Investor · Charlottesville, VA · Member since 2015 · 4 posts · 0 votes
We are under contract to purchase our fifth investment property in Virginia. The property is a large house that was split into six apartments and is currently fully leased. Over the past year my wife and I have transitioned to working on real estate full-time and our lack of W-2 form (and less than 2 year record on two of our properties) makes it difficult to secure FHA financing.
We are working with a private lender (Friends & Family network) to lend us $200,000 and I'm wondering what terms we should be offering/suggesting? Does anyone have any recent experience? I was hoping to get a 10 or 15 year note for around 5-7%. The property is operating at close to a 14% capitalization rate. Our other option (currently available) is to use a HELOC to finance the purchase but we would like to hold this property for some time and I don't want the interest rate risk on a floating rate loan.
While there are many on here who's lending experience exceeds ours, here are how we approach private lending from either side.
When lending, or borrowing, privately we are typically looking at shorter term financing: 12 months - 5 years.
As a lender, my preference is a 12-24 months, with the option to renew. Borrower pays all origination and administration costs. The note and mortgage are registered in first or second position (whichever the case may be) against the title of the property. If LTV is high - over 75-80% - we may also require pledging of other assets (such as being registered against a second property).
The terms of the mortgage can be anything you and the lender agree upon - within the confines of the law. In practice, they should conform to conventional mortgage and notes, but probably be as simple as possible.
As a borrower, I am securing private financing primarily in two forms:
1) Vendor Carry / Vendor take back - Financing of up to 5-years, preferably interest only, carried by the vendor on the property. This can also be helpful to the vendor by allowing them to defer capital gains taxes over the life of the loan.
2) Third-party private note - basically the same as what you are proposing here. As a borrower, my preference is interest only with a final balloon or with an annual principal paydown schedule. I also look for no pre-payment restrictions.
Rental Property Investor · Lindon, UT · Member since 2015 · 862 posts · 438 votes
11y
If you can get the terms you described, you should take that money all day long. Hard money and most private money is much more expensive that 5-7%. Keep your equity line available for the next deal!
Investor · Charlottesville, VA · Member since 2015 · 4 posts · 0 votes
11y
Thanks for the advice. Working with a local bank on financing and it would appear that we should get a pretty nice mortgage that way and follow the advice of Darren to hold onto the equity line for acquiring future projects or for rehab. I don't know if it is the case everywhere but certainly there is interest in local banks here to finance cash-flowing properties, as long as the rest of your profile doesn't scream default.