I'm currently in scale mode and would like to join forces with a family member who has offered a sizable amount of money to invest. Right now I'm in BRRR mode and have been pretty successful the last year. The family member doesn't have any idea of what they'd want to charge me so It's up to me to suggest a fee structure.
My only question is how much should I charge myself in points and interest?
I'm thinking a HML at 10% is a good return for a family member. The hope is to refinance with a bank in 6-12 months.
Not sure where to start and make it mutually beneficial.
10% and 2 points I would say is a fair market rate
@Scott Thompson Are you basing that from experience or anything of note?
1-5 points and 10-15 percent is what I would say the current market banding is.
From there depends on other variables, but I would agree 10% and 2-3 points is fair for both sides.
I’m a HML
@Jeffrey Calabrese I assume you are, but you're also taking into account that it's a family member?
What I quoted is what I believe to be a fair market rate. With regards to family members I don’t do business with family and would not advise how to discount or adjust based on that alone - that would be up to you
I agree with other posts that the market rate for a HML is 10-12% with some points. However, is your family member an active hard money lender? If they didn't lend to you what return would they be getting?
HML's are able to charge points and higher interest because that is their full time job. They know the business, they spend time in it, they know how to underwrite loans and people and deals. They expect a small chance present to take back your home.
Private lenders, your family member included, are a step further in the passive investor direction than a HML in my mind. They don't do this full-time usually. They don't have to worry about things going wrong as much. In exchange for a safer investment, they should expect less in return.
I borrow from several private lenders and we don't mess with points or amortization tables. If the deal is a flip, I pay 6-months' interest at day 1 and another 6-months' at day 181. If the deal is a rental, we keep it short-term with 2 year notes at 8-10% interest only.
@Michael Glaser it depends a lot of what the family member (or friend in my case) is doing with those funds also, IMHO.
I did a rehab loan on a property that I was flipping, with both the primary loan for purchase and the rehab loan coming from 'private money'.
The purchase was from another flipper that I did construction work for. He had too many homes at once. He sold it to me for $0 down and interest only payments of 6% annual rate. He borrowed HIS money to buy it at 3% from his family members. They were happy to get that as they were retired farmers with hundreds of thousands in CDs at less than 1%. He was happy to make a 3% spread selling it to me, and making 10K on the deal too over what he purchased it for the week before.
The fix up funds came from a family friend who is retired and a former landlord in his younger years. An extensive portfolio of investments with a good portion in CDs as Bonds. He was glad to loan the fix up funds at 3% also. These were both individuals I had known for YEARS and we had total trust in each other, and EVERYTHING was in writing.
Last year, we borrowed from one of them again on a rental house we owned free and clear. He got a first position lean and 5% interest on a 5 year repayment schedule. Similar to bank rates but a whole lot simpler.
These were both individuals that were more looking for a 'better ultra safe return' on the conservative part of their portfolios than someone looking to make an 'better return than the stock market returns'.
Both can be the right answer, just depends on their needs.
There is certainly nothing wrong with borrowing from family - just be sure to be very transparent and put it in writing regardless. I have a 5% loan with a family member who was happy to do that because it was way better than sitting in a money market account like it had been.
6% interest is good enough
@Michael Glaser Yes I am basing that rate that we charge here in Houston at Tidal Loans. Also regarding it being a family member, I've personally done loans at that rate with no points. One thing I wish I did with my family member was record a deed of trust at the the county like we normally would.
Lesson learned, lets just say that loan had a number of extensions.
It depends on your relationship with them, how experienced you are, and what their expectations are.
My personal philosophy is that I don't pay my PMLs more than my HMLs. When I first started in real estate, I paid them 20-30% since they essentially jump-started my business. Now I pay them more like 6% because I get hard money at 7-9% and around 1.5pts.
I talk more about private money (and how it can be worth it to sometimes pay even more than hard money) in this thread: