Private Lending for Buy & Hold

[David Beard]

I was interested to hear what others might be doing in securing non-bank financing. We all have a circle of potential lenders/acquaintances that we could tap, without the hassle (or outright impossibility) of dealing with banks.

What approach has worked for you, and what terms. I was thinking generally (and hypothetically) along these lines:

* Deal with folks where we have pre-existing relationships
* 10yr fixed rate - pay around 7.25% fixed for 10 years (this would be set at loan origination around the 10yr tsy plus 5.0%, or possibly the 30yr avg fixed rate + 2.5-3.0%); interest only ideally, or possibly 30-year amort
* Right by borrower to substitute collateral to maintain the LTV (if we want to sell a property)
* 1st mtg, 75% LTV on new appraisal value
* One investor per property, in 1st lien position
* Property rehabbed, seasoned for at least 90 days with tenant in place with term lease

How have you addressed lender concerns around investment safety and illiquidity?

Do you discuss that there is a market for buying/selling seasoned notes? Do you make any other hard/soft assurances for getting some or all of their funds back to them early? Penalties?

Seems it would be good to always have a waiting list or pipeline to provide potential liquidity to your current investors.

Obviously comparisons to equity market volatility and low bond/CD yields are your chief selling point, and are compelling.

Very simple really. Buy/rehab/lease properties at 25-35% gross returns, season for 90 days, re-appraise, seek 75% private financing, which should typically recover all of your initial investment. One investor per property.

What approaches have worked for you for different categories of lenders? Early retirees (65-75), high earning pre-retirees (55-65), middle age accumulators (45-55), groups where safety and liquidity have varying degrees of importance.

Thanks.

[Scott Hubbard]

Originally posted by David Beard:

OK, even if you never considered it before, if you think this could have value growing your rental business, how would you approach it?

Aside from all the obvious issues Bill has so accurately pointed out, raising medium term capital without the help of a licensed securities dealer is VERY difficult. It is the holy grail for RE investors.

I can only share my limited experience with debt partners.

In my experience, you might find it difficult to attract any medium term debt partners at 7.5% as others have said. Most people you run into are leery about real estate either having been stung by bad deals themselves or through someone they know. Security means very little these days as the headlines are dominated by banks losing money because of foreclosures and the talk about a deed of trust will go over their heads. Hence, your pitch will need to focus on safety through long-term cash flow and you will undoubtedly need to create a high level of trust and hold their hands through the entire process.

1) I have had luck with doing I/O payments in order increase cash flows. These interest only payments can easily be illustrated to the laymen. Example, You loan me Y and I pay you X for 5 years and on the 60th month I repay you Y + X. Additionally, I have been able to defer payment and interest for up to 3 months while I rehab and rent. That way, I can offer a higher interest rate on their money while maximizing cash flows and reducing risk.

2) Since your looking for medium term capital, you might consider offering points. You might find it more useful since you require a medium term. Although I prefer to offer points to be paid upon refinance (back-end) as an incentive for the debt partner to not jump ship, you might find it a useful tool to incentivize your partners to hang in there for the full-term.

3) Offer some sort of equity offering. For instance, incentivize the debt partner to stay in full-term by offering to sell them a minority equity stake in the LCC holding the property.

4) Form a private placement and get it registered with the proper authorities. This will likely cost you $20K or more in start-up fees, but then you could utilize financial planners to market to accredited investors. With that, you should have better luck with the 7.5%, but when you consider commissions to the security brokers, start-up costs, and other marketing and accounting expenses, your likely going to pay an extra point or two anyway.

All of the above are merely based on my own experiences with investors who are known to me and who are accredited. Obviously, what works for me may not work for you and you should ALWAYS consult with legal counsel as part of your due diligence. Some of what has been discussed may violate securities laws and I am not an attorney or an expert in said law.