Interest Rates Question for Private Lenders

12 Replies

Hi Roberto,

It's really whatever you can negotiate but it's usually always less than hard money. Keep in mind rate is not usually the big issue since it's short term money, you want the lender to make money so they're happy to lend you money again. Anyway, best of luck!

Dave

@Roberto Westerband , there are several different kinds of 'Private Money' that get discussed here. 

The first  would be Private Money from people that are trying to make a 'high return' by putting their money to work in 'alternatives to stocks' or similar. They might be looking for say 8-12%. In my mind, these people are ACTIVELY looking for these deals.

The second in the kind we pursue and what I call 'accidental lenders' - not meaning that they didnt WANT to, but that they had not thought about it until someone like you or I presented an opportunity to them to put their 'low yielding' money to work making a better return.

The deal we just did was using a property we own free and clear and taking out a Private Money first position loan - think a HELOC - on it to use as a partial down payment on the purchase of two additional properties. The property is worth about 85K, brings in $1000 months in rent and we borrows 69K on it (80% LTV). Our lender who is a family friend has a portion of his portfolio in CDs @ about 1% or so. We offered 5% and a 5 years amortization schedule. We were both happy with what the deal offered - a win-win if you will.

I think part of the puzzle in finding these kinds of lenders it to make a list of all the people you know who MIGHT have a higher net worth, or a sizable portion of assets in lower yielding investments like CDs. In my case that was a list of maybe 50-70 relatives, friends, and past customers from my construction business. The last group consists of mostly people building or remodeling 500K-750K second or third lake and vacation homes. Chances are they have some sizeable investments :-)

Although I have only done deals with the one lender so far, all of the 3-4 others I have talked to are interested in at least sitting down and hearing what we have to offer and see if it would fit for their goals. If does definitely help that we have a 25+ years of stellar reputation in business and take top notch care of the rentals we have also.

Dan Dietz

Hi Roberto, if you're talking private lending companies, usually rates are anywhere between 7% - 9.9%. The terms vary some offer 10 year while others 30 year. On average investor either refinances or sells the property 7-8 years.

There are interest only options out there, usually it's 3 years, the rates will be higher. These would be 9% - 10%, perhaps higher as you're nearing hard money territory (usually 12 - 18 month terms). 

Private individuals also lend but their rates/terms are all over the place.

@Roberto Westerband what @George Despotopoulos is saying is somewhat misleading. There is actually no such thing as a private lending company. If a company advertises that they lend money they are not private. They just made it public that they lend money and this requires a license. A lot of hard money lenders use the term private lenders because they think it sounds more appealing than hard money lender but they are in fact hard money lenders. Private lenders are individuals that lend their own money. I guess technically a person could set up an LLC and lend money from that LLC which could then be considered at private lending company. But if they advertised that they lend money they would need to have a license. Individual private lending rates vary widely, depending on the riskiness of the deal and the sophistication of the private lender.

Hi @Julian Buick -- There can be private lenders who are in fact private lenders offering rates in between traditional lenders and hard money lenders. Where a hard money lender usually starts at 10%, a private lender may offer rates as low as 6.5%.  To say private lenders use that term because it sounds more appealing may be true but that is a broad and general statement. You can tell the difference if you're dealing with a hard money lender or private lender within 30 seconds of speaking about their rates/terms/fees. I do not know how successful such a practice of mislabeling yourself as a private lender would then be. They are two completely distinct and separate categories.

With regard to needing a license to advertise, could you provide more information on that or cite to a source for this. In many states you do not need a license to lend $50,000, and up, on non-owner occupied residential real estate. Most hard money and private lenders operate in that space. It would seem counter-intuitive that you need a license to advertise in such a state.

Roberto, 12 month loan terms are reserved for hard money or bridge loans. These are primarily for fix and flips or buy/rehab projects. They're usually not 18 months from the start. It's 12 moths and then lenders allow for one or two extensions for a fee. Hard money usually doesn't have prepayment penalties so you can use this to brrrr. You'd get a hard money loan at a high rate, do some work to the property where appropriate, get higher rents, hopefully increase your equity and do a cash-out refi to pull some money for your next deal. 

Not many lenders will offer you rental property financing at 24-36 months. Most start at 10 year terms, 30 year amortization. 

There are non-traditional lenders that may entertain a 3 year term but rates won't be in the mid to high 6% and these lenders may also have prepayment penalties.  

Again this is strictly speaking of non-bank lenders dealing with non-owner occupied investment properties. 

@George Despotopoulos I said hard money lenders use the term "private lender" to sound more appealing, when they are not actually private lenders, they are hard money lenders. You seem to think there are two different types of lending companies; hard money lenders and private money lenders. As stated previously, private lenders are not companies, they are individuals that lend their own money. I saw that you stated in another thread that private lenders have seasoning requirements for lending on refi's and they are not as strict as a hard money lender's seasoning requirements. Where a HML might have 2 years, a private lender will only require 6 months or something. You just made that up. Private lenders can and will have their own underwriting requirements based on the sophistication of the individual. There is no rule that says private lenders rates will be somewhere between conventional and hard money. You just made that up too. A private lender can make a loan at 0% interest if they want to, and they do all the time. Mostly for a family member or close friend, to help them out of a bad situation. On the other end of the spectrum they can charge 24% or higher interest, it's definitely not uncommon. I'm guessing that the rates that you are throwing out there for these "private lending companies" are actually the rates that your company, a hard money lending company, charges and refers to it as a private money loan. Either way, it seems like you are trying to promote your services, which is fine, I see people do it on the forums all the time. It's just not really allowed is all.

Hi @Julian Buick  

Can you cite/link to where I stated that "private lenders have seasoning requirements for lending on refi's and they are not as strict as a hard money lender's seasoning requirements." I think it's unfair to make a claim w/o substantiating it. I generally do not speak in absolutes, especially in lending or law, as both are fact-specific and vary depending on the parties or circumstances involved. If you saw something I said somewhere else on BP it would be more fair to address/challenge this statement there in that other post. Not merely claim I said it here where no one can verify it's basis. 

Also, you did not provide information or a source about needing a license to advertise being a lender like you mentioned in a previous comment. (you said: "But if they advertised that they lend money they would need to have a license.")

Private lenders, or rather non-bank, or non-traditional, direct lenders (although, please note, many individuals on this forum and elsewhere refer to lending companies such as Lima One, B2R, Lending One, etc., as private lenders,) typically have much more stringent requirements than hard money. 

Seasoning requirements and hard money is uncommon; not many people are looking to do a rate/term refi w/ hard money, that wouldn't make sense unless you started off with a rate greater than 14% and term of only 6 months and you're looking to for whatever reason go to 12 months and 12% (hypothetically speaking but again that does not make much practical sense)....Also, you also don't come across many borrowers looking to cash-out w/ hard money, the rates on cash-outs are typically higher than purchase money loans or rate/term refis, combining a cash-out with hard money would result typically in a high rate, high fees, and short term.  So seasoning requirements rarely come into play with hard money. And given that hard money traditionally is based on the asset only, with less stringent requirements, and the goal is to fund quick, it's hard to see a situation where obtaining hard money would have more requirements, in general not only as it relates to seasoning, than a private lender or non-bank direct lender. 

You stated: "Private lenders can and will have their own underwriting requirements based on the sophistication of the individual. There is no rule that says private lenders rates will be somewhere between conventional and hard money. You just made that up too."

Private lenders can have their own requirements, as can hard money lenders, or any non-traditional non-bank  direct lender, as long as it doesn't run afoul of state/federal statutes and regulations. I never stated there are rules across the board or rules that private lenders or non-bank lenders must follow/implement. In fact, I always preface anything I say with that my experience/opinion/comment is applicable to non-bank/non-traditional lending & non-owner occupied investment property space and that rates/terms vary b/w lenders. And I do add that there are general standards/requirements from lending companies, like the ones mentioned previously, and that typically a potential borrower would be see rates in a certain range. 

I think you're running afoul giving advice that may put some lenders at risk when you say, "On the other end of the spectrum they can charge 24% or higher interest, it's definitely not uncommon." Usury laws have long existed restricting the amount of interest that may be charged for money loans, particularly “private” loans made outside of the traditional banking establishments. If a loan exceeds the maximum criminal usury rate, the lender may be prosecuted for committing a felony. This is state specific and I know in certain states 24% or more would be considered excessive. 

"I'm guessing that the rates that you are throwing out there for these "private lending companies" are actually the rates that your company, a hard money lending company, charges and refers to it as a private money loan. Either way, it seems like you are trying to promote your services, which is fine, I see people do it on the forums all the time. It's just not really allowed is all."

I do not promote anywhere on these forums, not even in the marketplace, so this is your assumption and interpretation of my post(s). I think this may be stemming from the fact that you are a private lender and have taken issue with my use of the wording "private lending companies" or "private lender" in general. And further, perhaps the rate range I mention that typical lenders give in this space may be coming below what you offer to borrowers?

Not here to combat users or put down others, only want to foster growth and further provide info for other users. I am happy to discuss/debate issues and questions or field challenges about things I've said. Not interested in what is essentially unsubstantiated claims. If you see something I post elsewhere that you disagree with I suggest addressing it in that threat/post, not attacking it elsewhere. I'm fairly active here and my posting history is extensive. Not many people have the time or care to go through to find what you're referring to and validate whether it's accurate or not. It's  unfair and comes off as inflammatory. 

It really varies a lot. With the private lenders we use, it's usually 8-10% with no points. Usually the term is a year, although we've had loans with no term at all. Hard money lenders usually want between 12-15% plus 3-5 points and some other fees. Which, of course, is why we prefer private lenders.

@George Despotopoulos aha, now I get it. Lima One, B2R, Lending One, etc. are not private lenders and referring to them as such only confuses people. The OP was requesting info on what rate and terms private lenders charge. Your response is more aligned with what those companies charge and not private individuals. Private individuals rates and terms can be all over the map. That was my point.

@Julian Buick exactly. You're right about that. I agree, I know of private lenders whose rates/terms vary greatly. I think the confusion comes that many individuals on BP think of companies like those as private lenders, and refer to them as such, sometimes I too may intertwine them all. I think it's best to refer to such lending companies as non-bank lenders or direct lending companies. I do get what you're saying and where the use of it in such a manner could lead to further confusion. If I respond to a private lender question I'll clearly define what I'm referring to and try to keep the distinction clear. 

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