So I have maybe silly question about private money interest rates. I've got a potential person I can work with as a first time private lender, however I want to make sure when I try to convince them of their ROI I'm doing it right. So here is my question. If I say you loan me $X and your return is 12%, is that 12% of the total loan, 12% annually, or just 12% on however we decide to do it? If it's the latter, what is common practice for interest rate returns on a private loan?
How the interest is calculated, provided you are within the bounds of the law, is up to you and the lender. Here most commercial lenders compound monthly or semi-annually (depending on the type of loan).
When I lend privately, I use an annual, simple, interest rate (no compounding) to keep everything strait forward and "simple" for both parties. If pre-payments are allowed, we will calculate/accrue the interest monthly to account for the changes in principal over a 1-year term.
Usually you would do an interest only loan if you are rehabbing the property. Lets stay simple, 100k loan at 12% or 1% per month. Payment is $1000 per month as long as you have the loan. If you rehab the property and sell it in 5 months you will have paid 5k in interest plus the 100k back. It is usually on an annual basis.
Makes perfect sense, I like keeping things simple. Thank you both for the quick responses!