I had a question about how private money works... If I have around 75k to invest but need about another 25-50k to put down a down payment on a decent multi-family I was thinking that private money would be the way to go but I had a few questions...
Is private money lending a short term deal like hard money or can you extend terms for say 5 years?
If I received 50k from a private source how do banks look at that when they require a 25% down payment? I would think that they look at that as an additional loan so I wouldn't have the 25% down that they would require.
Based on the question above about banks... if getting private money do you normally fund the entire balance of the property with them since in my situation I wouldn't have the full 25% down payment?
Thanks for any help you may provide.
Honest to goodness private money is from someone you know and who trusts you with their money. Most of what you see advertised as "private money" is really hard money. And the broker or syndicator who's making those loans often gets the money from private individuals, so the name is somewhat appropriate. But, as you seem to understand, hard money isn't what you need. That's short term, high rate, and a HML will rarely take a second position behind a first.
True private money will come with whatever terms you negotiate with the lender. If its done as a loan, then it needs to be disclosed to the first mortgage lender. Commercial lenders will sometimes allow this. Though, if they want 25% down, they might not a 75/10/15 split (them/second/down.) But they might do 70/15/15 or some such. That is, a lower LTV than if it was all your cash. And might charge a higher rate.
An alternative is to do this as an equity investment. You and your private money partner form a partnership, pool you money and then the partnership (typically an LLC) gets the loan on the property. Now, the partner gets an equity interest, so a split of any profits from owning or selling the property. You could collect management fees for running the business like this, which are an expense for the business. Here, again, its whatever you can negotiate. This is more complex than a loan because you're "selling securities". It may not make sense for a small amount like you're discussing because of the costs to set up such a structure. I have some investments like this and I've been told its about $25K in legal fees to set one of these "private placements" up.
I have recently learned that when getting a commercial loan like this the lender will want your net worth to be greater than the loan amount. So, that may be a factor in doing such a deal, too.
@Jon Holdman thanks for the information. Looks like I need to find out how my lender looks at this.
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