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.
Zac,
You don't have to pay a $12,000 down payment, that equity is already there if the house appraises for $60k, as in your example. So, the simple breakdown is: you pay your investor back, plus interest (let's say $33,000), several thousand dollars goes to closing costs on the re-fi, you pocket the ~$10k net difference between the $48,000 and your lender payoff/fees/etc., and you own a property with ~$12k equity (assuming you could actually resell at 100% gain one year after only putting in $5k).
Yes, it would be a sweet deal for you. Not so much for your lender, which is why the vets are expressing skepticism.
Meant, nothing to add, it's been said by our expert finance guys!
Zac, no bank is loaning 60 on a 30K property. The golden rule is, purchase price plus improvements (hard costs) or the appraised value, which ever is less, then from that value the loan is made under the loan to value requirements. Only gurus push schemes to cash out at closings for doing nothing with banks financing, usually has elements of fraud sprinkled in. After seasoning, the appraised value will be used, but not always. If a lender sees that you bought a 69K appraised house 14 months ago, the may ask for the costs of improvements, if you only put in 10K, they may want another appraisal or they may just lower the loan they are willing to fund. There is no requirement for any lender to accept appraised values without considerations in other aspects of the property conditions or values or any other common sense matter. Need to talk to your lender, never assume by meeting some rule that you're getting financing. :)
@Account Closed Thanks, that was helpful. However, I don't understand why it would be such a "bad" deal for my investor. My financier/investor is not a real estate investor and can not do this on his own. So he really needs someone like me that knows how to do this. So if that financier was you, wouldn't you rather do this at 10% interest than the bank for 1% (if that)?
@Bill Gulley I have run into that before with funding on appraisal amounts. Thanks for the input.
Aaaa, did you just say he needs you because you know how to do this? It's an opportunity for you to make some money and we're trying to help you figure out how you can do it.
Why is 100% financing a bad deal or dangerous for the investor. Risk that you don't get it done, getting it done, on time, at budget, in a good workman like manner, free of other liens or encumbrances arising from your involvement and in marketable condition at the numbers you propose.
How many deals have you done?
I had a pretty standard comment for this as a lender. Hundreds of people would come to me saying basically what you're doing here or they wanted to do the work on a property.
My first question was how long have you been rehabbing houses as a contractor? How do I know that the windows will close and open, how do I know that doors will not be stuck, how do I know that sheet rock won't sag, or that an electrical outlet will go pooof? That is my collateral, I need to know that the property is done professionally, not my a guy that reads Handyman Magazine and who teaches math at the high school.
There are contractors that have gotten in over their heads and screwed up a house and walked away, that's not a good position for any lender to be in.
You need more than confidence and desire by a borrower to lend prudently. :)
Let's say you do get 100% from a lender, and you hire a GC standing out front at Home Depot, and he messed everything up are you going to have the funds to get someone to do the job right and if by chance nothing goes right can you repay the lender.
Joe Gore
@zacp.,
While 10% is obviously a better return than whatever your investor might be getting in bonds or a savings account, it is not a great risk-adjusted return. A lot depends, however, on whether you are giving your investor debt or equity. If he has a secured, first position lien, then 10% is solid, close to market return.
But if you are giving him equity and capping his return at 10%, then that is not a fair split because he has all the loss exposure. I would say a 50/50 or 60/40 split of the profits is much closer to "average" (if there is such a thing) between the money guy (him/her) and the sweat equity guy (you). Look at your example. Putting aside whether the numbers are realistic, the investor's upside is about $3,000 with all the risk, while your upside would be multiples of that with no money in at all. It's a "bad" deal because better terms are available and the risk and return are disproportionately skewed in your favor. But, if he's happy with it, great.
Guys, your criticism is helpful and I take it with an open mind. However, with all do respect, my original question in this topic was how to structure these deal(s), not discussing why this might not be a good deal for the person financing. I know there is a ton of risk for someone fronting me $$$, but I already have someone in place to do this, I just want to see how you guys might structure this. Thanks! :)
What is your relationship with the investor? Do you want the best deal you can get, or are you concerned with being fair to a friend/family member?
If you want the best possible deal and they are happy with 10%, I would give the investor an equity interest since you'd likely have to pay 10% for debt financing from other sources. All things being equal, equity investors typically require higher returns since equity is riskier than debt. Since your investor's upside is limited, you are able to issue relatively "cheap" equity. Others' views may differ.
You should really get a lawyer to draft the operating agreement since it sounds like you plan to do this for multiple properties.
(As an aside, how do I tag someone's name? Can't seem to make it work.)
@Account Closed
To mention or notify someone in a thread use the @ symbol and begin typing their name, a window pops up below, scroll to that person and click on it.
I'd also suggest partnerships rather than lending.
Sometimes giving advice is like giving an uzi to a known gang member, not saying Zac is a gang member, but I'd rather be confident that any advice was used in a prudent manner, not knowing anything about this lender is an issue while knowing Zac is determined to forge ahead without a greater understanding of how these deals are done.
I think that's Adam's concern somewhat, in asking who this investor might be and the relationship.
Sounds like they may be some fish more than an astute money manager, I don't know, but if I'm a party to giving advice as to getting into someone's pocket who doesn't have a clue as to RE lending, I'll need to understand the details.
Best advice I can give is go to an attorney......I'm getting the sense of urgency is not a good indication, screw-ups happen when you get in a hurry. :)
Regarding "So if that financier was you, wouldn't you rather do this at 10% interest than the bank for 1% (if that)?" Since you personalized it, the short answer is I'll stay at 1%. I lend at 10% interest via my SDIRA, the difference is that most of my first position loan deals are at about 50% Loan to Acquisition, and 30% or so ultimate value. These are "no brainer" loans. I don't even need to do a site visit. 100% acquisition and rehab cost? It would have to be really compelling. In general though, no thanks.
Second point is that you asked a specific question about how to structure the deal. You have multiple answers. Ultimately, it's debt, equity, or come combination. Debt financing is "easiest" (I should say less complex), then an equity (e.g. partnership) deal, then some convertible debt/equity or some such (more complex). If your deal is really a $60K property you get for $30K, once your property is stabilized (and seasoned) you will most likely be able to get alternate financing (commercial, another private lender, etc.) GSE funding? Maybe.
Multiple people here on BP have done longer term (> 1 year) financing where the financed amount is greater than the acquisition and rehab amount. I've personally seen it done in our LLC (recently via commercial lender) and through member FNMA financing (although about 5 years ago.) So it can be done. Killer deals make financing and re-financing a lot easier. I hope your numbers are correct.
If you form a partnership, which many people are advocating, then make sure you have a buyout clause in there that allows you a way out if things were to change. Also, make sure, if its a partnership, you negotiate all your fees and boundaries up front. Are you charing labor to the partnership? What about gas? Is the partner going to get any sort of preferred return on his capital while it remains tied up in this deal? If the ultimate goal is to refi him out of the deal, then just treat him as a lender. I'm a real estate agent and many times when you negotiate a partnership people expect you to waive all your fees because you are a partner. Sometimes that may make sense for the deal, often times it does not. Defining roles can, at times, get messy.
@Chris Martin has summed up your options pretty nicely.
Great conversation going on here.
Zac, I too am working on putting together some similar deals. I too am new to this type of doing things, and do not yet have the funding in place, but have some pretty serious interest.
I think part of what the 'difference of opinion' is stems from the fact we are all in different situations, with different expectations, and deal with other people in a variety of situations too.
Someone asked "why would they even need you if they are putting up 100%" of something similar. I, like you, know people who are intrigued by getting a "better return" than what they are currently getting. They have NO interest in doing rehab, being a landlord, or even just managing a rehab with no hands-on experience.
For example, one potential private lender I just met with this weekend, a good friend of 20+ years, keeps about 25% of his portfolio in 'safe things' which in his mind are money markets, CDs, certain bonds, etc.... He is averaging a bit above 2% on this part. He is interested in possibly lending either short term for buy and holds while they 'season' until we can refinance them. He might also be interested in doing loans for a longer period of 10-15 years for buy and holds in my SDIRA that are not eligible for traditional non-recourse loans.
Part of his interest stems from the potential of getting 3-4 times his current returns for what he sees as a relatively low risk. I am in the contracting business, so know how to deal with properties. The properties we are targeting would be bought at least 20% below value, and we would be going in with about 25% of that amount from our side, so he would be lending at about 60% of value. Pretty easy to recoup that in our area if we were to default.
Just thought I would throw in my .o2 cents on why it DOES make sense from someone else in a similar situation.
Dan Dietz