Investor · Providence, RI · Member since 2019 · 51 posts · 16 votes
Hey everyone,
I am trying to learn all I can about hard/private money and how the deals are structured. I think I know the answer to this, but I want to make sure: Do hard/private money loans only wok for both parties when a property is purchased significantly below the after-rehab-value? I see how these deals work for flips and BRRRR deals, but I am wondering if hard/private money can work for purchasing properties that are priced close to market value.
Private money and HML are designed for short term. You are correct they work best when you are forcing the equity by rehabbing them as in flips and BRRRR's. To buy a property with private or HML would be difficult. Private money in my opinion is better especially if borrowed from family or friends where you are getting a family/friendly rate. Most loans are 10%-15% and some with points. Don't be confused with HML who are posing as private lenders it's not the same. Private lenders are individuals and the rate should be better than HML. I think if you combined a private lender for some of the down payment and you borrowed the rest from the bank it could work, buy you definitely need to buy at a discount.
Private money and HML are designed for short term. You are correct they work best when you are forcing the equity by rehabbing them as in flips and BRRRR's. To buy a property with private or HML would be difficult. Private money in my opinion is better especially if borrowed from family or friends where you are getting a family/friendly rate. Most loans are 10%-15% and some with points. Don't be confused with HML who are posing as private lenders it's not the same. Private lenders are individuals and the rate should be better than HML. I think if you combined a private lender for some of the down payment and you borrowed the rest from the bank it could work, buy you definitely need to buy at a discount.
Private money and HML are designed for short term.
Hi Kenneth! I haven't gotten to this point yet, but I hope to soon! Once 10 mortgages are obtained. Then what options do you have to keep growing? I thought hardmoney/private money was the route folks took (even though rates, points, etc. aren't as good) since 10 is typically the route through standard lenders?
Investor · Providence, RI · Member since 2019 · 51 posts · 16 votes
6y
Thanks Ken.
“I think if you combined a private lender for some of the down payment and you borrowed the rest from the bank it could work, buy you definitely need to buy at a discount.“
Because you still need to refinance ASAP to pay the private lender back?
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
6y
Hey @Tyler Rowley if you can find a relative or friend who has 200k or 300k sitting in a CD at a bank for 1.2%-1.5%, you might ask them if they want to get a whopping 4% on their money. Usually older people have fixed incomes and they like to know exactly how much money is coming in. They might like a slightly higher return. THEY might give you a 15 year loan at 4%, maybe 5%. That would work long term. It is tough to find those people. Most investors are going to want 8%+.
As rates have been low for an extended period of time and continue to be, some investors are starting to be ok with lower returns. Maybe you will see hard money at 6% or 7% soon.
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Tyler Rowley A hard money lender (and a very savvy private money lender) who is lending short-term is going to look at how you will exit your deal either through a sale or refi. If you are purchasing close to market, what is your proposed exit then?
If you mean using commercial terms that many hard money lenders now offer (30yr, 10/1, 5/1 products), then purchasing close to market could work. Your business plan still needs to work however. Are you renting this? And if this is what you are thinking, why not lock in a conventional loan instead with these crazy low rates?
If you can't qualify conventionally, also look at finding a private lender to carry the note, like Ken mentioned. There are so many investors moving money from the stock market right now into a self-directed environment. If the deal is good, I bet you can find some to carry the full note at 4-6%. Then you get to craft the terms!
30yr = 30yr amortizing fixed rate loan (ie. a normal conventional loan or a commercial loan to mirror those terms)
5/1 = 5yr adjustable rate mortgage. In most cases it's a 30 year amortization schedule. The rate is fixed for 5 year, then adjusts annually but a calculation of Prime + X%. Can be great to hold down expenses if you are going to move the property in that time frame.
10/1 = Like a 5/1... just 10 years fixed rate.
What I meant by that last comment is you can find a private lender who will act as the bank instead for a decent rate. You can then craft the terms (interest only, duration, amortization, etc).
Investor · Providence, RI · Member since 2019 · 51 posts · 16 votes
6y
@Whitney Hutten: Thank you so much for the advice and answers so far. Some more questions:
- Let’s say a private lender gives you $100k for the purchase and rehab at 10% and the projects takes one year. He is owned $110,000. Is the $10,000 interest payment paid back at the end of the deal or is it paid back monthly ($10,000/12)?
- Let’s say the same private lender wants to be involved in the equity of the deal; he wants to be a 50/50 partner with you once the house is rehabbed and cash-flowing. So he lends the $100,000 at 10%, he gets paid back his $110,000 once the house is rehabbed and refi’ed, and then the two of you split the monthly mortgage, expenses, and cash-flow. Does that sound right?
The great thing with private lending is you can structure it anyway you like. When I use a private lender, the funds are returned when the property sells. You could structure it with monthly payments. In your example of 100K at 10% interest in one year the lender is owed $110,000 that is correct this is called a debt investor. On a 50/50 partnership the lender is typically reimbursed by 50% of the profit. There is no monthly payment or interest. Could you structure it both ways, yes. If the property had a profit of $30,000 you would split it 50/50, $15,000 each. This is called an equity investor.
Investor · Providence, RI · Member since 2019 · 51 posts · 16 votes
6y
@Kenneth Garrett: Very helpful thanks. Debt Investor vs. Equity Investor. It’s always helpful to know terms. The Equity Investor has to get his investment back, right? Could you walk me through a typical Equity Investor deal where the investor puts up all the money for the purchase and rehab. Thanks.
You find a project to invest in. You know this investor, could be family, friends or someone you met at a REIA meeting. This is important, there SEC requirements with exceptions for a previous existing relationship. Always use an attorney when drafting documents.
The private lender agrees to lend you the money. The lender is given the first lien position on the mortgage or deed of trust (depends on your state), a promissory note is prepared and outlines the specific terms of the loan. The money is wired to the closing at the title company. They do not hand you the money. The purchase is $100,000, rehab is $30,000. The wired funds are $130,000. You are given a check at the closing for $30,000 to conduct the rehab. The lender could choose individual payouts as progress of the work is performed. You can have a JV agreement describing the terms of the agreement as well. Property is rehabbed and sold. After all expenses are calculated and paid you then split the profit at the sale closing.
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Tyler Rowley To echo above, you can structure the private money loan any way you can agree to. I think where many investors new to private money get in trouble is that they try to mix up the debt and equity side, and end up giving away too much of the deal for too long. As your skills grow, you can renegotiate new terms with your private money investors. Also, I'd align the structure with your goals. If the goal is to flip the properties, I like using equity structures as then you all make (or lose) money together. If your goal is to refinance out to a hold, I like using debt structures.