Do Private Lenders Do Something Like This?

11 Replies

Hi all!

First time starting a post on BP and new to REI. I have been researching Private Lending options and resources to use for BRRRR, but am hitting a walk on grasping loan structures that are feasible to a PL. I realize that details vary from lender to lender, but is this scenario even remotely close to what is feasible:

I'd like to secure a loan from a bank but need help with the down payment. Would an investor consider fronting the DP? I'd take on all the costs of rehab. 6-12 (based on seasoning requirements) months later, refinance and pull cash out to repay the investor with interest and I'd hold the property to rent and use any proceeds towards another property (DP or Rehab costs). Eventually, I'd be able to roll proceeds to cover my own down payments.

I see several issues here and perhaps the community can offer some clarity or other points of view.

I don't know if PLs are going to be interested in only working with say $40k of capital to return such a small dollar amount ($6k @ 15%)?

It's tough to find properties where I can rehab them and make enough margin to cover the PL return, recoup my rehab costs, and make reasonable ROI. Was targeting properties 20-25% under value, but is looking like I need to be targeting 30-35% to make rough numbers work...?

It's going to take several (maybe 5 or 6 or more) "rinse and repeats" to get any substantial cash on hand to invest in DP on my own...

Maybe I am looking at this all wrong. Does this sound at all how a PL deal may be structured or are there other ways to structure financing with PL to accomplish a similar outcome?

I've spoken to several PLs and got a wide range of answers... Lol. Wondering what you all thought.

Thanks in Advance!

Nick Belsky

@Nick Belsky I believe your biggest hurdle is going to be the bank, they generally don't look favorably on borrowed down payments and may not loan you the remainder.  Your profile says you're a lender so maybe you know something I don't.  And unless the market keeps it's crazy pace it may be tough to force enough appreciation to refinance all of the money out in 6-12 months.

@Aaron K.

Good eye. Yes, I am a mortgage broker and work with more than 30 lenders in Texas alone. I have two banks that will work with me on a second position down payment.

Aside from those challenges, would a PL even consider a proposal like this?

Nick

Everyone is different and you may have better luck with the smaller amount, someone's grandma could very well have $40k saved that they would like to earn 15% on, but are much less likely to have $200k saved.  You may have more hurdles with hard money lenders and companies but if you get in front of enough people you may be able to make it work.

You are correct. As a lender anything less than 100K loan is not worth the trouble for the absolute return. The typical model is more that the entire project is funded by the PL and refinanced out later on completion. No bank in the early stage. Also most lenders want first position on the house. This solves that problem also. 

@Anish Tolia

Makes sense. But I still get hung up here...

Let's say PL provides $125k to purchase, and I put $25k into in rehab. The rent revenue increases and rehab yields a new appraisal value of $200k. I refinance with a bank up to 80% LTV ($160K) and pull out as cash to pay the initial loan to the PL, my costs, then am left with $10k ... That isn't counting interest owed to the PL...

It may take 2-3 years to build enough equity where 80% LTV Refi covers the initial investments. Again, maybe I am wrong here but I wouldn't think investors would want to wait that long to get paid? My top priority would be paying my investor first. I could short myself and pay myself back over time with positive cash flow?

Thoughts?

Nick

Originally posted by @Nick Belsky :

@Anish Tolia

Makes sense. But I still get hung up here...

Let's say PL provides $125k to purchase, and I put $25k into in rehab. The rent revenue increases and rehab yields a new appraisal value of $200k. I refinance with a bank up to 80% LTV ($160K) and pull out as cash to pay the initial loan to the PL, my costs, then am left with $10k ... That isn't counting interest owed to the PL...

It may take 2-3 years to build enough equity where 80% LTV Refi covers the initial investments. Again, maybe I am wrong here but I wouldn't think investors would want to wait that long to get paid? My top priority would be paying my investor first. I could short myself and pay myself back over time with positive cash flow?

Thoughts?

Nick

Yes you are correct. There is no shortcut and quick money here. In your example above you end up with a rental property that hopefully cash flows with little of your own cash in the game. Thats what people look for. If on top of that you need enough profit for the next down payment then you need a home run deal, which are unicorns. And yes investors doing PL usually expect the capital back in a year. But now if you have a good track record the same investor will re lend the cash to you for the next deal and so on so you build a portfolio with minimal input of your own cash.

 

I don’t see any private lender lending $ where the borrower has no money for a down payment and they would not be in first position.

So I think the better thing to do would be to partner up with a private lender to help you with the capital you need to acquire the properties and then rehab them. Then just flip them. I know you are wanting to build a portfolio but I think that it would be better to do a few flips and then you will have your own capital that you can now invest with and start building your portfolio. This would likely take less time than trying to save up cash from cash flow while trying to pay your private investor off. 

I am looking to do the same thing in my market. @Michael Glist is correct. If you want the cash quick so you can eventually use your own money for down payments, then a flips would make the most sense. The BRRRR method you describe is a get rich slow scheme, but you have a property that cash flows with little of your own money down. Thats the perk.

@Nick Belsky the way @Anish Tolia describes it is correct. The private lender would lend the money for the acquisition which would be a first position loan. You use your own money for the rehab. Then when it's rented you refinance through a conventional lender. The conventional lender would pay off the private lender, so at that point there is nothing owed to the private lender. If you are doing a cash out refi, which I assume you would be in order for the BRRR to work, you would get the remainder of the 80% LTV as cash. You don't get the 80% LTV cash in your hand and decide what to do with it. If you end up not getting back the full amount of your rehab amount then you will have to save up some more money before you do the final R, repeat. You do that either by saving the cash flow or from your day job, if you have one.

@Nick Belsky   One other point to note as I've done a number of rehabs...your example of $125k purchase + $25k rehab and hope for a $200k appraisal.  $25k is usually enough for some paint, carpeting, kitchen appliances, and very unlikely to force appreciation from your $125k purchase to $200k in 6 months.  

You may want to try local banks or credit unions and get purchase + rehab financing and use your rehab money for that DP instead, since the bank will be providing the rehab funds. Plus they'll appraise it advance and lend off the ARV, so there shouldn't be too many surprises. Ask for the commercial lending department at the bank.

Good luck!