I've decided to become a private money lender for a fix and flip investor. I've done my best to research the process but wanted to get additional guidance. I'd like to loan around $25k to start, but I'm undecided on loan terms, so any guidance in that area would be great. It seems like interest rates are most common, so that's what I'm leaning towards, but is the ball in my court regarding the terms or in the investor's? Additional questions are regarding the legal process: Do I need an attorney? Do I need to set up an LLC?
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
2y
Hi Chad,
Real Estate Attorney here. I represent private money lenders and do several loan transactions a week. If this will be an ongoing business, I suggest you set up an LLC. I would highly recommend that you speak with an attorney that does this on a regular basis to ensure you are protected and to ensure the loan docs are legally binding - the loan docs are of course key to ensure that you have documents you can execute on in the event of a default (mortgage, note, assignment of rents, personal guarantee, etc.).
The lender dictates the terms. You need to determine what rate of return you would like to make it worth it for you (while of course keeping in mind what the market rates are in your area for interest rate and points - in the Phila area you can generally expect private loans to be in the 11-14% range and 2-4 points - but there are a lot of factors that go into the rate such as LTV, strength and experience of the borrower, 1st position vs. 2nd position, and so on).
Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
2y
Chad, You're in a good place (BiggerPockets) for lots of good advice, but in the end, you should work with an attorney familiar with real estate, private money loans, promissory notes, property liens, etc. You will want that attorney to prepare the appropriate documents, use a notary at signing, etc.. Hope this helps.
Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes
2y
Please check out the book I co-authored called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending published by BiggerPockets.com/lendtolive. It's a complete guide to all the key considerations you will need to make and the provisions you'll have to include to ensure your loan is safe and secure. We discuss loan rates and terms, documentation, and the entire process to find and fund a loan through our C.P.R. Lending System. We also discuss all the key players you'll need to create your virtual team because private lending is a team sport. As mentioned already, the most critical would be a real estate attorney who is also well-versed in private money lending. If you ask them usury rate in your local state and they hesitate, then they likely aren't super familiar and only dabble in it. We provide a bunch of supplemental materials including an attorney interview guide. Hope this helps!
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
2y
Hi Chad,
Real Estate Attorney here. I represent private money lenders and do several loan transactions a week. If this will be an ongoing business, I suggest you set up an LLC. I would highly recommend that you speak with an attorney that does this on a regular basis to ensure you are protected and to ensure the loan docs are legally binding - the loan docs are of course key to ensure that you have documents you can execute on in the event of a default (mortgage, note, assignment of rents, personal guarantee, etc.).
The lender dictates the terms. You need to determine what rate of return you would like to make it worth it for you (while of course keeping in mind what the market rates are in your area for interest rate and points - in the Phila area you can generally expect private loans to be in the 11-14% range and 2-4 points - but there are a lot of factors that go into the rate such as LTV, strength and experience of the borrower, 1st position vs. 2nd position, and so on).
Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
2y
Chad,
I totally concur with Beth Johnson, co-author of Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending published by BiggerPockets. Couldn't think of the title last night. This should be your foundational guide. I highly recommend this book!
@Mike Grudzien and @Beth Johnson appreciate the advice! I'll definitely look into that book and will find an attorney well versed in private money lending. I love the tip regarding the usury rate.
@Ronald Isgate thank you for the advice! One follow-up question: do you have any quick tips for finding a real estate attorney, such as the usury rate mentioned by @Beth Johnson?
As this opportunity just came up, it sounds like I need to do much more legwork and research of the area prior to jumping in. Any good resources to help find private loan ranges for that particular area?
@Ronald Isgate thank you for the advice! One follow-up question: do you have any quick tips for finding a real estate attorney, such as the usury rate mentioned by @Beth Johnson?
As this opportunity just came up, it sounds like I need to do much more legwork and research of the area prior to jumping in. Any good resources to help find private loan ranges for that particular area?
Hey Chad. Where is this deal located (sorry if I missed that but couldn’t find that in the post string). Usury (and a whole host of other legal compliance issues) need to be answered and addressed by an attny who does this on a regular basis. Networking is the best way to find a local attny who handles these transactions. Let me know where this is located - if I happen to know of someone I would be happy to pass along a name or two
@Ronald Isgate I actually realized I didn't include location, so my apologies. It's slightly outside the Raleigh, NC area, but I reside in the Tampa, FL area. Not sure in this situation if my location is more applicable than the real estate location or not.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
2y
@Chad Herring If you are lending under $100k, I am assuming it is just for the renovation funds, or for the down payment.….meaning it is likely that some Other lender has lent money for the purchase and possibly the renovation costs. This means You will be in Second position behind the other lender. This is Absolutely the Best way to lose all of your money. Being in second position (a Gap loan) is Extremely risky….do Not do this.
I've decided to become a private money lender for a fix and flip investor. I've done my best to research the process but wanted to get additional guidance. I'd like to loan around $25k to start, but I'm undecided on loan terms, so any guidance in that area would be great. It seems like interest rates are most common, so that's what I'm leaning towards, but is the ball in my court regarding the terms or in the investor's? Additional questions are regarding the legal process: Do I need an attorney? Do I need to set up an LLC?
*Reposted from another forum.
Here's how I think about loan terms as a private lender- It's all negotiable but at the end of the day it's your money- your terms. That was our rule when we used to lend.
The loan terms:
Interest only X% (You're taking a risk so the % should be high. Much depends on the experience of the person your lending to. I think of it this way. If I can make 10% on my money investing in the stock market in 6 months then I probably want more than that as a private lender.
Points- Again your decision on whether or not you want to charge points
Security- Will the loan be secured against the asset- preferably in a 1st position. If your loan is in a 2nd position what recourse will you have if there's a foreclosure
Insurance- Do you want you or your company named on the Insurance policy if the place burns down so you get paid?
Use an attorney- For your first deal- Yes. After that you use the attorney to close on the loan and the fees are charged to the borrower. But you'll have your basic documents in place for future loans.
Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes
2y
a less-experienced investor is more likely to be flexible with terms or want to come to them together. someone with more experience i'd think would already have a set of terms that works best for them and their deals. 8-12% annual interest seems to be the most common range. the security of lending to someone with more experience usually comes with a lower rate, vice versa. if you have someone you want to lend to, just ask! and i'd probably use an attorney at least for your first one.
@Chad Herring If you are lending under $100k, I am assuming it is just for the renovation funds, or for the down payment.….meaning it is likely that some Other lender has lent money for the purchase and possibly the renovation costs. This means You will be in Second position behind the other lender. This is Absolutely the Best way to lose all of your money. Being in second position (a Gap loan) is Extremely risky….do Not do this.
I did my first deal of private lending similar to this situation for about $40k this year. I knew the contractor/investor, had seen his work and would be willing to work with him on a project. On a house I was an agent for the seller, he was the contractor for the investor. So basically, I'm saying I knew him fairly well. Also, I toured the house and checked out the comps for the ARV. He allowed me to follow the progress. Everything checked out. I think it helped that I had some experience as a flipper myself. Still, as I was the second and it was my first time, I was a bit nervous, but I got good a really good return of funds. But I don't think I would do this for someone I causally knew.
@Chad Herring How well do you know the investor? How good is the deal? Have you checked the ARV? Was the purchase of the property at a good price? How long for the return of investment? What interest rate? Things to think about before investing.
@Wayne Brooks thank you for the insight! I believe the buyer is using their own funds for the purchase and is using investor to raise the money for the renovations, but I could be wrong. If this is the case, should I still avoid?
@Jessie Dillon thank you very much! I figured asking would be the best strategy but definitely wanted to have some ranges like you mentioned prior to sounding completely ignorant.
@Kevin Polite thank you for describing your situation! I personally don't know the investor very well, but I have a close friend that has lent money to him on multiple occasions within the past six months, which gives me a little bit more confidence.
it's not a requirement, i just think a multiple of 7 figures is a good baseline, since you are risking 100% of your principal with a private loan. and with high yield savings accounts finally having decent rates, it just doesn't seem worth it for a new investor.
to be clear - it's a perfectly fine strategy, it's just not a beginner strategy.
beginner strategies - house hack, live in flip.
advanced strategies - private lending, sub to, tax liens, notes. lots of others. all valid. just not for beginners.
Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
2y
So, it sounds like you are a Gap funder for someone who needs 25k to get a deal closed on. That is very risky cause now the investor is leveraged out 100% and that's a high wire you do not want to walk in REI. Things go south all the time and if things go south on a deal by an investor who can't afford the deal and it is leveraged out 100% then people are going to lose and lose bad.