Unlike a bank, a private investor (not a hard money lender) is looking to get their principle+interest within a very short period of time, 1-5 years. Whether they're getting interest only at first or a one-shot balloon payment at the end of the deal term, it doesn't matter: what matters here is that it is a short period of time.
With private investors looking at anywhere between 7%-12% ROI, there is no way a property investment can afford that kind of investor return unless it (1) a BRRR play or (2) a flip. In other words, you're typical buy and hold won't accumulate enough cash flow.
True or False?
False! A private money investor could have money in a self-directed IRA and is looking for a long term, consistent return. I also have borrowed private money at 5.5% for three years with the first payment delayed 4-5 months to give me time for the rehab. Don't make negative assumptions.
We have rates starting at 4.99% Stated Income if credit score and DSCR are high enough and LTV is low enough. The rapidly expanding Private Equity market is ever driving prices, through competition, downward in the direction of bank pricing.
Brad Smith, Lender in MD (#1036015)
Thank you gentlemen for your feedback. The network of private equity investors I have access to would expect nothing less than 7% interest. You're seeing requirements less than that, which is an advantage by all means. Ultimately though, whether 5% or 12%, what I was trying to determine from my question/post is whether a forced appreciation of sorts is required to render the private equity funding model a workable one. Now if you're borrowing at 5% it means the appreciation has to be less acute than if borrowing at 12%.The point is, one cannot borrow money without using part of it to rehab a property. Once the rehab is done, you either flip and return the money to the investors or wait the seasoning period out and cash-out-refi the property paying back the investors.
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