How are you structuring your private lender deals?

6 Replies

Hi Guys!

New pro member here!  This is my first post!

I am gearing up to close on another deal, this time using private lenders to provide a large portion of the down payment.  I have a few basic questions I would appreciate your feedback on!  This is an income property that will be a long term hold. Income is strong, but there is opportunity to improve upon the current rent role with a few thousand invested in a basic clean up.

At the risk of sounding like a total newby... How are most Private loans structured?  In a perfect world this would be a 1 year loan of about $25,000.  I have a network of friends and family that are excited to invest in the deals I have, so I am NOT looking for new lenders.

My biggest questions are these:

What is a reasonable interest rate for a loan described above? is it unreasonable to think I could be in the range of 8-10%?

What are typical terms on an income property?  Is 1 year "normal"? Are monthly 'dividend' payments made, or is it a lump sum at the end of the year?  Both would be feasible given the current income stream.

Has anyone offered their investors a split of equity and debt?  I would prefer debt only.

What do your agreements look like?  I will need to be in contact with lawyers to have something drawn up I assume?  Does anyone have anything I could look at?

Thanks in advance!

Rob

@Robert Napolitano   Welcome to BP Robert!

If you're just working with friends and family, discuss what they're looking for rates and terms. I've done a few for rates of 7-12%, 1 year, usually interest only with monthly payments and the balance due at the end.  

Yes, definitely use a lawyer but the paperwork shouldn't be too extensive.  The actual note should only be one page. 

You mention you're using this for a downpayment - is your bank OK with that? Sometimes the bank (1st mortgage) won't allow 2nd's.  And sometimes partners won't do the deal without it being a 2nd mortgage.

Thanks @Tom S.

This will not be a traditional mortgage, it is a business loan and due to the debt coverage ratio they are ok with a second mortgage as long as they remain in first position.

I closed on 3 units with the same lender on the 1st of October this year with my own capital.  I will be able to cross collateralize with those after a 12 month holding period.

Thanks for your help Tom.  I will consult them them.  If I could be in the 8-9% range I would be happy!

Does anyone have an example of a note they have used for a private lender deal?  I would appreciate seeing an example.


Thanks in advance!

Rob

I've got a friend that funds parts of my deals. I believe you need to take care of the person lending you so they will keep lending you. I offer 10% interest only payments for a 6 month to year loan term, at the end of the loan I pay the principle back and give him an additional 5 % of his principle. I put in the agreement that it will be paid back as early as 6 months but no later than a year. If I'm out in 6 months it saves me on those interest payments and he still gets his 5% at the end plus whatever he has made in interest to that point. It might sound expensive but this is off the books money and that carrys a lot of weight to me, not having my credit dinged or showing a brand new loan on my credit report bringing the score down when i go to finance it long term is a huge help if your financing in your own name. Might not work for everyone but I have done this for a few deals succesfully.

Does anyone have an example of a note they have used for a private lender deal?  I would appreciate seeing an example.


Thanks in advance!

Rob

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