Private Money - What's considered a good deal these days?
Hartford, CT · Member since 2013 · 6 posts · 1 vote
Hey BP...I have noticed a few private lenders in my area offering minimum loan amounts, for example $80,000 min loan amount. They all require a down payment of at least 20% - with points of course. Just wondering what is considered "normal" these days (in terms of rates, points, loan amounts, etc) when it comes to private funding? What are some of the best deals you guys have seen out there for private funding? I'm interested in getting a loan to purchase and also for rehab costs, depending on how big the rehab is....
@J Scott Thank you for helping to clarify this discussion. @Kashana R. 's initial question - you don't seem to be describing what we call "private money" if 20% down is a requirement. That sounds like a traditional lender. When seeking Private money, start with your "warm market"; define what YOUR program is (i.e. how much you will pay, what term length, etc.) The best part about Private Lenders is they typically won't DEMAND what they want, you are in a better position to "call the shots" - if you have a relationship with them and they trust you and like what you are doing, you have a change to get access to funds in a way that will make your business hum! But it HAS to be a Win-Win. I have paid my CPA up to 6 points on a deal, because it was well worth it for me and it enabled him to get the 12% yield he was looking for. As you get rolling and establish more credibility, you can attract more investors who may be interested in what you are doing. Then you'll have even more control over the terms.
Good luck!!
Hello,
First let me say I do NOT think the first deal I am going to mention is normal, but it is what worked for me. Also, both of the lenders are people I have had LONG business and personal relationships with, they know my complete financial background (which is very good).
I bought a wholesale deal from a 'flipper' that I usually supply cabinets and counter tops (my day job) to for his flips. He ended up with 'too many' houses at once when he had two that took a while to sell, three he was working on, and he picked up two more when multiple offers went through for him. House was assessed at 140K, he got it for 75K, sold it to me for 85K with 6 month terms, 6% interest, and interest only payments and a balloon at 6 months. He has access to cheap capital through borrowing from Private Lenders who are relatives and happy to get 3% instead of the < 1% they would get in CDs. He paid 3% to them and made a bit by charging me 6%. I did not have to screw around with all the back paperwork, appraisals, etc.... and he made a quick 10K for himself
For the rehab funds, I looked at different ways such as credit cards, HELOC, etc... and finally asked 'good friend #2' whom I knew had pretty large liquid assets including CDs at low rates, etc... I offered to pay him 6% for 6 months also. He counter offered at 3% for 3 years :). He was getting under 1% on this money, and he know my back up plan was to do this in a way that it could still make sense for a rental if it did not sell, so it might be more of a 'long term' type of deal.
............................
With those figures in mind, I am just now starting to seek Private Lenders for Buy & Hold rentals, and am hoping to get funds in the ball park of 5-7%, mostly by trying to work with people I know who likely have large amounts in CDs and other low yield investment, and would be happy to get MUCH better returns. Again though, the people I am starting to talk too are ALL people I have LONG relationships with through either personal, business, and civic activities, or some relatives too.
Dan Dietz
I don't know that I'd be putting down 20% plus paying hard money fees.
Where's the benefit there? If you have decent income and credit, just go with a bank and get a regular loan. Then wait the year and do a refi cash out to pull your additional money back out.
I'm all for hard money lenders and I use them exclusively for my investing purchases. But I wouldn't recommend them when they are providing roughly the same terms that a bank can provide on a purchase loan but with significantly higher points and a much higher interest rate.
If you're looking to flip, then they're ok too. Just build in their fees into your deal to make sure the numbers work. Again, even that seems odd to me. Why not just use a regular bank on a flip?
The reason I use hard money is that they let me roll the rehab and purchase into the loan so I can refi rate and term after I'm done and then I'm out little to no money on my deals.
Much easier to build capital if you're only coming out of pocket 2 to 6 or 7k per deal versus 20% (15 to 20k per deal). I'd run out of money fast. :-)
Keep in mind that there's a difference between "hard money" and "private money" (though everyone may have different terms).
Hard money comes from professional lenders that you probably don't have any personal relationship with -- they lend professionally, and they are going to charge as much as they can get away with charging (as business owners, they should).
Private money tends to come from family, friends and/or other acquaintances who don't lend professionally, and who are simply looking for a better investment vehicle than whatever they currently have (generally stocks and bonds). These people certainly want to make good returns on their investment, but they aren't necessarily going to be looking for maximum returns -- they just want more than they're currently getting without much additional perceived risk.
Hard money these days tends to run from 10-15% with 2-5 points (it can be more or less, but those are rates I've seen across the country). Private money tends to run from 8-12% with 0-1 points (again, it can be more of less, but that's what I'm seeing a lot of investors finding).
Of course, your experience, how much money you bring to the table, the quality of the deal, the relationship you have to the lender, etc., can all play into the cost of the money, but those are some rough numbers.
@J Scott Thank you for helping to clarify this discussion. @Kashana R. 's initial question - you don't seem to be describing what we call "private money" if 20% down is a requirement. That sounds like a traditional lender. When seeking Private money, start with your "warm market"; define what YOUR program is (i.e. how much you will pay, what term length, etc.) The best part about Private Lenders is they typically won't DEMAND what they want, you are in a better position to "call the shots" - if you have a relationship with them and they trust you and like what you are doing, you have a change to get access to funds in a way that will make your business hum! But it HAS to be a Win-Win. I have paid my CPA up to 6 points on a deal, because it was well worth it for me and it enabled him to get the 12% yield he was looking for. As you get rolling and establish more credibility, you can attract more investors who may be interested in what you are doing. Then you'll have even more control over the terms.
Good luck!!
Thanks for everyone's responses. I think people use the terms private money and hard money interchangeably. HML say they are PML but in reality they are just HML. @Mike Bryant you are correct I just have to find those people! True "private money" is an obvious first choice, I just don't know anyone at the moment who has access to this type of cash. @J Scott your numbers are basically the same as what I have been seeing. @Mike H. bank loans can offer better terms but are too cumbersome and have too many stipulations and requirements. I'm going to keep looking and keep all options open at this stage...
That is the best approach you can take! Even an "expensive" HML is worth it if you have a deal. We figure our funding at the most expensive rate we think we'd have to pay (worst case scenario), then if we get it "better", just more profit. And if you are prepared, you can educate your "warm market" about using IRA money for your deals. Its a win-win. Your mindset should be to offer a great investment option vs. asking for money. This is tricky but makes all the difference. People who know and trust you, AND are tired of the gambling of mutual funds, etc, will end up making good Private Investors for your business.