Hi! I have some friends / ex coworkers interested in becoming my PML's. (Private money lenders) I am wondering how I should structure the loan though. I would like to see how others that have used PML do it. I would like a model that works for a rehab and also one for a buy and hold loan. I just want to make sure I'm being fair but at the same time use criteria that won't put me out of business. Thanks!
Its all comes down to what you negotiate. Best to do them as loans with a deed of trust (or mortgage) to secure the lender's interest in the property. For a fix and flip do it as short term (say 9+/- months) with monthly interest only payments. Or, all payments deferred to the end. Max LTV of 70% of ARV is the most I would lend.
For buy and hold you need a longer term and lower rates. But no private lender is going to give you a 5% 30 year fixed loan. You get those from banks. But perhaps 8-10%, with a balloon at 3-5 years. Could be interest only or amortized, though you would want a much longer amortization period than five years.
One definition of fair is that legislated by the CA legislature that Brokers have follow ... trust deed investor (aka pml) must be "suitable" for the investment, have less than 10% of their net worth in any one loan, with the ltv being no more than 75% (for a sfr) of the as-is value. And most trust deed investors are accredited these days since required filings (if in CA) by the issuer of the security (you) with the department of corporations for every loan involving a non-accredited trust deed investor is very time consuming and intrusive into your business inner workings.
Or, you can do what many rehabbers do, hit up friends and family for 100% of the purchase and rehab, give them a 5% return (hey, that's 500% more than they can get in a bank, how can that be bad) and if the deal goes south, oh well, it's not your money. You don't have to worry about personal guarantee's, cross collateralization or big down payments ... none of those pesky details that would make you accountable for a loss.
If you choose the former, you should speak with an attorney that is familiar with mortgage lending.
If you choose the later (not recommended), you don't need to speak with anybody about anything, just convince the pml you are the (wo)man, give them a signed note and deed of trust with whatever terms you decide in exchange for the dough, and off you go.
Most (all) pml's want short term loans. Buy and hold with pml's only works when you intend to refi after bringing the property up to code.
But I'm not an attorney, I'm sure there is one out there that will tell you whatever you want to hear.
My sarcasm is nothing personal Amanda, I know nothing about you or your business model.
Well, sort of what Jon mentioned, he's what I'd call an old salt lender, been around RE, not really the private individual who is willing to make you a loan out of love, affection or based on your friendship, not that Jon can't be loving, affectionate or even friendly!
So, reading into that remark, what is really going on? Sounds like you want an example to propose to some people you know, or did they really get excited about your getting into a deal and wanted to join in? It makes a difference.
If your "friend" is getting 3% they may be delighted in getting 5% or 6% for a year. They do need to be assured of getting their money back, you plus collateral might be enough for them, they might go 95% of the total deal. Is it that kind of friendship like family or a friend who has never done a deal and wants to do what the professional types might do, 70/75% LTV, 10+%, deferred payment for 90 days or 120 days then boom, pay up?
There is no set standard with true private money, there is with those that lend as a sideline or as a hard money lender.
I suggest you post what you need, what you need it for, the price of the property generally, when you can make payments, how long you need it for and we could start devising some terms that you might ask for or suggest.
As to long term loans, private folks rarely go beyond 5 years really, they need some access to their money if nothing more than a feeling they aren't tied in for long terms, people can't really go there unless they really never need that money. It's more involved meeting their financial needs, some financial planning is necessary in all fairness. You also don't do high LTV loans long term, they need to begin secured.
People aren't business entities, things happen to people, things change, things can happen to you too, so they need or their estate needs to be secured. Nothing like having some wild and crazy loan out there that get tied up in an estate with trustees or executors or judges looking at it. :)
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