How to make private lending work at 12%+ interest rate?

Question

I just watched the recent episode of BP where they talked about private lending. She said she pays 12% interest and newbies are paying her 16% interest! I am having a hard time finding deals that work with 7% interest. What kinds of deals work with 12%-16% interest?? What am I missing?

Edwin Epperson · Answer

@Sean Gum I agree with @Robin Simon as well.  12 - 16% earned interest for a PL is typically reserved for short-term investors.  As a private lender based out of Tampa, FL I only lend on 6 month projects.  I may go up to 9 month or 12 month, but in my experience (8yrs+) if a F&F investor cannot get a project done in that amount of time, there are bigger issues at hand.  Also, you have to be able to find deals where the numbers work.  These are VERY high-level numbers you can use as guidelines:

- Purchase Price = < 55% ARV. If your buying a property at a value that is higher than 60% ARV then make sure your renovation requirement is very low as a percentage.  For instance, if your purchasing a property that After repairs are complete it would be worth $320K, then the most that you would want to offer is $176K;- Construction Costs = < 20% of ARV based on a purchase price of 55% ARV.  If your renovation is going to cost more than 20% of ARV then your purchase price needs to be less than 55% ARV.  For instance, if your ARV is $320K then the most you should be putting into renovation should be $64K.  And your purchase price should be no more than $176K in this scenario.- Closing Costs = 8% +/- This will vary depending on if you are an agent, and if you are having to provide concessions at close.  While concessions have not been necessary in the past 2-3 yrs (speaking of FL specifically)  we are fast approaching a time where concessions will begin becoming necessary to get the price points people think they can get for their property.  Historically you should account for 0.5 - 2% of ARV towards concessions, plus the RE Agents costs standard of 6%.  So if you account for 8% sell closing costs to be paid by you.

Backwards plan... If we were to "back out" all costs associated for a F&F based on an ARV of $320K this is what you get (and these are HARD costs... these do NOT include "soft" costs, which primarily include your acquisitions costs and costs of capital)- Sell = $320,000- Sell Costs = $25,600 (8% ARV)- Renovation Costs = $64,000 (20% ARV)- Purchase Costs = $176,000 (55% ARV)- GROSS Profit = $54,400 (17% ARV)

You can see real quick why buying WELL below the 55% ARV is so important.  If you calculate soft costs (Property Insurance, Title Insurance, Lender Costs, Lender Holding Costs, Utility Holding Costs, SNAFU Buffer (10%+/- of Reno)) then you can see that the 17% can get eaten up REAL quick.  If your not finding deals that work even with 7% rates from a lender, then analyze where you are sourcing your deals from.  MLS will not provide the deals that meet these number requirements.  Even now deals offered by wholesalers can be hard to find that meet these numbers.  The BEST way to source deals is to source your own deals, by getting in front of the actual homeowners and negotiating the purchase for yourself.

Best wishes and much success, if I can be of any help let me know!  Also if you are more interested in becoming a lender then check out my company turn-key private lending solution.

Robin Simon · Answer

12-16% interest would only really work for very short term loans, such as a ~2-4 month rehab period.  Theres no way to make that sort of financing work long-term, you would need to refinance in pretty short order.  But 12% interest over three months is only 3% so it can be absorbed if you can work quickly