Hi Bigger Pockets!
I am reading Brandon's book on Investing in Rental Properties with No and Low Money Down. He gives several examples like the following where an investor gets a private money loan for a term, say 5 years at 8%, and rehabs and sells the property before the 5 years is up. My question is, does Sara have to pay her investor the 8% interest for the entire 5 years even if she sells early, or only for the time she has her investor's money?
Other examples are borring hard money or private money for 12 months at an interest rate, say 10%, then flipping the house in 5 months. Will the investor only pay the 10% for the number of month's they have the private inestor's money, or for the whole term?
Sarah is an investor in the Dallas area who is
primarily interested in small multifamily properties. She is
especially interested in finding properties that have been poorly
run and poorly maintained, acquiring them for a low price,
rehabbing them, and renting them out while she waits for the
market to improve. Sarah finds the perfect property, located near
her home—a garden-style fourplex in a great neighborhood that
needs some new paint, carpet, and better management. She gets
the property under contract for $110,000 and sets out to find
She discusses the deal with an experienced investor, Wilson,
whom she met online through BiggerPockets.com. Wilson is tired
of dealing with tenants and has been selling off his properties. As
a result, has a sizable chunk of cash in his bank account that he
Sarah to buy and rehab the fourplex, for a five-year term at 8%,
interest only, which comes out to $866.66 per month.
Sarah immediately improves the property and rents out each
unit for $750. After all the expenses, including the loan payment
to Wilson, she clears almost $700 per month in cash flow. She
then holds on to the property for several years, until the market
improves, and then sells the property for $190,000, clearing a
Typically, hard money loans are interest only payments during the loan term and if you want to pay the loan term early, there may be a prepayment penalty or minimum number of interest payments that would need to be paid from their payoff letter. There also may not be any penalties - this is subject to which lender you use.
Private money depends on the wording, but most typically follow the same as above. I have seen people who paid 10% interest for a 6 month term, which means they were annualized at 20%.
In every loan, you should be able to get a payoff letter that states what it takes to payoff the loan in its entirety. This would cancel the continuing monthly payments.
Normally the interest rates stated with lenders is an annualized rate, so you only pay that entire amount if you hold for a full year. Otherwise, it's prorated to however many days you've had the loan.
Of course, pre-payment penalties could be in play too.
Feel free to ask your lenders upfront about this when approaching them for a loan.
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