Typical Private Lending Rates?

16 Replies

Hi, I'm new to bigger pockets I'm interested in different areas to earn passive income. I was approached by a friend who currently has 4 rental properties and is looking for a fifth however his debt to income ratio is limiting his ability to get another conventional loan.  He's looking for me to be his private lender. He needs $30K - $50K what type of rates do private lenders usually charge? Also, it seems most private lenders get points is this accurate?

Thanks,

Dave  

@David Marzullo

The answer is there's really no answer.  It's whatever you and your friend agree to.  I lend at 13% plus 1 point.  I don't like rentals because it ties up my money for too long.  There's a finance concept called money velocity. In other words how quickly can you deploy your money, have the loan pay out, and put it into another project.  I don't know what your exit strategy will be.  Perhaps your friend will refi the rental and pay you out but the exit strategy is just as important as the terms of the loan.

Good luck

You generally dont see a lot of private lending for rentals, but it happens. 

I pay my guy 2pts and 12% for flips.  I get really good terms, though and the extra expense is worth it.  

If he's asking for rental $, he's probably thinking more bank money rates.  Mid single digits.  Just a guess, of course.  Private lending is pretty much anything you guys agree to.  I'd never tie up my money for 30 years at 5%, though.  Too many other opportunities.  

-D.

I've heard of people getting loans from mature private lenders that just want to get a better return than they can get in their CD. I've heard of rates in that scenario in about the 7% range. If you are doing it to try to make money there are much better returns to be had. I've been private lending to fix and flippers in 2nd position for 20% return. It can be risky but if you know who you're lending to and are comfortable with them and the deal makes sense, then it can be fairly safe. 

@David Marzullo Investment is all about risk/reward ratios. The higher the risk the greater your reward as an investor needs to be. If you are not sure how to assess risk/reward I would suggest first doing some research around this subject. Once you grasp the concept then look on BP for others who do private lending and seek individual advice as to their risk/reward process.

Risk is a very personal thing. Some people are comfortable with high risk whilst others are not. So here are some basic questions you might ask of yourself to help get a handle on your risk profile.

1. What would it mean to you and your family if the money you invested was completely lost to this investment?

2. What rate of interest can you earn in government bonds, deemed to have the lowest risk, and therefore how much extra would you need to charge to be able to sleep at night knowing you have taken a measured risk?

3. What level of experience does the borrower have compared with others who do the same type of investing and what do those other, more experienced borrowers pay for their private loans? More experienced operators paying say 12% would potentially offer less risk than a less experienced investor. You could check their track record of past deals.

4. Can you seek independent advice from a CPA or financial planner?

In regards to charging points it is an accepted practice and varies from deal to deal.

I would also pay special attention to what @Jeanette A. posted about exit strategy and time value of money.

Hope this helps.

Happy investing!

@David Marzullo

There are some good points and some bad ones, customary for public forums.

A private lender is the role you will have with this borrower, he was known to you, personally. However, as a private lender, not related by family, you also cannot act as a registered lender. 

First check on any usury law as to the legal rate a non-registered lender may charge. 

Points, or any fee charged that are required to obtain a loan is pre-paid interest, that will be computed into any usury rate. 

Generally, points are not allowed in private lending, the premise being the borrower is known to you personally and while funds may be used for a business purpose, it is not as much of a business loan as a personal loan, in other words, the lender is not in the business of lending to others who do not have a personal relationship. What might be acceptable in practice with real estate operators is not necessarily what is legal. 

While many of the concepts used to underwrite a loan by a lender are applicable, prudent for an individual, the personal knowledge you have about your borrower is what is most relied upon.  I could write a book here, but can't. 

Legality of your loan in these situations may arise due to death or incapacitated parties, it's not just you or your friend, but others who may end up owing or holding the note. A good point was made as to the exit strategy, someday you need your money back, how and when will that be? Under what circumstances? 

Private lenders generally loan for personal reasons, to someone they know, they want to help out, they are not in the business of lending. Rates charged are usually at or just above the rates they may earn elsewhere.   Not saying you can't charge more, but the more you charge, your loan begins to take on the flavor of a business opportunity more than a loan to a friend. Perception matters, are you a personal lender or are you looking for a business opportunity? If it's a business, then I would suggest a business entity with this repeat borrower and take care of you lending activities inside the business entity. 

Individuals that actually lend to several people, promoting the business of lending are not really private lenders, they are hard money lenders, at that point, they need to be registered as a lender. That is not like being a mortgage broker or lending company, since you use your own money, it's usually a simple registration process. If a loan blows up and you aren't registered as you may required to do, you can lose your money! There are attorneys who are not aware of the differences between lending as a commercial transaction by an individual or as a personal loan relationship. But you should consult with your attorney at the amount you're considering. 

Interest is not arbitrary it is to reflect the risk assumed by a lender. Charging too much when a borrower may not be at that risk level can be seen as predatory lending.   

See your attorney! 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thanks for that run down David Marzullo that actually helped me a lot. I want to get into private lending but was asking myself what the difference was between HML and PML. The thought started under the grounds of PML but quickly turned into HML according to what you just said! I was unaware of the fact that you have to register to be a lender. Definitely food for thought!

Be certain to understand the usury laws in your state.  Here is a good site to help with that. http://usurylaw.com/state/

In California you can not charge more than 10% annually as a private investor, this would include points and fees, unless you have a broker involved.  I have several private investors who utilize my lending services in order to charge higher rates.  Our rates typically span from 9 - 14% with 1% point upfront to the investor.

Be certain to consult with appropriate professionals, such as an attorney, before you enter into any lending practices.

I pay private lenders 6%-13% depending on the terms.  The more they give me and longer I get to use their money, the better their return.

Best of success! 

@Bill Gulley you suggested that if a loan starts to look like a business opportunity then setting up and loaning through a business entity would be a good idea. How about if you are lending money through a SDIRA? That is already a separate entity. Would you still make the same suggestion?

Originally posted by @Julian Buick :

@Bill Gulley you suggested that if a loan starts to look like a business opportunity then setting up and loaning through a business entity would be a good idea. How about if you are lending money through a SDIRA? That is already a separate entity. Would you still make the same suggestion?

 No, a tax qualified retirement plan conducts investment business, it is an entity. It's also not "private lending" if the note is in the entity's name*. It is a personal investment to you and under an administrator that has the authority to make or allow investments at your direction. 

Laws dealing with finance are intertwined, which makes "finance" more complicated than real estate or general business. Various agencies look to other related law or rules in determining how they may apply their opinion. "Being in the business of" as opposed to "private dealings" or "ancillary income" of a business,  come from the IRS Code. First you have business classifications, that you elect. That election as to the type of business you are can change by default when more than half of the income is derived from another or when you spend a significant amount of time in another business classification.

A regulatory agency may look to the IRS Code as a basis to determine if activities are accomplished as a business venture, but they are not required to as they may base their opinion on many other aspects, such as the population activity, are you dealing with three people or 30 or 300? Are you advertising to make loans (clearly a business venture) ? Are you charging points or fees? Are you personally involved in taking applications, processing or any underwriting aspects? Are you getting into brokerage activities, note accounts being churned instead of held as an investment? Are you doing only loans through a business entity, like an LLC? (That is clearly doing loans as a business). They will look at the big picture rather than a lender's claim as to how they operate, or their intentions.

Your SDIRA is the source of your funds, it is a tax animal to make investments on a favorable tax basis. That entity is still subject to applicable finance and lending requirements. as well as you in connection with that entity. A tax plan is not a lending license!

*That area of compliance then falls under the trust administrator, managing your account if the loans are made in the account name. If they are originating and funding loans, they must comply with lending requirements, simply having an SEC license or charter doesn't make them a mortgage lender. There are firms that specialize in tax deferred accounts for mortgage operations. 

However, their ability to act in lending does not allow you to be in the business of lending. Federal and State laws apply apply regardless of your source of funds, but there are exemptions when you fund with your own money, not a get out of jail free card, but you're not as restricted as other lenders that have investors or others involved in funding loans.

As I mentioned, what the public might be engaged in as acceptable or common does not make an activity legal or compliant. 

Books, podcasts, note schools, IMO are not an education in finance or compliance, they are marketing oriented. Most stuff written in the past is no longer compliant. Look to the motive of those "teaching" notes, you may get enough on how to find a note but my guess is that the teaching is designed to bring you back to them when there is an issue and then deal with or through them. You may get some good ideas, but don't take such information as correct, see a good attorney before investing money. :)

  

  

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Shaun Draughn :
Thanks for that run down David Marzullo that actually helped me a lot. I want to get into private lending but was asking myself what the difference was between HML and PML. The thought started under the grounds of PML but quickly turned into HML according to what you just said! I was unaware of the fact that you have to register to be a lender. Definitely food for thought!

If you are 'in the business' in NC, then I suggest you do as Bill outlined and check with an attorney. There are NC regulations out there that most people are not aware of. The North Carolina Consumer Finance Act is one that applies to loans <$15K (you could read as 'rehab' loan), and under the jurisdiction of the NC Commissioner of Banks. Think about it. You can't lend via Prosper.com and LendingTree.com in NC. That doesn't mean you can't do it... just realize there are regulations.

Loans made in NC to entities secured with a deed of trust have some regulatory exemptions that provide relief for people or businesses not in the business of lending an opportunity to lend. But again, check with your attorney before getting in the business of lending, 'private' (still regulated) or otherwise, in NC. My 2 cents.

First of all, make sure you set things up legally the right way when you are loaning someone money.  Your lawyer should be able to guide you on this.

Second, what I would charge in terms of rates and points would depend on the following

  • what is the borrowers exit strategy?  If he is going to rehab and refinance I would give less favorable terms because that is going to take him longer in most cases than a traditional rehab
  • what is the experience level of the borrower?  Do they have past experience executing the exact strategy they plan to employ on this property?  The less experience the less favorable the terms
  • do you have a way to run comparables on the subject property to make sure that the plan going into the project has a good chance at succeeding?

These are just some of the things to ask.   There have been really good points made in this thread as well.

Medium rzt hc 6483Michael Noto, SalCal Real Estate Connections | [email protected] | 860‑384‑7570 | https://www.zillow.com/profile/Mike-Noto/

Thank you all for the thoughts there is much more to this than I thought. I will have to get with my attorney and decide the best course of action. I really appreciate all of the comments, thank you so much.

Dave

Sonya,

The usury law in Pennsylvania is no more than 6% if an amount of $50K or less in loaned. I cannot seem to find if there is a limit over $50K will be contacting my attorney.  But at a max of 6% this is most certainly not worth it.

Originally posted by @David Marzullo :

Sonya,

The usury law in Pennsylvania is no more than 6% if an amount of $50K or less in loaned. I cannot seem to find if there is a limit over $50K will be contacting my attorney.  But at a max of 6% this is most certainly not worth it.

Check to see if this is consumer finance related or if it also applies to loans secured by real property. In many east coast states, loans to entities for real estate are exempt from consumer finance protection laws and in some, there are no (statutory) limits. It's worth the free 30 minute attorney consultation (this is not atypical, especially when you have concise questions regarding your business proposition) to clarify for your state.

Originally posted by @David Marzullo :

Sonya,

The usury law in Pennsylvania is no more than 6% if an amount of $50K or less in loaned. I cannot seem to find if there is a limit over $50K will be contacting my attorney.  But at a max of 6% this is most certainly not worth it.

Check to see if this is consumer finance related or if it also applies to loans secured by real property. In many east coast states, loans to entities for real estate are exempt from consumer finance protection laws and in some, there are no (statutory) limits. It's worth the free 30 minute attorney consultation (this is not atypical, especially when you have concise questions regarding your business proposition) to clarify for your state.