Return on money for private money lenders

8 Replies

This is a concept that confuses me, so I'll ask the community. 

Obviously- if you have private money on your side, that'll add rocket fuel to your  buisness. Here's my question, how does return on investment work for the private money lenders on buy and holds, whether it's single family or multifamily? 

Do you agree on the percentage return they recieve? Do you split the cashflow 50/50? Exactly how does this work for the private money lendors?

@Erin Butler each lender will be different. You should ask them what they prefer and try to keep them happy. They happier your money partners are, the more they are likely to lend to you again.

You need to provide more details for the answer to be more objective. Obviously the higher risk, higher the return. It all depends how the deal is structured and how much of your own money and work you bring to the table.

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I am looking for the same answers. Can any of you guys give some examples of the terms on a private money deal? I have just finished three sfr brrrr deals using HML and my own cash for one. I have a really good deal flow right now and would like to approach a few PLM's but I'm not sure how to structure the deals to intice the PML.

@Shane Ward Anyone? I have read a book on private money, listened to podcasts etc. and the one thing that you never get is how to structure a PM deal. Some examples for structuring a BRRRR deal with a PML would be great. Let's say I found a property with a purchase price of 35k that needs 50k in repairs and an ARV of 125 and the property would rent for $1300 to $1500. I have the 80k but would rather use OPM to do the deal (I would actually like to do 3 of these at once). Any examples would be helpful.

I am a PML in California, so it may be different elsewhere. But when I fund a buy and hold loan, for the borrower it’s much like getting a loan from a bank. We agree on the amount, the type of loan (interest only or amortized over some period), the length, and the interest rate. There is often a broker involved and there are loan origination costs much like with a bank. All I get are the loan payments.

The loans are typically set to between three and five years. This gives the borrower time to purchase the property, get a renter and show that they can make the loan payments.

After some time, generally a year or two, the borrower will go to a bank, show that the property is making money and that they are paying the private money loan. Then they will get a conventional long-term mortgage, with a lower interest rate. I am then paid off and a conventional loan is in place. At no time do I receive any cash flow from the property; just the loan payments.

If the borrower cannot get a conventional loan, they may go to another private money lender, but they will be able to show that the property is profitable and they have been paying the loan. This can help to get a lower interest rate, as well.

The interest I get will depend entirely on the parameters of the loan request. Is it a first or a second mortgage? What is the LTV or CLTV? What is the borrower's FICO score? Is the property in an area where it will rent easily? Is it a SFR that will produce one rental stream or a multi-family which will produce several? Etc.

In California, the interest I receive is between 9.5% and 12%, but the borrower generally pays 1% more that is taken by the servicing company. I only make loans that I feel are fairly low risk, so the rates go up as risks increase. I personally have not seen rates higher than about 14% (not counting servicing fees). They may be out there, but I hope that gives you an idea of rates.

Again, this is just my experience in California and it may be different where you are. But I know it is confusing when you are first starting out, so I hope this helps.

Very helpful! Thank you.  With the learning I've been doing that was the most important piece for me.  I have access to people with money I just couldn't wrap my head around how to best structure a deal. 

This is just my experience, but it may be helpful to you. For fix and flips, where you need a substantial amount of money for the “fix” part, you may find it much easier to get a private money loan if the loan is against a different property than the fix and flip property.

I, personally, will only loan against the value of the property at the time of the loan. I consider it speculation to loan against the ARV, as that may never happen. So I would not loan against the property in your above example, as I do not want my return on/of investment to rely on a property that needs so much work and has no income stream.

But if you have another property, for example, a profitable rental, you will almost certainly get a better, and much easier, private money loan against the profitable rental. The lender will not care that the money is going into a fix and flip property, because their loan is secured by a profitable rental.

I hope this helps.

As others have already said when it comes to PML it's in your best interest to find out what the potential lender wants. That being said the most common thing I've seen is to use the PML like a hard money loan - short term loan with a higher fixed interest rate. When you stabilize the property and do a refi, that's what the PML gets their principle back.