I recently found a property that I would like to rehab and sell. However, I can't finance it myself and I am in search of a PML. My questions to the BP community are: do you have to put money down (if so, how much?) and how can I persuade a PML to lend their hard earned money to me?
I'm new to investing and this could be my first deal. Any tips or suggestions would be greatly appreciated.
First private lenders are people you personally know. So, you find them by talking to everyone you know and everyone you meet about what you're doing. If you need someone quickly, you probably need a hard money lender.
With a private lender you might be able to do a fix and flip and use only their money. Typically that results in a 50/50 profit split. They put in all the money, you do (or get done) all the work. That may be really tough to do when you're getting started.
A hard money lender is going to lend you some amount based on the price, rehab budget and ARV. About the most liberal terms I've seen is a loan amount of 70% of ARV with four points and 15% interest. Points and other fees come out up front, you have monthly payments and you'll have to pay for materials and labor then be reimbursed out of your rehab budget. If your deal has purchase plus rehab exactly at 70% of ARV, my rule of thumb is you need 15% of ARV of cash from some other source.
Many HMLs have minimum down payment requirements, which would increase the amount of your own cash needed. Very, very tough to do wtih with none of your own cash.
If you go over budget on the rehab, you'll need to cover that out of pocket.
Private lenders may have similar terms as a HML. Rates are whatever you negotiate, but are typically high single digits.
Thanks @Jon Holdman
Exactly what are points?
A "point" is a fee you pay up front to get a loan. One point is 1% of the loan amount. If you get a loan of $100K that has four points, you will actually get $96,000 after the points are subtracted. You will still have to repay $100K.
Points are considered pre-paid interest. So, if a loan has an interest rate of 10% with two points, the APR will be higher than 10%.
On conventional long term loans, one point is pretty typical. You can reduce the points, which will usually result in a slightly higher interest rate. Or, you can pay more points and get a lower rate.
Hard money lenders typically charge anywhere from three to six points.
a friend with money will probably lend you money because of you... a serious investor will lend you money because of the deal. So concentrate on learning the language and finding deals and the money will find you. ;)
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