I'm new to private money as an investor and want to make sure I understand the mechanics so I can build reliable models. Here's an example deal:
I purchase a property for $235,000 and expect $50,000 in repairs and $5000 in escrow/title expenses. Total cash needed for deal = $290,000.
I'm confident I can refinance that property 6 months later at an ARV of $425,000.
I borrow all of the cash needed from a private lender and agree to pay 10% interest on the back end.
After a cash-out refinance at 75% of $425,000, I'm, left with $318,750. I then pay the private money lender after 6 months their original $290,000 + 10% or $319,000 and I basically break even and make no money other than the monthly cash flow (money I didn't have before, I realize).
- Despite the actual numbers, is this a reasonable and/or typical private money deal?
- Is a "10% deal" normally independent of the pay-back length? Is "10%" an annualized percentage rate or a flat rate of return? If I pay her back in 6 months, would I actually owe half of the annualized return rate or 5% of the total cash borrowed?
- Unless I'm missing something, I need to find deals where the all-in cost is no more than 68% of the ARV just to break even or turn a profit, correct?
- My only option to for making more profit (other than reducing the all-in cost as a percentage of ARV) is more favorable terms with the private lender (i.e. 8% return).
I found these numbers surprising since most of the BRRRR examples I read and hear about talk about all-in expenses being 75% of the ARV.
Thanks for reading and for any advice/clarity you may have.
Basically you are correct, if you annualized the return and pay them back early they would only make the interest up to that point of pay back.
Don't forget you need a mortgage and note to secure the investor's money. You didn't mention it so just making sure you are aware of that aspect. 10% seems to be the average rate with private lenders.
@Harv Yergin IV
1. Yes that looks typical
2. I usually pay 10% annualized. Generally a smaller rehab like you are talking about here would take 6 months or less so you could save some money there.
3. This would be true if it took you a full year to rehab.
4. Something I do to hep bring in some money is to do some of the rehab myself. For example I like doing flooring so I might do all the flooring and pay myself $8000 for the work. That definitely helps my mindset because it sucks working on a project for 6 months without getting paid at all. Sometimes the cashflow doesn't come immediately after renting it out because new tenants seem to find little issues no matter how much of a great rehab I do.