Private Lending - Delayed Interest Options

[James Blair]

For the past five years, I have been providing private loans to a builder for new construction projects. Our agreement has typically been structured as an interest only loan, where he puts down 25%+ when purchased and I provide the loan for the balance plus draw payments for construction. The builder makes monthly interest payments and repays the principal once the property is sold. This arrangement has worked well for both of us.

However, we now have several projects that will be running concurrently, and the builder is facing cash flow challenges with making the monthly interest payments. To address this, I have agreed to defer the interest payments on our next project until the property is sold. At that time, the builder will pay the accumulated interest along with the principal.

We have discussed a few different options to structure this arrangement, assuming an interest rate for interest-only loans with monthly payments is 10%:

Option 1: delayed interest with a rate of 12% (interest rate is 2% higher)

Option 2: charge a lower interest of 8% then profit share (need to determine appropriate % split)

Any other thoughts on how to structure this arrangement?

[Chris Seveney]

@James Blair

I do not defer interest I actually will have them prepay it and roll it into the loan amount upfront

Delaying interest will hurt your returns signficantly and if someone is having cash flow issues I would not be lending to them