Private loan question

6 Replies

Hello all,

I am new to Bigger Pockets, I have been reading the forums for about a year as well as listening to the podcasts on my commute to work. I am also a rookie investor from Texas,  I currently have four rental properties that I have obtained all with loans from a local bank at a rate of one property per year. I have heard a lot about private money loans and it got me thinking, how do you structure a private money loan on rental properties? It seems relatively easy to set up private money with a flip deal because the investor gets their money back within a year if everything goes as planned, but with a buy and hold is your investor in it for the long haul with you? and after its paid off are they still a partner, or is just like a bank just a loan with interest? I have a possible private money investor but he is an older gentleman and I don't know if a 10 or 15 year loan would be appealing to him. I listened to Michael Zuber on the BP Summit 2012 Audio, I would be curious to know how his private money loans are structured. I hope all of this makes sense. Thank you in advance for all yall's help.

Makes complete sense.  

A hard money loan or a private money loan are loans that generally carry higher rates of interest than the prevailing conventional loan rates.  The higher interest means less money from the property cash flow goes into your pocket and more of it pays the lender.  

The loan term can be what ever is agreed to.  Often times the lender/investor will want a shorter term but that is not to say someone won't put money out for the right rate at a longer term.  Again, it is what you can agree to on what the lender and you want.  

At some point after acquisition and when the property is able to be financed conventionally operators will take out the hard money loan with a conventional loan.  The big influence there is the rate of interest being paid and how much cash flow nets down to the owner instead of going to the lender.  

Can you make higher interest loans work long term?  Sure but it depends on the property's cash flow and influences on the ease or difficulty of obtaining more conventional rates of interest.  

The lender is invested in the loan until such time as he is paid off or sells the loan to another investor to hold until maturity or payoff.  

I just bought a house today with private money and it is for 10 years. Just ask him how long he would hold the mortgage for.   

You can make any terms you and him can agree on. Your imagination is the only restriction. Listen to what the lender wants and fill his needs, and get something you want for filling his needs.

I bought one property on a 17 year agreement of sale and no money down. This worked for him. This was a deal with the owner and not a lender but it shows some agreements may look unusual.

Thank You, that all makes sense. I understand they will all be very different depending on what agreement you can come to. My bank loans have been just below or just above 4% 15 year and around 60k with the 8-12k of rehab cost included. What in your opinion would be a good starting point for interest rate with a private investor? 

Originally posted by @Hunter Woolsey :

Thank You, that all makes sense. I understand they will all be very different depending on what agreement you can come to. My bank loans have been just below or just above 4% 15 year and around 60k with the 8-12k of rehab cost included. What in your opinion would be a good starting point for interest rate with a private investor? 

 It can be anything you are willing to pay.  He may be happy with 3%. He may want 10%. 

The one I did today I gave 8%. He would have been happy with less, but I want him telling his friends about me.

Another thing to consider, and someone correct me if I'm wrong, but the ability to refinance the acquired home in to a conventional loan with a financial institution will also depend on your debt to income ratio. Keep this in mind with already having 4 other loans. If there's enough equity in your next purchase you could possibly pull out enough to consolidate some of that other debt but this is a point that you might want to ask financial institutions and get answers to prior to taking on anymore debt because this will allow you to either be able to or not be able to refinance and pay your private money lender off. This piece of information would drive your direction on the terms of your private money deal.

Happy Investing..!