Private money and principle payments

[Olga Kostrova]

Guys,

How to structure private money loan so it's not an interest only loan, but payments goes towards equity from the very first payment ,or at least after after 1 year?

Do we have some clause in the agreement on principle-only payments or is there another way to structure it?

What would be the most typical structure that private lenders are comfortable with?

Thank you.

[Tim Herman]

@Olga Kostrova borrowing 100k @ 10% your principle paydown in 1 year is approximately $550. Most private lenders don't want their money tied up for long periods of time. With the fed raising the interest rate 8 times this year mortgage rates will follow. Maybe the private lender will renegotiate the interest in a couple of years.  

[Scott Wolf]

@Olga Kostrova, you can draw it up like any other loan, with a loan payment schedule. Amortize it however makes both parties comfortable. 5 years, 15 years, 30 years.  Whatever you want.

[Wayne Brooks]

@Olga Kostrova No private lender is going to lend you money without making the interest they want....why would they?  The money is not supposed to be free.

[Olga Kostrova]

@Wayne Brooks, I never said I would pay no interest, I have not fallen from the moon.  :-)

I mean some payments to be principles only, to expedite equity accumulation, just like with bank mortgage.

[Wayne Brooks]

Quote from @Olga Kostrova:

@Wayne Brooks, I never said I would pay no interest, I have not fallen from the moon.  :-)

I mean some payments to be principles only, to expedite equity accumulation, just like with bank mortgage.

Well, just like with a bank mtg, you can make Extra principal payments if you want to.

[Jeff S.]

The safest and easiest way to do this, @Olga Kostrova, is to simply find a private lender that allows pre-payments with no penalty. Some do and some don’t. Very common and it will be clearly stated in the note.

If your monthly minimum is the interest, then pay a bit more and tell the lender to apply it to your principal. This doesn’t lock you into any sort of amortized loan, though your payment strategy could reflect that, at your choice. If you want to or have to make the minimum interest-only payment at any time, this gives you that option.

The note should also specify the order your payment is credited (typically to fees, charges, and advances first, then to interest, and finally to principal). You’d be wise to carefully track these yourself, keeping a record of all payments and communications, since your lender or their servicer could easily misapply your intended overage.

[Olga Kostrova]

Thank you, guys. All response are very helpful.

[Dave Spector]

@Olga Kostrova: @Jeff S. answer is spot on.
As an alternative, you could just park your excess cashflow in a separate account to be used when you identify a second project.

[Olga Kostrova]

Thank you very much, @Dave Spector

@Dave Spector

[Miranda Holland]

@Olga Kostrova

The interest only is to help investors with smaller payments while renovations are ongoing. After renovations are complete you can find a lender who will refinance the property for a lower interest rate and longer term with no prepayment penalty.

[Olga Kostrova]

Thank you, @Miranda Holland

[Frank Greg]

@Olga Kostrova

@Wayne Brooks, I never said I would pay no interest, I have not fallen from the moon.  :-)

I mean some payments to be principles only, to expedite equity accumulation, just like with bank mortgage.

Olga, usually the borrower is concerned about what you described if its a personal property as opposed to an investment property. When dealing with short term high rate rehab funds, the investor is usually looking to refinance out of the higher rate loan as soon as possible.

If it were rental, investors typically deploy any excess cash towards repairs, incidentals, reserves or acquiring other properties and not particularly attempting to pay off the loan. Unless of course you just have idle cash laying around.