Private Money Lender Payments
One of the advantages of using private money loans is that they can be structured more favorably than an HML or bank loan. However, there are still some general rules of the road that even private lenders expect. I used a PML in the past. But, it was from a family member who didn't charge any interest or points. And, my only experience with an HML was a nightmare! So, I'm looking for another private loan, but this time from an investor. I need to understand or confirm how payments are typically structured for a PML. And, I've read that private money interest can range between 5-15%, plus points. That sounds cost prohibitive for smaller loans!?! (I know each lender's terms can be different, as well as those of each project; some lenders may or may not charge points, interest can be paid at refinance, etc.). Here's what I'm trying to understand:
BRRRR Project (Example): SFH in decent condition, converted to multi-student rental
a. $60,000. asking price
b. $85,000. ARV (min.) [single family rental]
c. $10,000. cosmetic repairs and furnishings (beds, mattresses, stove and refrigerator)
d. Private loan - $70,000. at 10% interest for 12 mos., plus 2 pts.
If I understand correctly, the terms identified in Item d. (above), mean that I'll be expected to repay the lender $7,000. interest, plus $1,400. in points. But, is that $7,000. each month, throughout the term of the loan ($84,000., unless paid-off early), or is it $7,000. in total? If the former, that's more than double the expected rental income each month, and nearly pays off the entire ARV in only 12 mos. (assuming I can't refinance after seasoning for some reason)! How is that cost effective as a financing strategy?!? What am I missing here?
Also, how do I determine the true ARV, taking into account the increased value of monthly rent that's more than that of a single family's lease?
