Private financing from a friend - what is a good deal?

Question

I have a friend who has a lot of cash parked and wants to invest in real-estate.

He is willing to finance 100% of the deal which fits with my situation of having a lot more deals than I can personally finance.

Quick summary:

- I have two single-family rental properties that have done very well but they were financed with conventional lending so I'm a newb at presenting a fair offer to a private investor

- Investment would be for $185,000 for a single-family home

- House will clear $500 / month in NOI

- The house will pass a standard inspection and appraisal (I already attempted to get this property through conventional financing but it fell through because it's a condo with > 80% of the units rented. In that process I went ahead with the inspection and appraisal to see if it would make sense to pursue this option).

- My goal for the property is to buy and rent/hold long-term

- The property needs very little renovation , has been nearly completely updated with new kitchen, appliances, carpet, hardwood, paint, toilets, etc.

Questions:

1) Assuming I'll want/need to give the lender additional security by making the loan a secured loan?

2) What is a reasonable interest rate and term? I was thinking about a combination of interest rate (let's say 5%) + 5% equity in the home where if we refinance or sell they would get 5% of the home value.

3) What is a fair amortization schedule? (i.e., If the deal is financed at $185k over 30-years then I would pay $993.12 each month. If I were to refinance or sell early then we would lookup the ammoritzation accrued -- does that seem fair?

4) Any other best practices on financing this deal with me providing 10% or less down?

Thank you BP community!

Account Closed · Answer

Your question: "What is a good deal" For you or for him? It's whatever floats both your boats. Have a discussion with him. He could be investing where he is making 50/50 splits on properties. What is your point of reference? What does he want for his money? Return? Safety? Cash flow? Equity? Quick Cash? Diversification? Tax Shelter?

Your Update:

Your comment: he wants "best possible return over 3-5 years"; That would be 50/50 splits on properties, or quick cash or fix & flips or Subject To or Wraps. What you are offering doesn't come close to "best possible return over 3-5 years" so I'm not sure how to answer the question. What you are offering him doesn't fit his criteria.

Basit Siddiqi · Answer

1. Providing the lender with collateral(the property) does give him more assurance and a peace of mind.

2. A reasonable rate of return for him is a rate higher than he normally can get adjusted upward if your deal is riskier than his current investments.
This is something that can be negotiated from both sides - I would have to guess it to be somewhere from 6% to 10%.

3. not sure what your asking here

4. Condo's have bylaws that normally protect the interest of the other owners inside the condominium. With that said - they normally want people with strong credit profiles with large down payments(above 10%) so the others aren't at risk if you default.

Private financing from a friend - what is a good deal?

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