Private Money Loan For Rentals
Hello all!
I've recently had a couple forum posts regarding hard and private money financing, then financing into a mortgage, for a rental. I've slowly been learning both avenues and hopefully I'll have a better grasp after this post!
My remaining uncertainty lies with private money. I've heard of instances where private money was used for the purchase and rehab and the borrower wasn't required to make any interest payments (as with hard money), with the lender collecting the principal and interest at the end, after the refi. I was simply wondering if this is possible and how it would work with the refi. How would the private lender's principal balance and interest be paid back?
Any guidance or clarification would be greatly appreciated! Thanks!
Mikael W.
Most Popular Reply
I wouldn't say that being creative is being demanding. I think creative financing is even more necessary when you're starting out, especially when you don't have the cash in the bank for the 20-25% down plus any repairs. Talk to friends/family/coworkers and tell them what you're doing. Don't beg for cash and don't demand it either. Simply have the conversation, some times people will offer to help or get involved all on their own. There have been plenty of books and BP posts/podcasts that talk about private money and creative financing.
Say you are buying a duplex at $70k with an ARV of $160k and $40k in repairs. You need $14k down at 20% plus the repair, so $54k. Most people don't have $54k sitting around in a savings account these days.
Talk to 20 friends, family members and coworkers (don't break solicitation rules!). Maybe 2 of them offer $5k each towards the rehab costs, and you agree to pay them at a 10% interest in a balloon payment at refinancing. You also have $10k in your 401K that you can borrow at a very modest 3% (that's what mine offers right now). Next you can talk to a hard-money lender and get a $20k loan towards the rehab at 10% with monthly interest-only payments and balloon payment at 12 months. Finally you attend a local REI meeting and tell everyone about your deal, and someone expresses interest in partnering on the deal. He offers to give $10k in exchange for 20% of the profit.
Now you have $40k in "creative" financing that doesn't have to come out of your savings account. Out of the $54k needed to do the purchase and rehab, you only have to come up with $4k out of pocket. If you still need more borrowed money, you can keep going with other financing ideas, such as a HELOC or equity loan on another property (to include your personal home).
Once you're done rehabbing in, say, 9 months, go to a bank and do a cash-out refinance for 15 or 30 years (whichever you prefer) and take the net cash and pay off all of the creative financing, and you keep the remainder. Assuming you did your homework right, and the rehab didn't go too far over cost, you should have cash in your pocket, which you can now use on your next project, while keeping the first one.
While it is a little complex, creative financing can be a very good way to pay little out of pocket, especially when you're just starting out.
Just my $0.02.
- Austin