In Southern California, I've seen 12% interest-only (rate)and five points (fees) to be typical terms (on the loan amount). Most private money lenders offer 5 year terms

Thanks for the answer. Just so I'm clear lets say I'm loaned 100K (to keep the numbers easy). We agree on 12% interest only, so I owe them 12K/year, or 1K/month. So then the 100K and 5 points would be paid back on the eventual resell/refi? Am I right in this?

Edited: 06/26/2010 at 11:28AM

Josh Green

Banker · Tampa Area, Florida

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Feb 02 '10, 07:16 AM

not quite chris.

you would be charged the points upfront. so you would borrow $100k. pay your 5 points (5k) and would get your 95k. you would then pay 1k a month i/o on the full 100k.

that's how its always been presented to me.

Edited: 06/26/2010 at 11:28AM

Will Barnard

Rehabber · Santa Clarita, California

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Feb 02 '10, 07:37 AM

Chris,

You asked about private money lenders and not hard money lenders. All the answers you received are about hard money loans.
I rarely pay points on private money loans. Most deals get 10% or 12% interest based on the loan amount.

So in your example of a $100k loan, at 12% interest, yes, you would owe $1k a month. Typically, I have the loan contract to pay the principle and interest in one balloon payment, and not monthjly interest payments, so at the end of the term, say 6 months on flips, I ouwld pay the private investor $106k

For holds, I would structure the interest payments monthly.

Edited: 06/26/2010 at 11:28AM

Will Barnard, Barnard Enterprises, Inc.
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Josh Green

Banker · Tampa Area, Florida

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Feb 02 '10, 07:39 AM

awesome will!

sorry to have not caught that!

Edited: 06/26/2010 at 11:28AM

Will Barnard

Rehabber · Santa Clarita, California

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Feb 02 '10, 07:44 AM

Not a problem Josh, no apologies necessary. Often, private lenders are mixed with hard money lenders. It is quite common.

It is just important to understand the difference. Keep in mind that most hard money lenders have a DRE license and private money lenders do not.

As a private money lender, you need to be careful to make sure you only loan for business purposes and not personal, as a 12% interest rate charge could violate usury laws. In CA, the max interest rate for loans is 10% according to current CA usury laws. That law is circumvented when you loan for business purposes and to business entities.

Edited: 06/26/2010 at 11:28AM

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
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Bill Gulley

Real Estate Investor · Springfield, Missouri

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Feb 02 '10, 09:43 AM

Hi, right Will. Commercial loans are exempt from consumer usury laws since they are to protect consumers and homeowners. Business loans are presumed to be made to sophisticated or knowledgable borrowers.

Brian, are those 12% rates from individuals or private money through brokers or an entity conduit? In this economic environment, I'm sure many individuals would take much less on a good loan, at least they do in the midwest. Understandably, CA seems to be higher for many things, so I'm not surprised. Bill

Edited: 06/26/2010 at 11:28AM by Bill Gulley

Christopher W.

Residential Real Estate Agent · Orange County, California

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Feb 02 '10, 10:02 AM

I understand now. Thanks a lot guys!

Edited: 06/26/2010 at 11:28AM

Joel K

Real Estate Investor · Bloomington, Indiana

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Feb 02 '10, 10:08 AM

Will or Bill or Anyone else for that matter...

Any suggestions on where to locate a sample contract for private money loans? I've got investors and we've discussed terms already.

Edited: 06/26/2010 at 11:28AM

Josh Green

Banker · Tampa Area, Florida

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Feb 02 '10, 11:39 AM

awesome will!

sorry to have not caught that!

Will Barnard

Rehabber · Santa Clarita, California

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Feb 02 '10, 11:39 AM

Joel,

I highly recommend you get with your attorney to put all the appropriate verbiage in teh contract as wll as stay compliant with any state laws.

I could certainly send you mine from CA, but then, it may not all be appliacble for your state. Better to have your attorney draft it. Once it is drafted and you pay the fees, you are done. Use it over and over again.

Edited: 06/26/2010 at 11:28AM

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com

Joel K

Real Estate Investor · Bloomington, Indiana

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Feb 02 '10, 10:01 PM

Right...that makes sense. Thank you.

Edited: 06/26/2010 at 11:28AM

Will Barnard

Rehabber · Santa Clarita, California

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Feb 03 '10, 01:10 PM

Anytime, that is why we are here! :)

By the way, thanks to all who voted my posts up, I appreciate that!

Edited: 06/26/2010 at 11:29AM by Will Barnard

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com

Christopher W.

Residential Real Estate Agent · Orange County, California

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Feb 03 '10, 02:11 PM

Originally posted by Josh Green

not quite chris.

you would be charged the points upfront. so you would borrow $100k. pay your 5 points (5k) and would get your 95k. you would then pay 1k a month i/o on the full 100k.

that's how its always been presented to me.

I have a question about this. For HML, if I'm paying the points up front then why wouldn't I just borrow $105K instead, give back the $5K, and then be left with the $100K I wanted originally? Why would I pay the points up front if I could just borrow a little more to cover it? I mean it looks like I'm borrowing money just to give a portion of it back immediately.

Edited: 06/26/2010 at 11:29AM

Bill Gulley

Real Estate Investor · Springfield, Missouri

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Feb 03 '10, 08:15 PM

Hi, you're right, you're borrowing the points in a way, if it were exactly five points on the 100 you wanted, it would be 105,260.00. Your deal is probably made to finance the points and with you paying $260, instead of $5.260K out of pocket at closing. So, in that case, you're not getting 5K at closing.

Joel, follow Will's advice here, get an attorney! The cheapest way I know of is to use a LLC with captail contributions to individual capital accounts. 5 is the limit for the SEC but your state may be lower. Also, watch the amounts funded.
Each member can loan money out from that capital account and in the Operating Agreement address assignments of collateral. This is absolutley not a novice venture, talk to an attorny familiar with SEC and investment pools. Bill

And PS. Thanks for the votes as well!

Edited: 06/26/2010 at 11:29AM by Bill Gulley

Josh Green

Banker · Tampa Area, Florida

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Feb 03 '10, 08:20 PM

Originally posted by Christopher W.

Originally posted by Josh Green
not quite chris.

you would be charged the points upfront. so you would borrow $100k. pay your 5 points (5k) and would get your 95k. you would then pay 1k a month i/o on the full 100k.

that's how its always been presented to me.

I have a question about this. For HML, if I'm paying the points up front then why wouldn't I just borrow $105K instead, give back the $5K, and then be left with the $100K I wanted originally? Why would I pay the points up front if I could just borrow a little more to cover it? I mean it looks like I'm borrowing money just to give a portion of it back immediately.

you pay points on the total amount borrowed. in your example, if you borrowed 105,000 then your 5pts would equal $5250 so you would 'net' 99750 usable funds.

Edited: 06/26/2010 at 11:29AM

Josh Green

Banker · Tampa Area, Florida

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Feb 03 '10, 08:24 PM

Originally posted by Bill Gulley

Hi, you're right, you're borrowing the points in a way, if it were exactly five points on the 100 you wanted, it would be 105,260.00. Your deal is probably made to finance the points and with you paying $260, instead of $5.260K out of pocket at closing. So, in that case, you're not getting 5K at closing.

Joel, follow Will's advice here, get an attorney! The cheapest way I know of is to use a LLC with captail contributions to individual capital accounts. 5 is the limit for the SEC but your state may be lower. Also, watch the amounts funded.
Each member can loan money out from that capital account and in the Operating Agreement address assignments of collateral. This is absolutley not a novice venture, talk to an attorny familiar with SEC and investment pools. Bill

And PS. Thanks for the votes as well!

haha, and i didn't mean to be repetitive to bills post. i was typing while he was posting.

Edited: 06/26/2010 at 11:29AM

Bill Gulley

Real Estate Investor · Springfield, Missouri

5,642 posts
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Feb 03 '10, 08:32 PM

Hey, You're on target here Josh! Just the math:

Funding a loan with points included is the same as wanting to net a certain dollar amount after real estate commissions. At 5%, the net sale or loan amount is divided by the reciprocal being .95, rounding between our answers?

Later, Bill

Edited: 06/26/2010 at 11:29AM by Bill Gulley

Brian Haskins

Real Estate Coach · St. Louis, Missouri

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Feb 03 '10, 10:43 PM

I wouldn't pay more than 10% and that is for the money they lend. They get none of the profit.

Brian Haskins

Edited: 06/26/2010 at 11:29AM

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