Wondering if anyone has used private money lenders for ONLY the down payment on a SFH buy and hold? New to RE investing, have a great opportunity to purchase first SFH. Ran the numbers on BP rental calculator and cashflow/ROI look good! In addition, this market is on the upswing, and home values are increasing steadily (so in addition to solid cashflow, potential appreciation looks good). Offered less than market value by a long shot, secured the contract!
So, back to the original question, what strategies or approaches have BP members used for securing private money lending for a down payment (knowing refinance will produce ability to pull out that down payment in equity in a short amount of time, to pay off private lenders quickly)? Or is it better to shoot for the stars and find a private money lender to front the full purchase price?
Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
8y
The private money will be in 2nd position on a high LTV deal. That is not really attractive. I would seek out someone with a self directed IRA that doesn't want monthly payments. Either take a loan from them or sell an option to them for some of the equity in the property.
Example.... The house is worth 100k and you can buy it for 80k. The bank will lend 80% of the purchase price. So, you have a 64k loan in 1st position. The IRA gives you 16k for an option to own 20% of the equity at a future date.
5 years goes by and you decide to sell. The property has cash flowed well and is now worth 125k. At closing with your new buyer, The IRA exercises the option simultaneously, thereby giving them 20% of the equity. IRA puts 25k back in their account. A 64% return over 5 years isn't bad. You pocket the rest.
Of course these numbers and scenarios can be whatever you negotiate......
Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
8y
The private money will be in 2nd position on a high LTV deal. That is not really attractive. I would seek out someone with a self directed IRA that doesn't want monthly payments. Either take a loan from them or sell an option to them for some of the equity in the property.
Example.... The house is worth 100k and you can buy it for 80k. The bank will lend 80% of the purchase price. So, you have a 64k loan in 1st position. The IRA gives you 16k for an option to own 20% of the equity at a future date.
5 years goes by and you decide to sell. The property has cash flowed well and is now worth 125k. At closing with your new buyer, The IRA exercises the option simultaneously, thereby giving them 20% of the equity. IRA puts 25k back in their account. A 64% return over 5 years isn't bad. You pocket the rest.
Of course these numbers and scenarios can be whatever you negotiate......
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Nathan Burnett I have used this approach several times but I didn’t do it at the beginning. I had to use my own money or my own lines of credit at first until I had done several deals and I had a track record of knowing what I was doing. Then I started getting preferred rates from hard money lenders who would sometime fund up to the entire purchase and I started getting private money to fund the rehabs.
We have been able to refinance several of our properties without having any of our own money into the deals when all was said and done after the refinance. But it took about a year or two to work up to that level. Also, we always had our own money as back up in case anything went wrong.
If you don't have money set aside in case things go wrong, then I wouldn't encourage you to use private money until you are at a place financially where you could come in and buy out the private investor if things went wrong. The worst thing is to get someone to trust you to lend money to you and you default on them. In our deals, if there is a loss, we take the loss, we never have our investors take a loss. But we also don't offer equity sharing. We just offer a simple 10-12% APR return on their money while it's invested and we have never defaulted.
Lender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
8y
@Nathan Burnett When you say the down payment, do you mean the acquisition but not the rehab, or do you mean a % of the acquisition with a bank funding the rest?