Private Lending Rates

[Stephen Hairgrove]

I am getting started with real estate and preparing to partner with a friend on future real estate deals. For now, I am considering lending him a ~$50,000 private mortgage loan so he can buy another unit in a building he has several other units. As the deal is being worked on, I wanted to hear feedback about what kind of terms you would consider fair for a 15 year mortgage. He is a friend and future business partner so I want to be fair so for the sake of the friendship and future business it is important to me that the interest rate is profitable for me and for him. What rate would you recommend?

[Chris Mason]

Originally posted by @Stephen Hairgrove:

I really appreciate the advice. It would probably be structured as a 15 yr loan but would likely actually last shorter as he will have an option to refinance with a broker in 3 to 5 years. I appreciate the words of caution as I am considering with eyes open about the effects it will have on our friendship. 

Quick note, my hat is off to you for structuring a real estate partnership the way I always suggest when there's the possibility of future Fannie-type loans in the pipeline. I can't tell you how many people I've encountered here in the Bay Area that are "stuck" because so-and-so co-signed for so-and-so in their fancy LLC or S-Corp like they're Donald Trump or something.

Best way to partner, assuming future Fannie loans are important, is to be each other's private lender or HML (pick your term) as needed in order to maximize liquidity and flexibility on the parts of both partners, and don't be on each other's title except inasmuch as you have a recorded mortgage or deed of trust secured by real estate.

Quick note to your partner. Start that refinance process 6 months ahead of when the balloon payment to you is due. Another thing I see is someone past the due date in a panic. And then when we go to refinance, the HML sends back a "verification of mortgage" (required for mortgages not appearing on credit report) saying it is in default... makes it hard to refinance when you're currently in default on a mortgage! The HML and private lenders never want to say it's "current" on the VOM because then the borrower could turn around and use that in court against the lender: "You're telling the judge I was in default as of 2/1/2019, but here you told the folks I was trying to refinance with that I was current as of 2/5/2019... you either lied then, or you're lying to the court now. Your honor, we clearly cannot trust this HML, I petition to have the entire debt waived." (Obviously it'll be a little more complicated than that, which of course translates to more legal fees...)