Suggested private money interest rates?

25 Replies

What do you think are reasonable rates and terms to charge private lenders I know. Giving them 1st position on a property where they will be lending no more than 70% of the ARV.

I have done private financing anywhere from 0% up to sharing 50% of the profits. It's really up to the private lender what their "magic number" is. The more savvy will want close to hard money rates. A relationship lender may be happy with anything over their credit unions CD rates,

How long is the term of their loan?

What are their alternatives?

Ellis is right it really all depends. If you know someone that has the money it doesn't hurt to ask them what they want to lend it for. I think anything less than 12% is a good deal for private money.

Gessssss, 0 to 50% is pure BS! partnerships are not loans, Ownerships are one thing, 0% have tax have tax issues!

There are children here who post who have absolutely no clue.

In ANY state 50% is usury on any loan in RE.

@Ellis San Jose

, please stop posting about seller financing and private money, you don't have a freaking clue! You're screwing people up man, you're a good ten years away from where you think you are in giving financial advice, may be 15 or 20 years away.

Just because you did something doesn't mean it's lawful, a good idea or really prudent.

If that is the crap you advocate, we are going to have problems and I doubt you win! Sounds like you're working on a book to sell.........you're still a student, please knock it off,

The rest of you, if you don't really know the issue very well, just don't post as all you do is gum up the works, you really don't know diddly. :)

Alma, 10% is customary with seller financing but there is no set rate. it can be lower as it depends on several factors, the down payment and how well the borrower qualifies in conventional terms. The rate can not be established by a cookie cutter analysis. Look first to the local customary rate acceptable rates for similar properties in the area. See your attorney, mortgage broker or a Realtor. :)

8-12% is pretty customary, but as others have said, there's no right or wrong answer here...

Originally posted by Bill Gulley:
Gessssss, 0 to 50% is pure BS! partnerships are not loans, Ownerships are one thing, 0% have tax have tax issues!
There are children here who post who have absolutely no clue.
In ANY state 50% is usury on any loan in RE.
@Ellis San Jose

, please stop posting about seller financing, you don't have a freaking clue! You're screwing people up man, you're a good ten years away from where you think you are in giving financial advice, may be 15 or 20 years away.

Just because you did something doesn't mean it's lawful, a good idea or really prudent.

If that is the crap you advocate, we are going to have problems and I doubt you win! Sounds like you're working on a book to sell.........you're still a student, please knock it off, :)

Bill, before you flame me, please read carefully. I said 50% of the profit not 50% interest.

If I pay a seller a premium on the sales price that they asked for & I make on time principal payments faithfully, how dare you accuse me of anything unethical. Imputed interest is disclosed so please don't ASSUME anything about how I conduct my business. http://www.investopedia.com/terms/i/imputedinterest.asp

I suppose you are going to say that convertible bonds are illegal & anyone one who uses them is a criminal. Cite the exact statute in California for my eduation. Also, if you would be so kind to illuminate us on Shared Appreciation Mortgages.

I have a great deal of respect for you, however your hair trigger judgment is something I do not want to emulate.

As far as winning I wasn't aware that this was a contest, And yes I will always be a student, because I enjoy learning & honing my craft. And no I don't have any books to sell.

So please, take a breath. Hopefully, I will see you at Jimmy Napiers next class & I can buy you a cold beverage. (Nov. 9th &10th)

We need to keep this on topic to be respectful to the original poster. If there is any other issue between each other please discuss it privately.

All good stuff...so do you normally pay points too? Is a 5 year term amortized over 30 years with a ballon payment at the end typical? Seems like if you pay 12% and paid points it would be quite comparable to a Hard Money Loan wouldn't it?

We have worked with private financing a number of times, currently ranging from 9-12% interest. These are all short term financing terms and almost always are in junior lien positions. The big saver on the our private financing is that it all has come through social networking and business relationships. So the typical origination fees we have are simply our legal costs.

@Alma Mills Are you able to tell us more about the project and some about the lenders? We may be able to give better suggestions or advice at that point.

@Alma Mills

Points are usually paid to a broker who arranges a loan. I typically will not pay points if I am direct. If it is arranged with a professional lender they will dictate the terms.

The property will determine the best fit for the financing, if the property can't afford the loan, you shouldn't buy it. ideally, the lender and the borrower both need to win.

I don't like balloons and tend to favor a call provision instead as a lender and a borrower. As a borrower I want as long as possible before I might be forced to address refinancing.

@Ellis San Jose

I do apologize for the 50% issue, I read that wrong.

Joel, I agree.

However, 0% is still a bad idea, beyond the scope of this forum, disclosures don't mean crap. Hello, I'm screwing you, do you agree with that, it's okay for me to screw you? Great, we can move on, I'll screw you

There are very few instances beyond the scope of 90% of the people here, where some 0 % rate is appropriate , the only one I can think of is in transactions with related parties. People here don't have near enough experience to do such deals as they have no idea of the crap that pops up later on. Just because you can agree to something does not mean it's a good idea.

Problem in RE, is we have all these kids with finance degrees who truly believe they have new a different ways, that they have some new answer, what they don't have is experience to find out nothing they can think of has never been tried before, as if they are some genius in financing with a few years in the industry. We get many newbies that are just cocky.

Ellis, I can tell you have some good ideas and you have studied well, so far, bt you're no expert, not yet. But you are pretty good and have a good basic foundation of RE financing. So, how dare me? Not sure I implied anything as I don't know what you do, but I'll be the first to dare anyone if I think I see something off color, rest assured.

I have no idea where shared appreciation mortgages were brought up, I didn't, but if you'd like to discuss them we certainly can, to begin with, if you aren't an approved lender such as with a reverse mortgage, then explain what you're doing, I'll comment. Not sure what that was about.

Have absolutely no interest in reading or hearing what your guru might have to say. I find such finance information as laughable. I have been totally truthful in my profile, when you can find anyone in the country with similar experience or more, I'll give them my full attention, until then, I'm not impressed. It's the privilege I take after the years of study and operating in the industry in various aspects. Trust me, there is no competition here, I don't know where that came from either and you are not competition. Frankly, there really isn't any competition on this site in my areas of expertise, what most don't know is that a few of our experts PM me for advice and guidance. What newbies get from me is simple advice and opinions, my greater consultation is mostly with attorneys and advanced financiers in RE transactions. I'm actually insulted by those with lesser experience and knowledge when they attempt to call me out on some minor issue. Granted, I don't go into great detail in the forums as I type too much as it is. You have all ready gotten more than is deserved and more than I intended to post.

What I do understand is that most everyone here on BP is trying to grab a dollar, they spar for top dog, they argue to achieve a presence to do business.......I'm not in that game, I'm basically here to educate and keep people out of trouble, that's all. While I may help a few to make money or more money, one thing is for sure, I won't be making money off of their deals and they will never have any of my money. I have nothing to gain really from being here. :)

70% of ARV really means nothing. What is this as a percentage of cost? Is the "V" based on an appraisal or something else?

Provided these aren't pie-in-the-sky numbers for value and there is true equity throughout the project for the lender the rates quoted in this thread seem to be pretty close. 10% - 12% interest-only seems about right to me.

BTW...I am not sure why people think it takes 15-20 years to learn any of these concepts. These really are pretty simple topics to understand despite what some believe.

Originally posted by Bryan Hancock:
70% of ARV really means nothing. What is this as a percentage of cost? Is the "V" based on an appraisal or something else?

BTW...I am not sure why people think it takes 15-20 years to learn any of these concepts. These really are pretty simple topics to understand despite what some believe.

I agree Bryan the concept is pretty elementary. In that range, most would not have a problem, with more of a down payment they may, interest charged has a relationship to perceived risks. Local custom also play on the matter as to where you might begin. Not really rocket science. :)

why hard money? You own a 4 pled in LA, if you have any equity, why not get an loc at ~4%? WF now goes to 85% LTV. I never touch hard money on principal. I'll only leverage what I have and buy using that. Screw that 10-12% due in 3-5 years. No wonder people get in trouble. And if the market turns, kiss your *** goodbye.

@Bill Gulley

I'm not sure if that was a partial apology or passive aggressiveness. Personal attacks and back handed uniformed accusations have no place here in Bigger Pockets. This is not the proper forum for me to respond point by point regarding your statements.

Thank you for sharing your knowledge.


Updated about 6 years ago

"uninformed"

@Trent Currie the lenders are friends/family that have funds and I would be borrowing the money to purchase distressed properties in my area then rehab and rent them out or sell them depending on the situation. I would like to be able to rent them for positive cash flow with the Private money would like to be able to move the financing to conventional loans at some point.

@Ellis San Jose so what is a call provision? I don't like balloons either but don't think my lenders want to wait 30 years for their money back.

@Alma Mills

A call is the option rather than the obligation to pay off the loan.

It provides the lender some leeway to renegotiate the terms if needed instead of an automatic payoff.

Yes, a "call" is an option in bond financing but it is not a process in mortgage obligations in the same manner, a mortgage, be it in development, construction or any end loan, are written with a balloon with an option of renewal subject to the lender's agreement to reset the loan.

You can find a call feature as Ellis points out in other agreements as well, such as a buy-sell agreement, capital call agreements where partners may be required to inject capital into a company or requiring some other performance.

Ellis it was an apology for jumping the gun and making an assumption. With over 11,450+ posts I'd have to say I'm aware of what is appropriate here, nothing was meant as a personal issue my friend.

Another comment as to rate, not sure if it was mentioned, but you need to consider the difference between a loan funded by equity in an installment sale and one funded by cash, they are not the same. Usury laws can be different or applied differently as to equity financed vs a cash loan. You may also have minimum loan amounts that may be secured and interest limitations on smaller loan amounts. :)

@Alma Mills

If the subject property is located in the state of California and a correct assumption is that your friends are not licensed as Mortgage Brokers in the state, the usury limitation for the interest on the note is 10%. So, 11% and 12% would be a no, no. The state has the power to charge the lender, even if the borrower does not bring allegations of usury. The note can be rendered invalid and the state can charge the lender up to two years of interest as penalties, amongst some other things.

I am not sure on the computation for usury in California when it comes to points paid at closing. You could ask and attorney. In general, points are considered prepaid interest, so 10% plus 1% is more than 10% interest. My suggestion is if they are friends, then forego the points altogether so as to avoid any potential issues. Friends lending to friends should, IMO, keep it simple. Exotic concepts can be stepping into minefield without proper experienced folks conducting the origination. In addition, there is market feedback for loans at or around 9.0% interest per annum, so they are still getting a good rate of interest. That is likely a "safer" number incase you have prepaid interest which increase the rate slightly which is not uncommon in a loan when calculating A.P.R..

Dobb-Frank and California prohibit loans to have a balloon if they are considered "high-cost" loans, which is any loan above 6.5% plus prime. So your loan is going to be a candidate for the restriction. In addition, some other features such as Interest Only may fall under similar scrutiny of the law. So with the interest rate being contemplated, IMO, forego the balloon altogether.


So then, how does the lender cause the loan to be paid back in a shorter term than 30 years. Well shorten the amortization and term of the loan. Perhaps a 15 year opposed to a 30 year works. I do note, that you mentioned you need to use the private capital for purchasing, rehabbing and then holding and renting the property. Shortening the amortization will certainly put pressure on the net cash flow from rental income, so be mindful to keep your eye on your ability to debt service.

If you do not have prior real property investing experience, a new conventional lender will want to see two years of such experience reflected within your tax returns for any new non-owner occupied loan before the give credit to the property income offsetting the debt obligation of the loan. Then when they do grant the income, it will be at 75%. Perhaps read up on conventional loans for investors here on BP to get more information.

A prudent and reasonable question any lender asks is how they will be paid back. The answer to that question takes into consideration the periodical payments from the borrower which will include principal payments, however it does also include understanding what future refinance event or property sale event may take place or any other paid in full event. You should sit down with your friends and talk about the plan. Perhaps come up with a couple "what if's" to explore. Such as, what if you can't refinance for any reason. While you will have a hard time articulating any specific feature that might lessen the amount of time the loan is outstanding, such as through a balloon, while maintaining a reasonable payment, it will at the least put the group of you on the same page to talk maturely about the arrangements everyone is entering into.

Banks can make 30 year loan arrangements because they can. They don't need to have that principal returned to them less than 30 years in order to operate. That is not always the case for friends and family. With some of the provisions of mortgage regulation it is purposely making it hard to lessen those time frames. In that idea, they really are not in a position to lend and should not do so if the term of the capital use doesn't match the real loan repayment schedule. I am not suggesting you tack on any outside obligation to the mortgage or deed of trust which deals with lessening the time frame such as "I will refinance in 5 years". Those types of conditions most likely will not be enforceable. But again, your friends understand the plan. There may be an opportunity to sell the loan off in the future as a way of them cashing out their interest in the loan leaving it intact. Having a 9.0% interest rate does decrease extension risk, which is the risk the note interest rate is exceeded by the prevailing market interest rate. Another option is simply make them your partners in the deal and do not set up the relationship with debt but rather equity.

@Dion DePaoli

Usury computations usually follow HUD requirements in residential, points are prepaid interest and part of the APR computation.

Added note for all, equity lenders are barred from charging points or prepaid interest on equity assumed as a loan in an installment contract. Cash loans may have points, they may also be limited to institutional/licensed lenders, barring private cash lenders, drill down in state regulations. :)

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