What is the going rate for capital partner?

Question

I came across a great deal that’s bank owned and wants a cash deal. I have plenty of equity but not enough time to get it these days.(corona) My partner wants 20% after 6 months. I’ve never used private money before. Is that the going rate? I know hard money is at 10% in my area but how many fees are involved? Never used hard money either. Always went conventional. Which way would you go?

Adam Schneider · Answer

@Mark Lovejoy Two comments about your post. The handshake deal --that's a huge no-no. Both parties should want a promissory note that clearly spells out the terms and conditions, and the lender will want a first lien. Regarding terms and conditions and rates, it's very difficult to understand if a deal is good or bad by just knowing what the lender wants to charge in interest. Looking at it on an apples to apples basis with alternative options, you'll want to consider points, fees (loan app, appraisals, draws), skin-in-the-game requirements, whether it's a dutch loan or not, if there are extension options, when interest payments are made, the risks involved in the deal...so, for example, would you rather pay 20% interest on 6 months at the end of a deal with no fees....or make monthly payments, put say 20% down, have some fees, and pay 10% to 12%?

Kyle J. · Answer

@Mark Lovejoy Sure the 20% interest is high.  But a HML would have to charge you points to make any money on a loan amount that low.  Although it still likely wouldn't equal what you're paying in interest to your private lender.  But does that really matter?  If you're only paying it for 6 months and you can still do the deal and make the expected profit you need to make, I'd argue that it doesn't matter.

And I'm not sure what exactly you mean by "it would be a hand shake deal".  However, if you mean your private lender is just going to give you the money directly without it being secured by the property or well-documented, well that must be a pretty good friend of yours and the added risk he's taking on by doing that must be worth a few extra percentage points because that's a very risky way to make a loan.

Plus I'm sure you want him to earn an interest rate he'll be happy with so he'll want to loan you money in the future.  Perhaps once he sees that he gets all his money back on this deal, and he becomes more comfortable with loaning to you, you can talk him into lowering his rate a little bit on future/subsequent deals.

Mark Lovejoy · Answer

@Lien Vuong it would be worth doing business but I feel like I’m taking on to much right now. Thanks for the information

Mark Lovejoy · Answer

@Adam Schneider that’s a lot to digest. We have a history together and don’t normally get contracts involved. The deal would work with retuning 20% to private money but building houses now I don’t have the time to rehab one. I was simply asking if 20% was equal to hard money with all the fees added in. It comes out close to the same. I’d rather give my returns to a friend rather then a stranger. Thanks for you input. Stay safe

Lien Vuong · Answer

Is that 20% interest firm? 10-12% would be more market rates for HML but unfortunately not many are lending in today's environment. I would invite you to look at the deal holistically and see if there's great return for you in there, if there is you have to think that 20% is the Cost of Doing Business and the gains you would not have realized if it was NOT for the lender funding you the deal. Hope that gives you some perspective.

Mark Lovejoy · Answer

@Ryan Daigle Ryan, you are correct, it is very rich. My problem is he has the cash and I don’t. My deal would support it but I would love to find a different option. I reached out to someone here on BP so waiting to here what he has to offer. Going to look at the property now.

My wife and I flipped a house in Benson. Loved it down there. The hole area from Wilmington to Raleigh is wonderful. If we can gather enough passive income, we would love to move down there.

Ryan Daigle · Answer

Hey @Mark Lovejoy. Wow, 40% annual return for your HML. I bet he would do that!

That's pretty rich, but if your business plan supports those cost of funds then it doesn't mean it's a deal breaker. But if you work your network and local investing scene, I suspect you'll find much less onerous terms than that.

Mark Lovejoy · Answer

@Ryan Daigle. A person I know says he would give me 80k and in six months I give back 96k. It would be a hand shake deal.

Ryan Daigle · Answer

Hey @Mark Lovejoy, Can you be more specific with the options on the table?20% interest seems punitive, but you might be referring to equity share there. The origination fees, IO period, delayed payment, and other terms also factor in here.

What is the going rate for capital partner?

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