What is a realistic minimum to become a private lender?

Question

Hi,

American ex-pat living in Thailand here. I've decided not to invest in Thailand for numerous reasons, and also feel sheepish about investing in the US from out of the country even with a local partner. But private lending is on the radar of possibility.

My question is, what is a good minimum amount to have before offering my funds for private RE investment?

Scott Hollister · Answer

@Gary Clisele I would focus on the price of properties where your local partner is located. It all depends on what type of lender you are, here is the financing on my last two deals in the past 3 months so you can get an idea of how deals are financed.

• Deal 1: Hard Money Lender. They loaned me 90% of the purchase price and funded the rehab at 100% (Around 7k) I did the rehab myself. 12% interest only payment each month with principle paid in full at end of year (Annualized) Points Had to get inspection and appraisals (As-is and ARV)I paid closing costs. Used HELOC to cover gaps ($0 out of pocket)
• 12% interest only payment each month with principle paid in full at end of year (Annualized) 
• Points 
• Had to get inspection and appraisals (As-is and ARV)
• I paid closing costs. 
• Used HELOC to cover gaps ($0 out of pocket)
• Deal 2: Private Money. They loaned at 100% and rehab costs covered. Rehab will be completed by partners and myself. 10% fixed on total amount (120k) regardless of time. (I said 12 month term because this will be a flip, in and out in 6-7 months)No points or costly inspections or appraisals. (You might want to require this on lending your own money, it depends on how comfortable you are in your investor) I know my numbers and have deals under my belt so I have built that trust over time. Investor paid closing costs ($0 out of pocket)
• 10% fixed on total amount (120k) regardless of time. (I said 12 month term because this will be a flip, in and out in 6-7 months)
• No points or costly inspections or appraisals. (You might want to require this on lending your own money, it depends on how comfortable you are in your investor) I know my numbers and have deals under my belt so I have built that trust over time. 
• Investor paid closing costs ($0 out of pocket)

• 12% interest only payment each month with principle paid in full at end of year (Annualized) 
• Points 
• Had to get inspection and appraisals (As-is and ARV)
• I paid closing costs. 
• Used HELOC to cover gaps ($0 out of pocket)

• 10% fixed on total amount (120k) regardless of time. (I said 12 month term because this will be a flip, in and out in 6-7 months)
• No points or costly inspections or appraisals. (You might want to require this on lending your own money, it depends on how comfortable you are in your investor) I know my numbers and have deals under my belt so I have built that trust over time. 
• Investor paid closing costs ($0 out of pocket)

The reason I shared this is so that you can have a realistic idea of HOW deals are actually getting funded. So now you can decide for yourself on what type of lender you want to be. Maybe you start with the guidelines of a hard money lender until this person has verified their worth (in terms of protecting your money).

Long response short: Depends on market of homes. You can purchase 35k homes or 150k homes. My advice is to stick with your bread and butter homes. Your buying pool is larger and financing is easier (That means your money gets rinsed and repeated more often)

This is how I protect my private financing when they finance 100%

Purchase Price: 110k

As-Is Value: 145k (35k buffer for lender)

ARV: 185k (Low value)

Rehab: 21k

Closing Costs: 6k

Total Investment: 136k (Remember this lender still isn't in over the as-is value, but is a little over the 70% rule. But remember, that is with closing costs and carrying costs for 6 months! Every penny needed is included)

End of 6-7 months lender with receive a check at closing for $13,600. (For not lifting a finger! The bank is the best place to be!) IMO

Best of luck Gary!

Account Closed · Answer

Making a couple assumptions and using the generally accepted flipper formula for Purchase Price

PP = 75% x ARV - Rehab Cost

If you were to lend 80% of PP, and rehab was say 15% of ARV, then

Loan amount = 80%xPP = 80%x(75%xARV - 15%xARV) = 80%x(60%xARV) = ~50%xARV

So, generally speaking you would need roughly 50% of ARV for a 1st position 80% of purchase price loan.  And more generally, you could say that to become a private lender you need 50% of the Median priced home for the area you intend to lend in.

For example, let's assume the Median priced home in the area you intend to lend is $500,000, as it is in Long Beach,

50% x ARV = %50 x 500,000 = $250,000

So, you would need $250,000.

Prudence suggests (and she is right most of the time), as well as federal and state authorities, that your net worth should be somewhat more than the loan amount...you don't want to be on the street if you should lose money, and you can lose money.

For example, a lender working through a California loan broker is required to sign a statement that the loan is no more than 10% of their net worth, so, using this as a baseline, a potential lender would be required to have a net worth of

10 x 50% x ARV

Assuming the ARV is $500k, this would mean a lender would need a net worth of

10 x 50% x $500,000 = $2.5mil

The loan amount and the net worth amount would be different for different ARV's, these formulas just give you a general idea.

You could always lend a smaller amount in 2nd position, but this would be much more risky and require much more lending experience.

Bryan O. · Answer

Hi @Gary Clisele I agree with @Scott Hollister that it will be location specific. If I wanted to lend $50k, that would do someone really well in some of the cheaper markets. Here in Denver, that barely covers earnest money! Okay, well, it would not cover much unless they are buying in run down areas. Your area will dictate your amounts. Another concern is time. Is spending tons of time to get a small deal that is over in 2 months worth the cost of your time? Just make sure you have enough in reserve in case you end up needing to foreclose.

Micki M. · Answer

@Gary Clisele I completely understand your hesitation about investing from afar, but don't make that choice out of fear. I'm currently running my Denver-based brokerage and my investing remotely (I'm in Chiang Mai this month) and it's actually helped me focus in and get more done.  Happy to chat about comfort levels etc. Where in Thailand are you?

What is a realistic minimum to become a private lender?

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