I have come across a very good deal and am digging deep to come up with the cash to make it happen. I have a friend who has the cash and is considering linvesting in my project. The plan being to purchase the house using his cash, myself financeing the rehab and then a cash out refi once the property is complete. To be on the safe side I am estimating 6 months to completion so he would be investing for a 6 month term. After I was compete I would then refinance to pay him back with intrest.
First question is what's a fair intrest rate for him?
Second question, how do we make it legal so that his money is secured by the property and that I owe it to him?
Fair interest rate can be anywhere from 8-10% and also it depends on your relationship. What may work for one person may not work for you. If you reach out to HML they can offer anywhere from 12-18% with strict guidelines. With friends and family we can be flexible and usually its better to earn something on the cash which is just sitting there.
You can make the deed of trust in lender's name and in any scenario you default on the loan, he would would have a tangible asset which he can use.
I am currently using a private lender and we did pretty much what @Nilesh Makhija said with the deed of trust. It is set up just like a bank were making the loan and it is recorded at the court house. I just had the closing attorney draft the loan doc as well.
One other thing to consider is the length of the loan. I would suggest you stretch it out to maybe 12 months. Your rehab may take longer than you think and more importantly you may find lenders require 6 months of seasoning before they are willing to do a refinance. The refi loan process itself may take an additional month or so. So, I would try to get him to do a 12 month loan with the understanding it may be shorter.
I just did the same thing, borrowing from a family member. I ended up doing 9% for 9 months. It will be a lump sum payment when my flip sells. He actually originally offered a little lower initially %, but I offered higher to make him happier with the return so he'd want to keep doing it over and over. Its a small loan so there wasn't hardly any $ difference in the rate. I found a loan agreement on rocketlawyer as a guide.
I borrow from a friend and we decided that 10% was fair..
But that was something we both agreed was fair.
We also do this through an attorney and have it all laid out legally.
I borrow for my rehabs, there may be a better way. But this has worked for us on 2 deals now.
@Brad Tamm I'm doing the exact same thing on the rehab I have going right now. My friend put up the cash for purchase, I'm funding the rehab and I'll pay him his cash back plus interest at a 10% APR when I refinance.
I didn't know where to start, so I offered him 15% when we started the conversation. He brought it back down to 10%.
I would make sure your lender is lined up for the refinance. There are some lenders, including a regional bank I'm using, that will refinance as soon as you're ready and don't require 6 months or 1 year of "seasoning".