Hello all! I’ve got a really good potential flip I’ve found that’s got great numbers. However the downpayment for the property is where I need the help of a private lender. I am wondering is it possible to find a private lender to loan me the cash for the down payment in return they would get their money back + 20% of the final profits on the home. Im structuring the deal this way because I am young and don’t have lots of experience so I’m trying to find a private lender that would give me a shot and also structure the deal to the point where they can’t say no. Let me know your thoughts!
@Quincy Jones , is it possible... maybe. But you are actually looking for an equity investor. Generally, your lender will no accept a borrowed down payment; they want skin in the game. And in my experience, private lenders don't want to be in a second lien position. But, I have met some private lenders that will also do equity investments if the terms are good enough.
This is possible but as mentioned you may run into issues with lenders allowing down payment to be borrowed or a 2nd lien on the property. You may also run into the issue of the return percentage. I think with you being new and having no skin in the game you would likely be look at a 50/50 split due to not having experience.
The best way to find out would be to talk to a few private lenders and see what they would want in return as well as talking to a few hard money lenders and see if borrowed funds and/or a second lien would be allowed.
Also if the deal is good enough you might also ask the private lender if they would just fund the whole deal. That way you are only dealing with one person/company.
I do think that finding a partner for your first few deals where you bring them the deals and they either fund them or secure the funding would be the best route to take. Yes you will make less due to having to split the deal but you will also make less mistakes during the process as well as learn a ton from them on how to do things.
@Quincy Jones while both of the above are correct in most circumstances, we have helped many of our investor clients secure 'gap funding' in the form of unsecured personal debt. This means the "no 2nd lien" issue is avoided entirely, as you can utilize unsecured personal debt for next to anything. Some very important things to know however!:
- Being unsecured, this is fast funding for this capital - generally 5-7 days
- Can apply for up to two times your annual W-2 income
- Unlimited use of funds (rehab, down money, legal fees, rehab reserves, cash for auction properties etc)
- Re-usable, or payoff (no pre payment penalties)
- No up front fees of any kind, and fees are taken from proceeds, so you dont need liquidity to obtain this capital (but you do need to show consistent W2 income)
- Not the cheapest capital. Average rates are between 10-18%. be sure this makes sense for your deal based on the estimate time you expect to hold onto the loan
- Doesn't match well with rental loans - really suited for rehab/strong value add to ensure you can exit the loan without issue - be sure your rehab and ARV numbers work well for 100% financing
- Short-term pay back period - these are 5-yr fully amortizing loans, so be sure the monthly payment is affordable to you (although most lenders won't lend you more than you can handle, as they due a global DTI ratio generally)
- Not all lenders accept Gap Funding, even when in the form of unsecured personal debt make sure your lender accepts this. Many HMLs do, even some of the big names out there, just be sure to clear that up front.
Please be aware, gap funding of any kind can be tremendously costly if you aren't confident with you numbers or the deal. You don't want to over leverage yourself for 100% financing with this type of capital. If you have a "Rich Uncle Joe" - they will always be your best source.
Hope this helps! Shoot me a DM if you want to chat more on this!
@Quincy Jones you only have to pay 3-5% if it will be your primary residence. I would suggest doing your flips this way, until you have extra capital to pay the standard 15-20% for investment properties.
@Cody Pratorius so basically live in the flip for the 6 months until it’s sold?
@Quincy Jones - Yeah! Sometimes we gotta make sacrifices!