Question About How to Structure Deals Using Private Money
Investor · Memphis, TN · Member since 2023 · 87 posts · 56 votes
I feel a bit stuck in this scenario, and I could use some advice.
I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:
Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!
I feel a bit stuck in this scenario, and I could use some advice.
I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:
Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!
Congrats on finding willing private lenders!
A few observations:
1. Your cash flow calculation is missing vacancy, maintenance costs, and capital expenses. Taken together, they'll likely cut your estimated cash flow in half.
2. You don't specify, but if you're using $110K in borrowed funds to purchase a property worth $110K, you're asking your private lenders for a 100% loan-to-value (LTV) loan, which is super risky for them and for you.
3. Most private lenders don't plan to lend forever, so you should consider how and when you'll get them cashed off.
4. The going rate for private money is considerably more than 7% (generally 10-14% in 10/2024). Your lenders may not know this yet, but eventually they're going to find out. You should plan accordingly.
If these are "friends-and-family" type private lenders, I would urge you to tread very carefully. Borrowing from loved ones is a minefield if not done properly.
Ask me how I know this...
I feel a bit stuck in this scenario, and I could use some advice.
I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:
Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!
Congrats on finding willing private lenders!
A few observations:
1. Your cash flow calculation is missing vacancy, maintenance costs, and capital expenses. Taken together, they'll likely cut your estimated cash flow in half.
2. You don't specify, but if you're using $110K in borrowed funds to purchase a property worth $110K, you're asking your private lenders for a 100% loan-to-value (LTV) loan, which is super risky for them and for you.
3. Most private lenders don't plan to lend forever, so you should consider how and when you'll get them cashed off.
4. The going rate for private money is considerably more than 7% (generally 10-14% in 10/2024). Your lenders may not know this yet, but eventually they're going to find out. You should plan accordingly.
If these are "friends-and-family" type private lenders, I would urge you to tread very carefully. Borrowing from loved ones is a minefield if not done properly.
Ask me how I know this...
I feel a bit stuck in this scenario, and I could use some advice.
I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:
Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!
Congrats on finding willing private lenders!
A few observations:
1. Your cash flow calculation is missing vacancy, maintenance costs, and capital expenses. Taken together, they'll likely cut your estimated cash flow in half.
2. You don't specify, but if you're using $110K in borrowed funds to purchase a property worth $110K, you're asking your private lenders for a 100% loan-to-value (LTV) loan, which is super risky for them and for you.
3. Most private lenders don't plan to lend forever, so you should consider how and when you'll get them cashed off.
4. The going rate for private money is considerably more than 7% (generally 10-14% in 10/2024). Your lenders may not know this yet, but eventually they're going to find out. You should plan accordingly.
If these are "friends-and-family" type private lenders, I would urge you to tread very carefully. Borrowing from loved ones is a minefield if not done properly.
Ask me how I know this...
Thank you so much for the post, Mitch! :)
My investor is a family member, and I have a friend who is looking to invest, as well. I'm negotiating a 7-8% return for them, and I will make interest-only payments until the loan matures (I'll ask for 2 years). Yes, it would be a 100% LTV for them, but they're not concerned with that number, their interest lies more in the monthly payments that I will give them.
If you were me, would you take a cut upfront as a fee (let's just say $5k), then keep the monthly cashflow as a reserve? Would you take a cut on the backend assuming a sale of the property after a year and it has been cashflowing?
I'm just a little stuck on how to make money for myself if I'm using a private investor for buy-and-hold deals :-/
I feel a bit stuck in this scenario, and I could use some advice.
I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:
Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!
Congrats on finding willing private lenders!
A few observations:
1. Your cash flow calculation is missing vacancy, maintenance costs, and capital expenses. Taken together, they'll likely cut your estimated cash flow in half.
2. You don't specify, but if you're using $110K in borrowed funds to purchase a property worth $110K, you're asking your private lenders for a 100% loan-to-value (LTV) loan, which is super risky for them and for you.
3. Most private lenders don't plan to lend forever, so you should consider how and when you'll get them cashed off.
4. The going rate for private money is considerably more than 7% (generally 10-14% in 10/2024). Your lenders may not know this yet, but eventually they're going to find out. You should plan accordingly.
If these are "friends-and-family" type private lenders, I would urge you to tread very carefully. Borrowing from loved ones is a minefield if not done properly.
Ask me how I know this...
Thank you so much for the post, Mitch! :)
My investor is a family member, and I have a friend who is looking to invest, as well. I'm negotiating a 7-8% return for them, and I will make interest-only payments until the loan matures (I'll ask for 2 years). Yes, it would be a 100% LTV for them, but they're not concerned with that number, their interest lies more in the monthly payments that I will give them.
If you were me, would you take a cut upfront as a fee (let's just say $5k), then keep the monthly cashflow as a reserve? Would you take a cut on the backend assuming a sale of the property after a year and it has been cashflowing?
I'm just a little stuck on how to make money for myself if I'm using a private investor for buy-and-hold deals :-/
Phil, you're scaring me.
Your friends and family aren't experienced enough to understand why 100% LTV is a horrible idea. It's your duty to protect them and your relationship with them.
Sure, "their interest lies more in the monthly payments" right up until the payments stop coming. Then, someone is going to look very closely at that LTV and all eyes are going to slowly turn toward you.
But, let's say you DID borrow $110K (at 100% LTV) for two years.
What then?
When you go to refinance, no lender is going to offer much better than 65-75% LTV, which means under the best scenario you'll be $27,500 short in repaying your lenders.
Are you financially prepared to make up the difference?
Even if you're planning to just sell the property when the loan is due, then you've still got to take into account the transactional costs: agent commissions, price concessions, holding costs, and closing costs, to name a few.
And, what if it's worth less in two years than it is now? How do you plan to make your lender whole?
Lastly, I'm assuming you are the investor and they are just lenders. So, your comments about possibly taking an upfront $5K "fee" and a backend "cut" are confusing. You're the one borrowing the money. Who do you imagine would be paying you these fees?
I am completely missing what you're trying to do here.
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
Have you already closed your first buy-and-hold deal?
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
Have you already closed your first buy-and-hold deal?
Yes, I've closed on 4, rehabbed them, and they are all rented with tenants in place :)
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
Have you already closed your first buy-and-hold deal?
Yes, I've closed on 4, rehabbed them, and they are all rented with tenants in place :)
OK, and for these deals, I assume you use your own funds to acquire and rehab.
With private money, you're now substituting some individual's funds for your own.
However, unlike when it was just your money, you'll need to proceed with extreme caution to make certain your lenders are well protected if/when things don't go as planned.
Private lending is its own whole profession. It isn't something you can pick up in a few Forum posts.
Honestly, if you need private funding, you're best off finding an experienced private lender and doing at least one deal with them to at least see what's involved, long before involving your friends and family.
That is, unless you don't particularly like having friends and family...
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
Have you already closed your first buy-and-hold deal?
Yes, I've closed on 4, rehabbed them, and they are all rented with tenants in place :)
OK, and for these deals, I assume you use your own funds to acquire and rehab.
With private money, you're now substituting some individual's funds for your own.
However, unlike when it was just your money, you'll need to proceed with extreme caution to make certain your lenders are well protected if/when things don't go as planned.
Private lending is its own whole profession. It isn't something you can pick up in a few Forum posts.
Honestly, if you need private funding, you're best off finding an experienced private lender and doing at least one deal with them to at least see what's involved, long before involving your friends and family.
That is, unless you don't particularly like having friends and family...
I understand what you're saying, and I really appreciate the advice, Mitch! Thank you! :)
@Phil Petite, to echo Mitch's comments a bit, you are not taking on investors, you are taking on private lenders.
So, while at the end of the day, you can do anything you want that your investors/lenders agree too, but it very much against the grain for you to both borrow money from them, keep all the upside, charge a fee to your lenders. Of course you are going to "keep the cashflow" after paying the interest, because your "investors" don't own the property, in this structure. They own a note secured by the property.
I think you are convoluting equity investors and the typical terms and structures provided to equity investors and private lenders.
Think of your "investors" as the bank. Do you charge the bank a fee for bringing them a deal to lend on?
As for BRRRRing, there are definitely people that use private money lenders as credit lines on deals. You use their money to buy deal one, you renovate, rent, and refi with bank debt, to pay off their loan, but the agreement is they keep that loan available to you until you find the next deal.
Again, almost anything is possible if you and your investors agree to what is happening. But like Mitch said, it sounds like you have had 4 winning deals and no losers. No one that has been at real estate for more than a couple years has had no losers, and when you lose your family's money, well sometimes those close knit families aren't nearly as close knit and you start getting people playing sides.
@Phil Petite, to echo Mitch's comments a bit, you are not taking on investors, you are taking on private lenders.
So, while at the end of the day, you can do anything you want that your investors/lenders agree too, but it very much against the grain for you to both borrow money from them, keep all the upside, charge a fee to your lenders. Of course you are going to "keep the cashflow" after paying the interest, because your "investors" don't own the property, in this structure. They own a note secured by the property.
I think you are convoluting equity investors and the typical terms and structures provided to equity investors and private lenders.
Think of your "investors" as the bank. Do you charge the bank a fee for bringing them a deal to lend on?
As for BRRRRing, there are definitely people that use private money lenders as credit lines on deals. You use their money to buy deal one, you renovate, rent, and refi with bank debt, to pay off their loan, but the agreement is they keep that loan available to you until you find the next deal.
Again, almost anything is possible if you and your investors agree to what is happening. But like Mitch said, it sounds like you have had 4 winning deals and no losers. No one that has been at real estate for more than a couple years has had no losers, and when you lose your family's money, well sometimes those close knit families aren't nearly as close knit and you start getting people playing sides.
@Phil Petite, again, I only mention this, not to convince you to do something different, but to make sure you are looking at it eye's wide open.
Section 8 does not provide any additional security. In my roughly 14 yrs of owning rental properties, your biggest risk is not in payment of rent but actual tenant. Tenants destroying a property is going to cost you FAR more than any missed rents. And in both my personal experiences with Section 8 and having read other people's as well on these forums, you can do fine with Section 8, but it certainly takes more work than market tenants.
I know this is off topic from your original post, but when I see a comment like "Section 8 tenants, so the deals tend to be as safe as possible", it terrifies me. If you haven't yet, I would certainly search the forums of other people's experiences with Section 8. Mine was overall, fine for the markets and market cycle I was in at the time, but other people can share some real stories that might help you understand that Section 8 does not reduce the risk of owning a property in anyway. It changes where the risks come from, but it does not reduce it.
I definitely hear your concerns, Mitch, and I have the same concerns, as well, but that's why I am asking for some advice! I'm not sure what to do.
If you were me, and an investor wanted to give $110k at 7% interest - what would you do if your strategy is to buy-and-hold?
Have you already closed your first buy-and-hold deal?
Yes, I've closed on 4, rehabbed them, and they are all rented with tenants in place :)
OK, and for these deals, I assume you use your own funds to acquire and rehab.
With private money, you're now substituting some individual's funds for your own.
However, unlike when it was just your money, you'll need to proceed with extreme caution to make certain your lenders are well protected if/when things don't go as planned.
Private lending is its own whole profession. It isn't something you can pick up in a few Forum posts.
Honestly, if you need private funding, you're best off finding an experienced private lender and doing at least one deal with them to at least see what's involved, long before involving your friends and family.
That is, unless you don't particularly like having friends and family...
I understand what you're saying, and I really appreciate the advice, Mitch! Thank you! :)
Thanks for the connection, Phil!
However...
I can't DM on this platform, so check my profile here if you're trying to reach me "live."