Typical Private Lending Rates?

Question

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

Thanks,

Dave

Account Closed · Answer

@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

Bill Gulley · Answer

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. :)

Chris Martin · Answer

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.

Chris Martin · Answer

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.

David Marzullo · Answer

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.

David Marzullo · Answer

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

Michael Noto · Answer

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.

Chris Martin · Answer

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.

Julian Buick · Answer

@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?

Johann Kleisch · Answer

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!

Typical Private Lending Rates?

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