When working with private money lenders, what is the best agreement in your opinion with regards to ROI for them? Profit-sharing? Interest rate?
What do you prefer? What do they typically prefer?
I want to make sure it's worth their while but also want to do better for myself than what I'd pay a HML. I'm paying my private lenders 2 points and 8% interest. If you give them equity, you also give them risk and those that are investing in me would prefer to be segregated from that.
If you're doing conventional cash out-refi's and are able to put their money to work for them twice per year (timing things perfectly) that's really a 12% annual return for them. With a shorter seasoning period with commercial loans or flips then they're doing even better.
@Matthew Ruderman First I would have a firm grasp on your goals. Then understand what your private investors goals are - because they are all different. If your investor just wants a straight up return and to be hands-off - then simple interest return at (fill in the blank) interest rate will be great for them. Especially if they currently aren't putting their money to work. But if your investor is more equity driven, finding the solution that works best for your relationship is the route I would take.
Strategy also plays a part in this (i.e. Flips, MultiFamily, BRRRR)
@Matthew Ruderman If you are bringing in an individual who wants to loan you money for your projects, you give them a good interest rate and point spread that works for both of you. If they want to bring their cash for equity in the deal because they have confidence in the deal and/or you as an operator, then you would most likely work out a certain ROI percentage which is held secure by making the investor a part of the single-asset LLC for the deal... For the latter option, consult attorney for operating agreement language etc.