What Terms to offer Private Money Investors for Buy & Hold ?

Question

I'm trying to decide on what time frame I would offer private money investors for buy & hold deals.  I was thinking 15 years @ 10% interest only.  Do you think that is too long?

Nicole A. · Answer

For my second property, I borrowed $20K from a "private lender"--actually a friend--who had the money sitting in a savings account not doing anything. I offered him $100/month for 3 years. At the end of 3 years, I owe the $20K back...balloon payment, I guess. He happily accepted and we're 5 or so months in.

I like $100/month because it doesn't kill my cash flow (and I can save up for the balloon payment, but still have flexibility with that money); he likes $100/month because it pays way more than his savings paid! I showed him the cash flow projections using this calculator:

http://www.goodmortgage.com/Calculators/Investment_Property.html

We have a Promissory Note, signed, notorized, and noted with the county so a lien shows on the property. 
	NOTE: while he gave the money before I closed (b/c this was closing money that didn't need to be vested), we did not put the lien obviously until after I closed on the property.

I'd like to try this tactic again soon, but right now I'm dealing with more vacancies than I'm comfortable with.

Steve Babiak · Answer

@Nicole Williamson - be very careful doing that; it is what is called a "silent second", and can be considered fraud in many circumstances.

http://www.investopedia.com/terms/s/silent_second_mortgage.asp

http://criminal.findlaw.com/criminal-charges/mortgage-fraud.html

David Beard · Answer

A 5-year term (balloon) would be more common, either IO or 25-30 year amortization, and you could target 8% with LTV of 75% of less, which is an excellent 5-year rate for a pretty secure investment with no income variability. You could offer 8.5% for 7 years, and 9% for 10 years.

Having a 5 to 10-year balloon, some amortization, and using a loan servicer will make the note more marketable in the event that your investor needed to sell it, though it'll be worth less than an owner-occupied note.

At the maturity date, many of your borrowers will be happy to extend at the same terms based on the great return they've been enjoying, or in the event that rates are higher, many can be enticed to extend by increasing the rate.

The liquidity risk from the 5-year balloons could be managed by spreading out maturity dates on the private lender notes, keeping some cash reserves, maintaining bank lines of credit or HELOC capacity on other property you own, and having a large enough lender network that there is always untapped capacity to replace lenders that demand their cash back at maturity. So you want numerous backstops to prevent the fire sale of a property.

You should also seek to constantly improve your own bank lending profile by maximizing your credit score, managing the rental income reported on your tax return to achieve the best possible debt ratios, and keeping detailed documentation of your investing success.  As you develop a great track record as a real estate investor over a number of years, and you have (or attain) great credit and low debt ratios, banks will be much more likely to lend to you.  So you may be able to refinance your private loans into lower-rate bank loans over time.

Ellis San Jose · Answer

Each person has their own personal expectations and needs.

Some lenders are perfectly satisfied to beat CD rates at the bank, so offering 5% is like giving them a 500% raise in their income if they are getting 1% a year on a CD.

Others have alternative choices where offering 10% isn't compelling to them.

It is very difficult to put them in a one size fits all box.

Interest rate in many cases is much less important than trust & confidence that their capital is safe & will be returned.

Like the old saying "Return of capital is more important than return on capital".

Phil Z. · Answer

- I want to advertise (probably out of state also), so non of the exemptions apply that I am aware of.

- Also, I know an investor who had an attorney do his SEC filing and it cost him $20k.  I plan to put everything together and then just have it reviewed for final corrections.

- As for 10%, it will be interest only payments and the property will be fully rehabbed so I wasn't planning on a large repair fund for most cases and I planned on managing the tenants/rent myself using Quicken Property Manager.  To be honest I didn't get into too much detail yet with the figures as I'm fairly new to the landlord game, but I did do a quick test run and it looked really good.  I'm trying to keep the business model simple (10% across the board) but if needed I can change that.

Curt Smith · Answer

@Phil Z.

My rentals would be tight for positive cash flow if I had to pay a lender 10%.  Are you sure your deals can throw off a reliable 15% that you can pay 10%.  I hear other lenders say that 6-8% is doable if the deal is solid and as others have said, the principal is safe.

A decent SEC autorney like Jilian Sidoti, can write your PPM to give you deal flexibility so you aren't locked in at 10%.

There is a thread here by Jilian on the new reg D 506 rule making recently and she and others have said that the recent Jobs act advertising allowance really didn't benefit small time real estate investors.

Jilian on the Jobs act.

Another SEC thread

Phil Z. · Answer

I'm filing with SEC to advertise for investors, so the terms need to be somewhat spelled out in advance.   I want  to keep things simple, so 10% annual return sounds good for short and long term investments.  It should be appealing to an investor (double digit) and it works great for me.

The total investment for a buy and hold will be in the range of $100-300k depending on the area.  The benefit of the long term loan would be that the money is constantly accruing interest, while the short-term flip loans will be on and off repeatedly.

I'm now thinking a 10-yr / 10% investment for my long-term deals. I would plan for an investor payoff via a single/bulk refinance or a new private lender replacement.

Ellis San Jose · Answer

I like using "call" provisions rather than a balloon.

A balloon forces the borrower to refinance regardless of circumstances.

The call gives the lender more flexibility.

Will Barnard · Answer

Why interest only?

The lender may or may not want a balloon rider added into that as well.

Need more info to better understand the situation.

Dawn Anastasi · Answer

What is the dollar amount involved?  $20,000 or $200,000?

What Terms to offer Private Money Investors for Buy & Hold ?

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