How are buy and hold deals structured with private money?

8 Replies

If I want to buy and hold a property and would like to use private money, how are those deals typically structured? Do private investors want an equity stake? Provide a short-term loan? Long-term loan? Something else?

Terms will vary from one lender to the other. Be careful who you trust and NEVER pay advance fees with the exception of an appraisal. Since you want buy and hold money, you need to find lenders that are good with longer term notes. Most, HML are going with shorter term arrangements. I know one BP guy that just offered me money with a 5 year term. I am pretty sure they are writing the loan and then selling the note, and making their money on the points up front.

Hi @Richard P. there are private lenders (individuals lending their own money through an entity or in their personal capacity) and there are also non-bank direct lenders (financing companies). @John Thedford made some good points. Although, I would say, many financing companies, like some traditional lenders/banks, charge an application fee. Usually this is around $299 - $500, depending on the institution (most I believe would be around $299-$399). This application fee covers the underwriting of your loan (and includes the credit report, valuations, underwriter's time, background check, etc.).  I believe John is saying (correct me if I'm wrong John) is that you should never pay a lender who says they need the origination fee upfront and I agree with that 100%. The origination fee is usually anywhere from 1.5% - 2.5% of your loan amount. It also should be earned by the lender ONLY IF your loan is funded and closed. 

Although, definitely do your homework and do not pay a lender an application fee without first establishing 1) that they are legitimate and 2) in what circumstances that application fee is refundable. 

Most financing companies will fund 70%-75% of the purchase price (or 70% LTV of the refi based on the property's appraised value) and give you a longer term (can be anywhere from 10 yrs to 30 yrs depending on their loan program). The interest rates will range from 7% - 9.5%.

If you want short-term capital (usually 12 months) then the rates are a bit higher in the 10% - 14% range. The origination fee will usually be from 2% - 4%. The benefits to short term loans are that they are interest-only payments, with the principal due at maturity, you can close quicker, FICO isn't much of a concern, you can get 80% LTV, and there is no prepayment penalty. The negatives are the high rate, high fee, and short duration.

Happy to answer any follow-up questions!

Thanks @George Despotopoulos for your comments on financing companies -- good advice.

Do you have any comments about how individuals are usually trying to invest their money?  It sounds like, from your previous answer, most financing companies are just looking to service a loan and don't take an equity stake.  Do you find that to be the case for individual lenders (e.g. individuals of high net worth)?  Do individuals generally charge some sort of application/origination fee?

Generally we want a first position note on the property and a term is established. It would be your responsibility to pay off the loan, refinance the loan, or extend the loan for a cost.

Hello there, I may be misinterpreting the question asked by @Richard P. but typically for buy and hold, private money would be used for the acquisition phase (the 'buy' of the buy and hold) and then you would transition into long term money as an exit strategy for the original private money loan.  

If you buy with equity or create equity through rehab, you can have great success with this strategy, using other people's money to build a rental portfolio! (I often feel like I am just shifting money around, but getting houses out of the deal!!)

IF, alternatively, you are referring to private money for investment, it gets a lot more complicated.  You are talking more of a long term type of partnership.  I have done partnership deals with investors on short term flip deals, but would vet a partner a lot more closely on a long term deal.  

I guess the only advantage to a direct partner for long term investment would be to scale up quickly, if you have the experience and team in place to make it happen and they have the financial resources.

I am not sure I would consider such an arrangement to be honest.  I love owning 100% of my own rentals and having 100% control.  It would be hard to have to ask someone, or get approval for, an expenditure for a property that I own (or co-own). 

Hope that Helps!

@Richard P. @James Ihssen James makes a good point. Private money can be different than a private money lender. Richard I believe the question you are asking is: "How does one financially structure a long term hold using someone else's money?" There are many ways this can be done: equity, preferred return, preferred return with equity, a note, etc. The way to best determine what works best for you and your investor is understanding each others goals and objectives. If your investor is looking for passive income, then perhaps a note at a lower rate. If your investor is seeking growth, then perhaps an equity position is a more appropriate option. It is important to create a win win for both parties. Either way, the property can be set up in an LLC, and then the two of you can figure out what is the best arrangements for both of you.

@James Ihssen Great comment! I guess the key would be to acquire the property at a good price such that its value can be improved enough (I'm guessing primarily through rehab) to refinance through more conventional loan methods. 

As an aside, supposing that I can get close to %100 percent financing (because the deal is so good) from a private investor, is it more typical to pay for the rehab costs with your own money?  Are there cases where private lenders will fund both the acquisition and some rehab?

Hey @Richard P. , good talking to you on the phone earlier this morning.  From a private lending standpoint, I am sure they will cover the rehab costs although since it is private money, it is basically whatever deal you negotiate with the private lender.  

Personally, I do not finance the rehab costs as I find it to be tedious and not worth the extra costs involved.  Not everyone can fund their own rehab costs though.

I do not like paying for draw fees and lender inspections and all that is associated with funding rehab costs.

Now If I was intending to rehab a larger multifamily property that may be a different case.

Good Luck with your move!