Greenville, SC · Member since 2017 · 27 posts · 5 votes
Question for private money deals:
For those doing flip projects - how are you structuring your deals with your private money lenders whom don't require points. For a flip project in which you need 100k, are you offering them (lets say) 8-10% interest monthly or on total return after the flip is sold. For instance, a 100k private loan at 8% for 3 months would be 667/mon --> 2000 total return whereas 8% return on the 100k would be 8000. Obviously, the 8k return is more attractive for the private investor and less attractive for you as the flipper but wondering thoughts on how some of you all go about structuring deals where you are dealing with interest only payouts? Thanks!
@Sean Eads When you talk interest with a private lender, you typically are calculating a simple interest balloon note. Your monthly payments will be $667 with a balloon payment of the total amount due on a set date, possibly 6 months or a year depending on the project, if it doesn't close sooner. Typically investors want at least three months interest if you somehow sell the property faster. The investor will only get the $8,000 if you hold the property for a year.
I just recently acted as a hard money lender for an investor in my area. They are newer investors and offered me 20% interest-only payments for 12 months with the intent to be out of the loan within 3 - 6 months. Mind you, there is quite a bit of meat on the bone which makes this palatable to them.
I think the interest rate will depend on your overall experience and relationship with the lender. I personally got a 15% hard money loan in STL quite recently. The terms are up to you and the lender, but I've seen anything from 0% to 25% [e.g., using credit cards] with interest only payments or no payments until the sell.
Bottom-line, it's up to you and your lender to determine the terms. If the numbers work with the terms identified, run with it! Happy hunting!
@Frankie Woods would you be willing to share a template as to how the terms were laid out on paper? I have some interest from family and friends to invest, but looking to create an agreement to review with them. Thanks in advance.
@Sean Eads When you talk interest with a private lender, you typically are calculating a simple interest balloon note. Your monthly payments will be $667 with a balloon payment of the total amount due on a set date, possibly 6 months or a year depending on the project, if it doesn't close sooner. Typically investors want at least three months interest if you somehow sell the property faster. The investor will only get the $8,000 if you hold the property for a year.
@Eddie Sorrell How did it go structuring your deal? I’m in that boat currently. I have a couple relatives interested in contributing to a duplex I’m trying to buy. Any advice you have is appreciated. Thanks
@Eddie Sorrell@Pamela Brady You could also consider offering an 8% - 15% (pretty standard) interest rate, paid in one payment, instead of monthly payments. One of my clients in Phoenix, structured her deal on a $200k loan, with 10% paid out in one lump sum, one year from the date of the contract. Also, If you need a loan agreement, Rocketlawyer has a great template to use. PM me if you need to create an agreement, as I have an account with them.
Thanks Charity. I will definitely reach out to you once we decide to move forward with the deal. I am in the middle of a rehab so I am not in a rush even though I should be :)
@Sean Eads
We get acruing loans at an annual rate. If we pay back in half a year, the lender gets half a years interest and the original investment back. If you can negotiate acruing loans, you can afford to do more at once.
Going the hard money route, expect to pay 8-14% interest and 2 to 3 points. If you have a more creative lender, you can structure it any way you want, including a lower interest rate with a profit kicker on sale. Some lenders will trade a little interest income in exchange for some of the ups. Benefit to you is a lower base cost of capital/managed risk. Downside is, you knock it out of the park and write your lender a big check (and end up feeling like you left money on the table).