APR vs. a Minimum Return on Private Money Loan

[Jason Merchey]

I have just begun to look into possibly loaning money on a flip, and I am a little surprised to learn that the going rate seems to be 10-13% and that it is annualized instead of by the flip. In other words, at 10% APR, if the flip takes six months that is a 5% profit. Are private money lenders not in a position of power relative to the rehabber or something? It feels like banks offering .5% APR - they are in the position of power and if you want to store your money somewhere else besides your mattress, you accept .5%. I'm not spitting at 13% APR, I'm just saying, I thought it was pre deal not per annum.

[Account Closed]

You need to add points to the loan to beef up the return. Usually the loan consists of the rate (10-15%) and points (3-6%). The points are independent of the term so in your example if you do the 10% APR for 6 months with 3 points, your net profit for the 6 months would be 8%. You can have points at origination, payoff or both.

[J Scott]

Typically, it's annualized (APR), not a fixed percentage return. To get your head around why they might be, consider a hypothetical situation where a private lender gets 13% per deal (as opposed to 13% APR).

This would mean:

1. The private lender is getting better rates than hard money lenders. Hard money in my area is 15% APR and 5 points. Assuming a rehabber does two properties per year (one every six months), they'd be paying 26% to the private lender (if it was 13% per deal), but they'd only be paying 15% + 10 points -- which is 25% -- to a hard money lender. So, 13% per deal is worse than hard money.

2. The private lender is likely taking most of the rehabber's profit. I average about 18% ROI per deal. If you're lending to an investor who is averaging 18% per deal like I am, and you're getting 13% ROI, that means the borrower is walking away with 5% of the total investment in profits. In other words, the private lender would be getting 72% of the profits! Even when you do a partnership, it's standard for the money guy to only get 50%.

3. The private lender is lending at usurious rates. Again, at 13% per deal and an average deal length of 6 months, that's 26% APR. In my state, 18% APR is the limit of usury.

As to Anish's point, if you want to beef up your returns, you can charge points. This is pretty typical when making more risky loans or lending to less experienced rehabbers.

Most experienced rehabbers I know are paying 10-12% APR for private money. We're paying 10-11% for most of our private money, but have upped that to 13% recently as we expand our business. So, the 13% APR with no points is right in line with the high-end of what I and other rehabbers are likely paying.

If you can get 13% per loan, you're probably making more than hard money lenders! Nothing wrong with that, but your typical borrower is going to be pretty desperate...

[Bill Gulley]

I'll bet any math J. Scott described is correct.

My point is that individuals are under different legal constraints than any regulate or registered lender, including pawn shops, finance companies, etc.

Charging points is requiring per paid interest or fees to pay to make a loan, individuals are looking at loan sharking and extortion implications, besides usury laws that can be different for an individual.

Kinda like the old 10 for 20 lender guys in the army barracks to payday. Can you do it....sure.....can you collect.....maybe, if you're the bigger guy.

Can you violate these issues in a secured note.....sure.....can you collect.......sure, as long as they pay you, can you foreclose....sure, if the borrower sits back, you could get the property back.

But if a borrower squeeks,yells and cries foul and you end up in front of the guy in the black robe, you may not get your money, or the security if you violated law, you might be paying more too.

So, you want to be a lender......I'd suggest you ask your attorney what you can and should do. Don't assume that because others do something it's good for you too. Greed has always driven some to do things they shouldn't, doubt that will change. :)

[Jason Merchey]

It does appear that I had it wrong. That happens once every leap year or so ;)

I am satisfied with 5-7% per six month deal, depending on factors such as probability of success and so on.

[David Beard]

Jason Merchey - while J no doubt does have access to good private lending sources, given his track record, there are still many many lower-volume, but perhaps not as well connected (but still experienced) rehabbers that work with HML companies and willingly pay 12-14% plus 3-5 points. The companies I've talked to are doing a brisk business.

As a private rehab lender, I think you can attract all the business you want by modestly underpricing HML companies, offering 10-12% and 2 pts, for example, for 6 mth terms (it makes sense to differentiate terms a bit based on strength of deal and experience of rehabber). This will give you 14-16% per annum, for really not that many hours of work (due diligence on borrower and property up front, dealings with the title company/attorney, and a couple of inspections during the rehab stage),

[Will Barnard]

The loans are based on per annul, not per deal. The annualized return for a lender charging 12% plus 2 origination points is 16% based on the loan going 6 months twice each year. That is one great passive return secured by RE! Nothing to spit at at all.