Long-term private money?

4 Replies

After spending a couple of weeks meeting with lenders, investors, and wholesalers, I've seen some patterns start to emerge. One of them is that many investors are stuck using hard money. This is fine if the deal pencils when hard money is included, but it significantly limits the range of deals into which investors can get involved.

This has me thinking about other options that might exist. The one that keeps coming to mind is private money that is borrowed with different terms. 

I have to imagine that a talented investor would have the ability to find a private lender who would give them a healthy line of credit—at something like 9%—that could be used to purchase and rehab prior to refinancing out.

Has anyone had luck finding private money at better rates or with better terms than normal hard money?

Yes...but the way I get it is a little different than what you described.  Here is what I get. what I pay for it, and how this is better for both the lender and myself:

Loan amount and terms:
Loan - Between $500k and $1M
Interest - Between 10 - 15% (depends on length and loan amount)
Type - Interest only payments (there is a payoff version too)
Term - 10 to 20 years, with a balloon payment (there is a better option for a balloon I use)
Collateral - None...and this is better for both parties

Why this is better:
If collateralized - Not a risk control, as many think. This is a penalty for failing to pay. It's a penalty for the lender too. The lender inherits the problem property...kind of like REI's version of a broken used car.
If not collateralized - Proactive Risk Control is used

Proactive Risk Control - Steps for Loan/Cash transfer and Use:
1 - Part of the Loan/Cash is used for a Down Payment on a NNN Commercial investment.
2 - NOI from NNN must cover the following (but doesn't need to make a profit) -
   A - Debt Service on NNN
   B - Interest Payment on Original Loan
   C - Credit Partner % (if you are not the credit partner)
   NoteDue to the nature of the NNN lease, all that is needed here is for the NOI to cover the above (A - C).  There is no 
               need for any profit.  This gives us free use of the funds not used as a DP (Step #1)

3 - Loan is placed in Escrow Account with instructions to be released, upon acquisition of NNN investment, as follows -
   A - DP money goes directly to NNN closing 
B - Balance of Original Loan is released to REI (me)
   Note:  This only insures there is an investment existing that covers the debt(s)...not that these debts will be paid...yet.
4 - NOI from NNN property goes into the same Escrow Account, with instructions to be released as follows - 
   A - Pay the DS on the NNN
   B - Pay the Interest Payment on the Original Loan
   C - Pay the Credit Partner (if any)
   D - Pay the REI (me) what is remaining

This is a Proactive Risk Control, that actually secures the payments to the Original Lender, without using collateral.

This frees up the balance of the Original Loan/Cash (not used for NNN DP) to be used...and re-used, as many times as the REI needs to...without cost.

@Taft Love

You can get short-term hard money (1-4 years) for as low as 8% in our state.  Long-term (5-30 years) starts at 5%, but usually 6-7%.  Private money isn't always cheaper or easier to work with.

I'm not sure friends and family would appreciate a line of credit option with their money; that's going to be tough on them and potentially unreliable for you.  Easier to do fixed loan amounts with private money.

Originally posted by @Taft Love :

After spending a couple of weeks meeting with lenders, investors, and wholesalers, I've seen some patterns start to emerge. One of them is that many investors are stuck using hard money. This is fine if the deal pencils when hard money is included, but it significantly limits the range of deals into which investors can get involved.

This has me thinking about other options that might exist. The one that keeps coming to mind is private money that is borrowed with different terms. 

I have to imagine that a talented investor would have the ability to find a private lender who would give them a healthy line of credit—at something like 9%—that could be used to purchase and rehab prior to refinancing out.

Has anyone had luck finding private money at better rates or with better terms than normal hard money?

Well, talented investors can get 9% rates with hard money and rehab at or close to 100% of the whole project. You just have to weigh the risk/reward scouting out people for the flexibility that private money can allow (i.e. people that lend full project at close of loan). 

As a direct lender, I've met multiple people who go both directions. I've met someone who pays Virtual Assistants to locate potential private money leads, learned all the SEC violations and how to avoid them when asking people to fund their projects, and taught a 5 hour class to teach others how to do it. I've also met people who were able to expand to 5 projects at a time, who previously were only able to do 2 at a time with private money, once they expanded to hard money.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.