Private lender money

[Nikko Tountas]

Hey guys,

So I am just getting into the real estate investing industry and am looking to purchase a few properties. I have a private money lender I can turn to for covering the down payment on the properties. What I’m looking to see is what is the best way to structure the deal to get him his money back the quickest way. He wants nothing to do with the property just wants his money to make money. I would like to just have his assistance to just jump start my portfolio. Thanks in advance for any advice!

[Eliott Elias]

Pay him monthly interest or a set return at the end of the project. 

[Nate Sanow]

I think having a 51/49 split so he’s a limited partner and you are a general partner could be the way to go - but do seek an attorney to verify as I am not one nor pretending to give legal advice. 

[Stacy Raskin]

@NikkoTountas, I think it depends on if you would like him as a partner or just someone to help fund. If just to help fund, I would work out a finance agreement and consult an attorney in the process. I'm a mortgage broker that works on investment property loans who can shop your scenario to multiple lenders to get the best rates and terms to meet your goals. Let me know if you would like to discuss to see if there's a way I could help you leverage your cash to acquire more properties. Rental property loans or DSCR loans only take current or projected rents, credit score and down payment into consideration to determine rate and terms.

[Nikko Tountas]

Quote from @Eliott Elias:

Pay him monthly interest or a set return at the end of the project. 

What is a typical good percentage for an ROI on a project like this?

[Stephanie P.]

Quote from @Nikko Tountas:

Hey guys,

So I am just getting into the real estate investing industry and am looking to purchase a few properties. I have a private money lender I can turn to for covering the down payment on the properties. What I’m looking to see is what is the best way to structure the deal to get him his money back the quickest way. He wants nothing to do with the property just wants his money to make money. I would like to just have his assistance to just jump start my portfolio. Thanks in advance for any advice!

 If he wants nothing to do with the loan and you're going for a long term rental, then you will have to probably source and season the funds to close for 60 days.  Not all lenders require it, but most do these days.  Funds to close include downpayment, closing costs and usually 6 months reserves.

If he wants to just be a money partner but still have his name on title in case something happens to you, set up an LLC that makes him a less than 20% owner. Most of the lenders in the DSCR space don't require anything (application, credit etc...) from any members with less than a 20% stake in the loan.

[Jonathan Taylor]

@Nikko Tountas Read the BP books on how to structure these deals as a no money deal is harder for all parties involved to both get their money out and make enough money for it to be worth it.

But basically you need to get a property at such a low value that the forced appreciation makes money for all. 

[Kevin Woodard]

Quote from @Nikko Tountas:

Hey guys,

So I am just getting into the real estate investing industry and am looking to purchase a few properties. I have a private money lender I can turn to for covering the down payment on the properties. What I’m looking to see is what is the best way to structure the deal to get him his money back the quickest way. He wants nothing to do with the property just wants his money to make money. I would like to just have his assistance to just jump start my portfolio. Thanks in advance for any advice!

First thing you should probably do is consult an attorney to keep everything square. The second thing is figure out your constraints with your partner. @Stephanie P. brought up a valid point with giving them a portion of membership that meets your lender's requirements. If it's a loan it will likely require some type of seasoning, or an explanation at the very least.

I'd be happy to answer any question I've worked with clients in various agreements. 

[Kenneth Garrett]

@Nikko Tountas

So there are typically two scenarios when working with private lenders.

There is an equity lender where the lender is part of the deal and receives a percentage return at the end. This is typically the scenario for flips.

There is a debt lender, where they are paid a percentage return. An example would be a 10% annual return until the property is sold or refinanced to pay the lender back with interest.

You also can do a combination of the two. The great thing is you can be as creative as you want.

[Nikko Tountas]

Quote from @Stephanie P.:

Quote from @Nikko Tountas:

Hey guys,

So I am just getting into the real estate investing industry and am looking to purchase a few properties. I have a private money lender I can turn to for covering the down payment on the properties. What I’m looking to see is what is the best way to structure the deal to get him his money back the quickest way. He wants nothing to do with the property just wants his money to make money. I would like to just have his assistance to just jump start my portfolio. Thanks in advance for any advice!

 If he wants nothing to do with the loan and you're going for a long term rental, then you will have to probably source and season the funds to close for 60 days.  Not all lenders require it, but most do these days.  Funds to close include downpayment, closing costs and usually 6 months reserves.

If he wants to just be a money partner but still have his name on title in case something happens to you, set up an LLC that makes him a less than 20% owner. Most of the lenders in the DSCR space don't require anything (application, credit etc...) from any members with less than a 20% stake in the loan.

This is great info! I appreciate it the feedback

[Nikko Tountas]

Quote from @Kenneth Garrett:

@Nikko Tountas

So there are typically two scenarios when working with private lenders.

There is an equity lender where the lender is part of the deal and receives a percentage return at the end. This is typically the scenario for flips.

There is a debt lender, where they are paid a percentage return. An example would be a 10% annual return until the property is sold or refinanced to pay the lender back with interest.

You also can do a combination of the two. The great thing is you can be as creative as you want.

Yes I was leaning towards this specific property using the BRRRR method to refinance and get him his money back plus some interest. 

[Kenneth Garrett]

@Nikko Tountas

Private money is a great way to fund BRRRR deals. After my first BRRRR deal one of my investors funded my projects at 100% of purchase and rehab.

[Eliott Elias]

Quote from @Nikko Tountas:

Quote from @Eliott Elias:

Pay him monthly interest or a set return at the end of the project. 

What is a typical good percentage for an ROI on a project like this?

 Typically 10% a year

[Brady Hales]

@Nikko Tountas there are definitely a few ways you could go about this. To be official you would want to sign a promissory note as well as have his position secured against the property even if it is 2nd position. This way if anything goes south your relationship with him is protected as it is secured against the property. You could also do a JV agreement or even create an LLC where you are both members. If I were you I would just do a promissory note and lien against the property.

[John Warren]

@Nikko Tountas when you refer to a private money lender, are you planning on using all private money and none of your own money? This is a common thing that pops up here on BP, but it is way harder to do in real life until you have an amazing track record. Most private money lenders will essentially take the 1st position mortgage in place of where you would normally go to a bank. 

Some investors use a private money mortgage in the second position, and they use that mortgage to decrease their down payment amount. Again, where this gets tricky is if you are using a 1st position mortgage still. The 1st position mortgage normally wants you to have skin in the game. 

If you are doing a partnership, this can be one of the best ways. You can bring a small part of the equity (maybe 20-40%) and your capital partner can bring the other part of the equity. You can then structure the equity split to compensate you for finding the deal, managing the deal, managing construction, etc.