Rental Property Investor · Lexington, KY · Member since 2012 · 115 posts · 64 votes
I am wanting to use private money to purchase "buy and holds". These would be 100% financed through private money and I would want this to cover any kind of rehab costs as well. So basically I want to purchase homes in cash and be putting none of my own $$$ into it. I would eventually refi to get that investor his/her money back and in the meantime, be paying interest. My question is, how do you all structure your deals like this? What kind of interest rates, terms, etc do you all use? Any helpful info would be greatly appreciated. Thank you.
Simple debt financing. Note and deed of trust. Since you can do it, roll all the transaction costs as part of the financing. Add $5K on to of that for your fixup costs. Your financing will be at over 100% of acquisition, but it doesn't sound like an issue for your lender.
It's the dream gig, but unless your private investor is family or someone with whom you have a long and proven record, it's a pipe dream.
Also, are you looking for a financier or an investor, its not clear. If I were to put up 100% of the money to purchase a small multi - say 200K for a 4 unit and another 50K for rehab you would need to make an exceptionally compelling case of why I need you in the picture at all. What are you bringing to the table and what do you believe it is worth?
So, you're wanting someone to buy a house for you and pay for all the materials and expenses related to you going in there and having or doing all the repairs in a manner that will be suitable to refinance at what, 75/80% LTV a year later? Good luck with that. Now, if this is your 51st deal and you have a track record, have the ability to qualify for that end loan and have a trusting party to lend to you, that might happen. :)
@Roy N. I already have the person in place who wants to finance 100% of the deal cash money. They would not be an "investor", but just financing. I am finding cheap houses between 25-40k with around 5k rehab average that can rent out for $800+. It's hard to go wrong with something like that. And for an investor with multi millions, that's pocket change.
This person just wants a better ROI on their "investment" than what they are getting at a bank. They aren't able to find a deal in real estate on their own. I can find those deals so that's what I bring to the table.
Roy, have you ever done something like this and how have you structured it?
Not at 100% on either side of the table. As a borrower, we like to have control of our properties and if you have no skin in the game, where is the argument to put title in your name?
As a lender my experience is less, but I want the other party to have skin in the game ... otherwise it's really my deal and I may as well be calling all the shots. On either side of the table we have structured things with the financier/lender simply providing a note at 10-12% with a 1-yr term ... that's another thing, you better have an exit strategy to make you lender whole in 6-18months. Most private lender are not interested in terms longer than that, or, if they are, they want you to have 25-40% equity in the deal.
Now if you were proposing to flip these houses and your detailed numbers showed the all in costs would be 60% ARV, that we'd be out in 6-months, and you had the track record to back-it up, then I might entertain putting up all the money, but you can rest assured, I'd be looking for my pound of flesh to ensure the risk was worth it.
Now, it your lender is willing to put-up 110% of the acquisition costs, let you rehab, and maintain title/control of the property, you are a lucky man and better treat this lender as well as your Mom. The problem I see you having where the enterprise is buy-and-hold is being able to refinance (75% of appraised value) 12-months down the road and make your lender whole.
Simple debt financing. Note and deed of trust. Since you can do it, roll all the transaction costs as part of the financing. Add $5K on to of that for your fixup costs. Your financing will be at over 100% of acquisition, but it doesn't sound like an issue for your lender.
I suggest you partner with them and stay away from lending issues. If they agree to take 10% as a return on their money, fine, you get the rest. You can split title as well as to the interest held so that your refinance will be underwritten as a purchase, allowing a higher LTV than a refi, but it will be closed as a refi taking the other owner off title, or out of the partnership. Title held in a partnership has advantages over a mortgage.
What does your "lender" want? Makes a difference too if they are closely related to you, mother, father, sister or brother, next tier in some states as uncle, aunt or cousin. That keeps them from being considered a "lender" in some cases.
Either way, your situation, like all others will be unique, there are many ways to skin the cat. You and they need to see a local attorney either way. :)
@Zac P. , the deal you want to put together is very straightforward and done every day of the week.
Your investor wants a premium over what they would get by investing their money elsewhere, you are going to have to accept and pay that premium. The rate is completely negotiable between you and your investor.
As to structuring the deal, you are in the Lexington KY area, I'd urge you to contact Johnson, True and Guarnieri in Frankfort. They literally do this kind of thing for a living.
I have funded deals like this on properties that I could easily value which were located in areas I knew well. The borrower had their name on title and they gave me a first position mortgage with an accompanying promissory note. If you have a lender who is willing to do this it should not be difficult to draw up. Record the mortgage to protect the investor. Name them as an additional insured on the hazard insurance policy if the insurance company will allow it. Treat this lender well, meet or exceed all the clauses in your contracts and they may be willing to do several deals with you.
@Bill Gulley On the refinancing side, if a house is bought and rehabbed for 30k and appraises for 60k, then I shouldn't have any trouble right?
Ok, this might be a really stupid question here... So an investor puts 30k in (includes rehab) to purchase a house. I refinance the property a year later with a bank. The appraisal comes in at 60k and the bank will finance it for that. They require 20% down. That means The bank is funding 40k (of the 60k), but the investor put 30k into it... That's 10k left on the table... Would that mean I just need to inject my own 10k into the deal upon closing with the bank? I feel like I am missing something here or not fully understanding it.
@Bill Gulley On the refinancing side, if a house is bought and rehabbed for 30k and appraises for 60k, then I shouldn't have any trouble right?
Ok, this might be a really stupid question here... So an investor puts 30k in (includes rehab) to purchase a house. I refinance the property a year later with a bank. The appraisal comes in at 60k and the bank will finance it for that. They require 20% down. That means The bank is funding 40k (of the 60k), but the investor put 30k into it... That's 10k left on the table... Would that mean I just need to inject my own 10k into the deal upon closing with the bank? I feel like I am missing something here or not fully understanding it.
On a refinance, for non-owner occupied, they would probably go 70% LTV. If it appraised for 60K, they'd loan about 42K. The investor would be paid their 30K and you would pocket the difference less any fees and closing costs.
Actually, his lender would have already gotten a good chunk of that 10K
True. If he pays if lender 10% interest rate to his private lender, he still walks away with $7k. I didn't want to get into it too much, but he made a mistake on his math. 80% LTV of a 60k loan is $48k. Less $33k on loan and interest, so he's actually walking away with a check closer to $15k.
Zac, I have been on both sides of the isle so i know how it's done. It's exactly like what Chris and Jeff said above. It's very straight forward like what Duncan said above. I suggest to give your private lender a note for purchase + rehab cost + interest and associated fees. If you borrow $25k for the purchase, $5k for the rehab, $3k for interest and say $2k for closing costs, give him a note for $35k.
Yes, there was an error in Zac's math, but ironically the result of 10K is closer to what he would probably pocket (or leave in the house as equity) after the refinance ... by the time you factor in interest, closing fees, etc.
Suggest you check with your lender. Loans may be underwritten as a purchase, raising the LTV and closed as a Refi. Just read my original post on the difference. See different lenders. Go with the partnership, not a loan and deed of trust. RE is local, see your lender. :)
Suggest you check with your lender. Loans may be underwritten as a purchase, raising the LTV and closed as a Refi. Just read my original post on the difference. See different lenders. Go with the partnership, not a loan and deed of trust. RE is local, see your lender. :)
Bill,
You and Roy are killing me here. I swear to god I just scanned through the thread & looked for terms like a note & a deed of trust. I spotted those from Chris & Jeff's posts. It was my fault for being lazy. I was helping my dad fixing a sensor for a water heater at one of our rentals. $11.90 for the sensor tax included after the pro-reward discount from Home Depot. No pun intended.
Now that you re-read your posts, that's a conservative approach, but it will incur a city & county transfer tax on 50% of the ownership from the private lender/partner to Zac. Also, the value of the property will be reassessed which will cause a higher property tax bill. Zac's state likely doesn't have Prop. 13 so my point may be moot.
I guess the best advice for Zac is to check with his lender about his game plan. It may end up being 1) rate and terms refinance, 2) cash-out refinance and take his private lender/partner off the title at the same time, or 3) let the property season for 6 or 12 months before doing a cash-out refinance to pay off his private lender.
I'm still not getting my head around this from Zac's lenders perspective ... not certain I'd want to take on 100% (purchase plus rehab) of the risk for 10-12% interest return.
Partnering with an eventual earn/buy out maybe ...
I'm still not getting my head around this from Zac's lenders perspective ... not certain I'd want to take on 100% (purchase plus rehab) of the risk for 10-12% interest return.
Partnering with an eventual earn/buy out maybe ...
Roy,
You know why you cannot wrap your head around this? Because you're not the 99%er. My cousins just want to the 10% annual return instead of going into a partnership and get a bigger piece of the pie. They don't want a note & a deed of trust. Just a hand shake and they hand over the money unsecured. If everyone is as savvy as you and BP members, there will be no deals for us. With that said, you should celebrate big this Christmas because you're not part of the 99%er.
@Account Closed @Bill Gulley@Roy N. Ok, sorry guys, my math sucks. So here is the breakdown that I got. Obviously there will be other fees, but to make everything easier, I'll skip over some of those. So in general, does this sound correct?
So I refinance the 30k house with a bank for 60k.
Lender wants 20% down which is ($12,000)
Bank will fund the other 80% which is $48,000
I pay off my investor his $30,000 and I pay my down payment of $12,000
That totals $42,000... So I get a check for $6,000 at closing?
Obviously there are issues that I need to check on and other costs, but man, how sweet would this be?