Private Lending for Buy & Hold

Private Lending & Conventional Mortgage Advice
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Private Lending for Buy & Hold

David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes

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.

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Scott Hubbard
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
14y
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.

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    14y

    This is how a private lender funds a note for one of our investors.

    For round numbers sake:

    $100,000 value
    $ 85,000 cost for buyer includes $20,000 renovation

    Property is already rented at $1,050 a month.

    The lender will lend 65% of the purchase price or $55,250 which puts the lender in the property at .55 cents on the dollar. That is their first line of security. The borrower has roughly $30,000 of their own money in the deal (skin in the game) which amounts to a second line of security for the lender. The property is insured at $95 dollars per square foot or replacement cost and most properties are owned by investors at under $60 per square foot which is the third line of security for the lender. Lastly, there is a quit claim deed signed by the borrower and the borrower gives the lender the right to exercise if they fall 30 days behind.

    That is how our deals are put together and lenders provide long term loans to our borrowers. Long term meaning anywhere from 5 to 15 year terms and rates from 9% to 12%. But under the circumstances above, a borrower can buy three houses with $100,000 in cash, where-as they could only buy one if they did not have access to funds.

    ------------

    On the deal you are trying to put together. I think finding an individual investor to hold a note on your property would be your best bet and you look for individual investors for each deal. You might find one investor who would want to do multiple properties, but I would not go the route of mixing funds and starting PPM's or regulatory filings. Nothing so complicated that simple contracts between individuals cannot handle.

    My advice would be to keep it as simple as possible where the average person who trusts you as an investor will understand. No complicated language or values, just very straight forward and maybe add some lines of security in there.

    If you want, I will send you the deal points we use to raise private funds and it makes it pretty clear how we offer security to an investor who funds a loan to a buyer. I think the more secure you can make an individual feel - the more you can show them that their money is safe with you as a borrower, the better chance you are going to have developing lenders.

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    14y

    True, my model is for my own rental portfolio and most of my notes have 18 month stops. I, too, offer a quitclaim deeds and I issue a guarantee of repayment from my parent company.

    Where I have need for intermediate capital and want to sell the property using seller financing, I tend to offer an equity position through a partnership. If a default occurs, risk is spread to the partners.

    Although I know Chris' model works well because there is such high demand for seller financing, I shutter to think what would happen if he had a sudden jump in defaults and had to make good on your guarantees. Can you say a "reserve for losses"!!

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  • Mike Mcginn
    Rental Property Investor · Santa Ana, CA · Member since 2011 · 4 posts · 1 vote
    14y

    I know it's not private money, but I'm considering New Penn Financial's investor loans (I have no affiliation to them). Max LTV is 65%, based on purchase price, but they also do refis. They quoted me a 6.5% 30 year fixed. You can close in an LLC's name, but a personal guarantee is required. There is a max of 20 properties you can have financed, but it's a start. I'm trying to use private money to do stand alone seconds on top of that. The numbers seem to work, but I haven't got one across the finish line yet (red flag, right?).

    I may try the back end point to sweeten the deal for the second and change the second to IO so it's easier to explain and more cash friendly for me. I like those ideas.

    This has been a very insightful thread. Thanks for sharing.

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  • Todd Palmer
    Cary, NC · Member since 2011 · 1 post · 0 votes
    14y

    does anyone no where i can find hard money in nc if so who and where me and my wife are kind if new to flipping can we get some help to become investor

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  • Shanequa J.
    Realtor · Houston, TX · Member since 2011 · 916 posts · 296 votes
    14y
    Originally posted by Todd Palmer:
    does anyone no where i can find hard money in nc if so who and where me and my wife are kind if new to flipping can we get some help to become investor

    Did you find any yet because I've been looking for some legit ones?

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  • Vasa G.
    Investor · Washington, Washington D.C. · Member since 2011 · 34 posts · 5 votes
    14y

    David, I understand and fully support your idea as that is something I am building for my own portfolio.
    I have read many great advice's from RE investors in this post. And that is what BP is great place for.

    When looking for people to fund your portfolio I would also look somewhere else as for this kind of financing, your target should be more conservative ( regular ) people.
    I use the principle "word of mouth" where I have started with regular people you know and offer them to put really small amounts ( starting from $1K and up ) into your portfolio. I offer interest only payments I call it CD payments as it is very easy to people to understand and believe me it is working as my network is growing. This is definitely long term approach, but I am trying to build trust and for that takes time.

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