Commercial Real Estate Broker · Seattle, WA · Member since 2015 · 8 posts · 0 votes
What do some of you see as a fair interest rate to pay an investor to be a passive investor and provide private debt equity for a single family build? I will raise say 25% of what I need from private investors on a promissory note. The other 75% I can get from a construction lender. I was thinking about offering 9% to the investors on a 1 year term. Any thoughts or recent money deals?
Denver, CO · Member since 2017 · 265 posts · 234 votes
7y
@Jeffery Morgan , you say "private debt equity", and then you're going to get a construction loan (debt). I think your private investors sound like they're "equity".....but you're using the term "promissory note". If I'm wrong, perhaps you are asking these investors to be 2nd lien (behind the construction loan).
I have seen offerings wherein the sponsor tries to get the equity investors 18% return. I've seen hard money lenders as 2 points and 10% APR for a 6-month loan, earning them 14% IRR.
I am aware of 2 speculative builders where the visionary/operating guy earns 50% to 60% of the profit, and a passive investor earns 40 to 50% of the profit for putting up the capital (or down payment and secure the loan). In this case, I estimate the passive investor is earning a 30% IRR.
It has been made aware clearly to the private lenders that this is 2nd lien. The mortgage has to be recorded still as a good faith and business practice.
Folks at 1st lien can have 9%. But funding at 2nd lien; should have higher return; due to the higher risk positionn they are in. You are either offer Debt position (say 14% to 18%) or equity position (30% of profit or so?). This again depends on how much you are investing and funds borrowerd; duration of the loan...Are you making monthly interest or paid at the end etc..