Structuring Private Money Loans for Rentals

[Carson M.]

Hello all,

I currently have sufficient income through my small business, good savings, but lack of taxable income and credit due to being self employed (taking deductions) and being 19 (lack of credit history.)

I am wrapping up a flip, as it is on the market. I am looking to purchase rental properties with the idea of expansion. I know I wont be able to get conventional bank loans, therefore I am considering seeking out private money, where no equity has to be traded (more simple legal structuring)

I am wondering how people structure private money loans for rentals, say offer 5% annually for x years on principle, then pay off principle? Or do you acquire a property, pay an interest rate, and refinance to pay off the investors principle? I read a lot about structuring loans for flipping, but not on rentals that do not have a quick, profitable exit stragegy.

[Jon Holdman]

Its really whatever you and the lender agree on. Its unlikely to be a 5% loan - that's bank rates. High single digits, perhaps. So, you will want to refinance into a lower rate loan in many cases. In your case, you might want to hold for a few years to build up some history then look into bank financing. Or, if you can find lenders who will give you rates low enough to turn a profit on the rental you could just keep that in place.

You wrote:

People say this sort of thing all the time. But there's something missing in this statement. If your business is generating, for example, $50,000 a year in gross revenue (i.e., what your customer pay you) but is spending $45,000 a year on true business expenses (i.e., what you have to pay out in order to make that $50K of revenue) then your income truly is only $5,000. Its not $50K and no bank is going to lend based on that $50K. Deductions against your income on your tax return represent actually money that's going out. Folks seem to think that somehow their tax return doesn't represent their true financial picture. In the case of rental properties you have the depreciation deduction which is indeed a deduction for money you don't actually spend. Lenders (at least savvy ones) are aware of that and will add it back in. But for other expenses, they're real expenses and the bottom line on your tax return is reality.