Private Money Loan Structure?

2 Replies

Hey everyone, I’m working to get my first deal going and will probably be going the private money route, at least for the down payment. This would be for a long-term hold focusing on cash flow as opposed to immediate equity gains. So I probably won't be doing a cash-out refinance. Because of this, I want to make sure I understand how deals like this are usually structured. Any and all feedback is welcome. 

And of course, I understand that every deal is different and it depends on the property and the numbers. I'm just looking for feedback on structuring the loan deal. 

Here’s what I’m thinking in terms of numbers as an example.

Private $ Loan Amount: $50,000

Rate: 10%

Deferred Payment: 3 months (I don’t have to pay out a disbursement for 3 months to allow for any reno and renting)

Year 1 Monthly Disbursement: $556 ($50,000 x 10% / 9 payments)

Year 2 Monthly Disbursement: $417 ($50,000 x 10% / 12 payments)

Balloon payment of original loan amount at any time.

So here are my specific questions:

  • Do I simply pay them the interest indefinitely until I sell or otherwise have the capital to pay them back their original $50,000 loan (balloon payment)? Or should my monthly disbursements be priced out to pay off the loan in 1-2-3-x years?
  • If it’s for a multiyear loan, is it 10% of the original loan ($50,000), or 10% of the year one amount ($55,000)?

Again, I’m a newbie so any feedback or guidance is appreciated.

@Johnny Bravo   Your monthly interest only payments would be $417 for both year 1 and year 2 (or however long your balance is still $50,000).  If the interest rate is set at 10%, making 9 payments or 12 payments the first year shouldn't change the amount of the monthly interest..

Are you borrowing $55,000 or $50,000?  

You can set it up to be interest only until the loan is paid off.  Usually someone will set a time by which the money is due - interest only for 5 years with a balloon payment at the end of 5 years, or something similar.  You can also pay principal along with the interest if you want to pay the loan off sooner.  If this is for a long term loan, how long is the lender willing to lend you the money? 

Thanks @Stephanie Irto . This is all theoretical. 

I mentioned that I'd look to make the first 3 months nonpayment months if I need to for reno and leasing if needed. So, therefore, I take the annual interest payout ($5,000) and pay it out in 9 months versus 12 months. Then the next and following 12 month periods would be the normal $417 to equal a $5,000 annual interest payment. 

In this example, I'm borrowing $50k. 

Thanks for the idea of the 5yr balloon payment. That was a missing piece I was looking for. But obviously, it could be any amount the lender is comfortable with.