Long time reader, first time poster. I have been reading bigger pockets for some time and have been going through my circle of influence to find private money. I am somewhat lucky in that I have a private lender willing to take my meeting and entertain the idea of doing business with me on fix and flip loans.
My question is what are some of the typical agreements made between a private money lender and a flipper?
- 10% flat interest on the amount borrowed
- a certain interest rate plus a percentage of the profits?
- A percentage of the profits without an interest-rate?
@Walter Ciucevich Congrats on using private lenders. I think the answer to your questions completely depends on the relationship you have with the lender. If they are close friends/family, the conversation can be a more open one regarding what they "need" to make it work for them. If it is more of an acquaintance type relationship then I think you have to run the numbers and bring your best (or close to best) offer to the table. That is if the first meeting goes far enough to actually talk that detailed. The first meeting might be more of a "this is what I have done" and "here is where I see myself going" conversation to see if they are interested in that. If you are experienced and have other lending options and they are just "another" lending option then I would keep it low (6%-10%) interest rate with 1-2 points. If they are your only option to do deals other than hard money lenders than maybe you bring them in and do interest plus a % profit or increase interest and points. If they are close family and friends you can probably get away with 8%-10% interest with no points. I currently have 6 people that will 8-10% with no points depending on the deal. I don't think you will have much luck with percentage of the profit with no interest type of loan unless they are really close family/friend that is wanting to help you out. I would also not even bring that up unless you are pretty experienced or they are pretty experienced. Ethically you should have some financial responsibility to take care of your lenders and if you and they don't have any experience, you are setting yourself up to fail with someone else's money. I would have a hard time sleeping at night. If on the other hand this person is very experienced then you could partner with them and split it 50/50 and you could have them help you learn.
Find out what your pricing is with a HML and then try to get better terms with them.
/edit 10% interest, payable when you sell the property is a good deal though that you likely won't beat with a HML. Note that you don't want to pay 10% over the term, you want to pay 10% for a year term. i.e. if you get out at month 6, 5% interest is paid.
@Walter Ciucevich a lot of the 'going rates' are dependent on the flipper's experience and track record. Most of the full time flippers I know are used to paying 10% interest on 90% of the project. But they didn't start out getting that on their first deals. I see a lot of first time flippers using other people's money at 30-50% of the profits because of the added risk.