Cash lender or Finance?

11 Replies

Question: I have a cash lender that will finance my next deal at $225,000 at 4%. No monthly payments , he just wants his money back within 2 years . Either i refinance to cash him out or sell it at the 2 year mark, no biggie. I ran the worksheet with using his money and me putting 20% down the traditional way. The ROI is actual more when I do the 20% down than it is borrowing off of my private lender, what am I doing wrong? Shouldn't the return be more with using 100% of other peoples money?

It depends. If your cost of debt (4% in this case) is greater than your yield (cap rate) then you have negative leverage, meaning the ROI gets worse with more leverage. On the other hand, If you have a cap rate of 6% and debt of 4%, then you have a positively leveraged deal and the return keeps getting better and better the more leverage you put on it.

If you give me more numbers I can put together a little spreadsheet. I love numbers!

Cheers!

Well my cost of debt is 4% and my yield is 9.75%

to me the numbers are very low. 5% , is it worth it?

@Bob Romano

How do you calculate YOUR ROI when you're financing the deal using all "his" money (i.e. your lender)?

You realize that your investment would be zero, so your ROI is undefined (i.e. most people call this "infinite", a result you would get from dividing a number by zero. To me "infinite" almost sounds like you make all the money in the world as in no limit... which is not the case... just my terminology hangup). The point is, on a deal with 100% OPM you would be making something out of nothing... and that's a better ROI than 10%, 100%, or 15,000% and on up...

Cheers,

Immanuel

@Bob Romano I might suggest you are overthinking this a little.  You are receiving an interest rate lower than the normal market rate...AND YOU HAVE NO MONTHLY PAYMENT REQUIREMENTS.  All of your rent is profit!  you will cash flow 100%!  Imagine if you owned 20 properties with no monthly payments...what could you do with that cash flow?  So, here you have 1 property with no monthly payments.  We call this a unicorn.  It doesn't exist.  But you have it in front of you.  Don't trip over pennies on the way to dollars.  This is a good deal.

Thanks Andrew. A few people I talked to said the same thing. I will be putting a cash offer in soon.

My private lender just told me he would need the interest payment at the end of each year ( $8,600 ) that I hold onto the property .  The rents will equal $22,000 a year.

Still a good deal ?

Hey @Bob Romano this is an awesome deal! The cash lender is offering you a great deal and I would try to finance the deal fully using OPM. It will be a great story/experience.

Yes, still a great deal! The only real risk you are taking is if the market tanks and the property is worth less than $225k. If you have confidence in your exit strategy, whether it be to sell or refinance, it's a great deal. Just keep in mind, to refinance out in 2 years, it will have to appraise for more than $300k to pay him back.

I put an all cash offer in today for $215, contingent on inspection and clear title. lets see if they bite .

I will keep you guys posted. Thanks for all your input.

One little thing that I must ask. Is this a friend or family member? If not, dont do it. I see too many people getting promised 4% or 5% all they need to do is send $495 "appraisal fee". Either the property mysteriously does not appraise or they just never hear from the lender any more.

If it is a family member or friend, great. They are getting more than a CD or in a checking account. It always sounds fishy when someone says they have a private lender at 4%. Even my sister who loves me dearly charges me 8%, no points. 

hi Rick. Yes it is an uncle . He does this a lot with other family members.  First time with me. he dosent lend out to strangers, just family. 

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