Hey BP Fam, I am trying to wrap my head around how the repayment of private lenders works, specially while using the BRRRR strategy. Can y'all give me some examples of your terms/stipulations. For example, is a specific date of repayment set in advanced? What happens if theres a delay in refinancing? What type of interest does the private lender receive--a set amount? percentage? or interest? Thanks
Its really up to you to structure the agreement. How long do you need the money for? Are you giving up equity?
I use private money for short periods only until I do a refinance of a specific project. My agreement is written up with a 1 year max, but without any prepayment penalties. I know I'll be paying them back in 5-6 months but I write it up for 1 year just in case. I do interest only payments and 1 point on the back end when loan is repaid in full. Also, in the case I should go over the 1 year mark, I have an additional point built in for the lender.
This is just the terms I have come up with. I want to make it attractive for my investors but I also don't want to pay more than I have to for the money. Its really up to you to be creative.
@Justine Scheuher For me personally, private lenders are friends and family and it's whatever we agree to. One example was $90k lent to me for 1 year, and a repayment of $110k. No other points, fees or monthly payments. I was delayed a few weeks for the refinance, but since it was a friend of mine, that was fine. Again, that's one example and it can vary depending on the lender and their needs.
@Tom S. Thanks! That helps a lot! I am currently in the planning/learning phase of my REI adventure and its helpful to see how others do this--especially with family/friends. Keeping it simple/causal sounds great.
@Alan G. This is great! Thank you, I didn't realize how much freedom/creativity I could have :)
You want to structure it so you can repay them whenever you want. You may put a term on the loan, i.e. you have to pay them off within a year or two. But you want flexibility on when you pay them back as it's hard to know up front exactly when you will be able to refinance the property.
@Andrew Syrios thanks! That makes sense.