Private Lending

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Keleen Culberson
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How would raising private money for a buy and hold work

Keleen Culberson
Posted Nov 8 2022, 18:37

Hello,

I am looking to acquire my first property soon within the next 3-6 months with a partner.  However, I am wondering how would the process of raising private money for this investment property we are looking to hold long term work? 

i.e. raising the money from a private investor for the initial downpayment and closing costs and getting them their money back (plus a return) without putting any of our own money in the deal?  

We would obviously want to make sure they received a return, so would that come after we refinance after 6 months?  Is this possible to do?

I hope this makes sense.

Thank you!!!

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Eliott Elias#2 All Forums Contributor
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Eliott Elias#2 All Forums Contributor
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Replied Nov 8 2022, 20:15

It's all negotiable. Most partners who put up all the money want to be 50/50 on the deal. Best case scenario for you is to just give them a return every month on their money and no equity 

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Andrew Syrios
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Andrew Syrios
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ModeratorReplied Nov 8 2022, 20:19

It's generally hard to use a private lender as a second on top of a bank loan. Yes you can do it but banks usually will prohibit it so you have to either not attach it to the property (which the private lender won't like) or do it behind the bank's back. You can also use the private lender for all the purchase and refinance later at appraised value (the BRRRR method) or have the private money bring the downpayment and get part of the equity (a syndication, usually for bigger deals).

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Brock Mogensen
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Brock Mogensen
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Replied Nov 14 2022, 07:53

There are several ways you can structure it. But likely want to either have it as Joint Venture or Syndication.  If you are looking to have investors for all the equity you will likely be looking at a syndication where you will have a GP/LP structure. I suggest connecting with an attorney that is familiar with Operating Agreements as there could be other ways to structure it.

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Grant Shipman
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Grant Shipman
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  • Estes Park, CO
Replied Nov 15 2022, 09:08

I'm glad you are getting ahead of the ball with this @Keleen Culberson!  Here's what I think your best options would be IMO.

1) Make it a private loan.  This avoids a lot of things like the SEC regs, taxes, syndication rules and makes things simple- you pay the mortgage, pay your private lender, and manage your tenants.  The downside is the rental income has to cover both the mortgage and the private loan and leave enough for you to make it worthwhile to you.  Pro tip: seasoning. If money is in your bank account for 2 months, then the bank doesn't care/ask where it comes from. This means you can get the private money loan put into your bank account. Then buy a house 2 months later (after two bank statements).  Write it into the private note (loan agreement) that 1st payment is (Date), and choose a date that is AFTER you've started collecting rent and can pay it.  I'm happy to send you my editable private money loan agreement if you email me. Remember, if you close as close to the 1st of the month as possible, then you have more time before the first mortgage payment is due.  Currently, I'm getting private money lenders at 8%, amortized over 30 years, balloon payment in 5 years. You can use this website to calculate how much your money payment would be. https://www.mortgagecalculator

2) Make is a Joint Venture: You only do this if you'd rather have the money person share in the risks/rewards THAN simply paying them back. If you do this, I recommend using an LLC depending on how much it costs in your state to file (start) and renew (annual). I have a short video lesson on this as part of the online course I teach- I'm happy to email this to you (it's private or I'd post it here). I love JV's and used them w/my first 7 properties. Huge win-win if you take the time to do it well. If you do a JV, you still need to season the money UNLESS your partner is on the loan. Upside is your partner doesn't make money unless you do, so you will never have to pay your partner money you don't have. Downside is your partner will share all the upside- rents/equity/tec.

BIGGEST DEAL is to get the loan with as little cash as possible b/c this ups your Cash ROI. Look into CHFA, downpayment assistance programs, USDA zero down loan, VA loans, FHA loan.

I'd encourage you to NOT count on a refinance.  This is never a good idea, but especially now.  The Fed, which effects the rates, are acting unlike any time in the past, so who knows when the rates will go down.  Personally, I am not counting on any refinances w/in the next 2 years, but I will be happy if the rates drop and they happen. 

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Alex Breshears
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Alex Breshears
  • Lender
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Replied Nov 15 2022, 10:45

Hi Keleen! I love your enthusiasm and how you are looking forward. There are a few things you could do, depending on experience and goals.

First, let's be clear that raising money from passive investors in any investment falls within the guidelines of the SEC. If you are looking for joint venture partners, or someone to be secured debt on a property, that is still something they are actively participating in. I'm not an attorney and don't play one on TV, but this is something to be mindful of when thinking about a business plan for acquisitions.

I personally know several active investors that have based then entire business model around private funds from private individuals for long periods of time. These are usually individuals who want the consistent monthly cashflow - so they may not even identify as investors or private lenders for that matter. the easiest way to find these individuals is to start talking to others in your network about what you are doing, how you are are doing it, where, and when.  These people have a way of working themselves into your network, watching what you are doing for awhile and then offering to work with you on a deal.  They usually don't want the hassle of owning a rental, want consistent income from a monthly payment (usually to help offset their own monthly expenses) or they have retirement capital they want to pull out of the stock market.

As far as raising specifically for a downpayment and closing costs, as a private lender I want to just caution your thought process a bit on this part.  Realize that 1) the downpayment is the equity in a property MOST at risk of being lost. When the property doesn't appraise, is damaged, falls into disrepair or has a major mechanical failure you cannot pay for, the value is decreased. Some factors are entirely out of your control as an individual investor such as the broader economy affecting the values, maybe a major employer scales back employment in that market and the housing market takes a hit, etc etc.  If you are going to reach out to others for this capital, please do your best to either safeguard it by mitigating those risks OR make them ABUNDANTLY clear that their capital is going to be used for this. IN the case of paying for closing costs - that money isn't even going into equity for the property, so now they are upside down in the property from a debt standpoint. We don't have the strong booming market we had in past years, so banking on appreciation is not a viable strategy in my opinion. 

I happen to be one of the authors of a book about private lending from BP. While the book is written from the standpoint of someone wanting to do a private loan - it also works great as a tool for active investors to be the knowledge base for their network to show how you will safeguard their capital in the deal.

The book can be found here: https://store.biggerpockets.co...

I hope that helps!

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Jay Thomas
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Jay Thomas
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Replied Nov 15 2022, 10:51

Of course, every situation is different and you will need to negotiate the terms of your partnership based on the unique needs of your business. However, it is important to keep in mind that everything is negotiable and you should not be afraid to ask for what you want.

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:47
Quote from @Eliott Elias:

It's all negotiable. Most partners who put up all the money want to be 50/50 on the deal. Best case scenario for you is to just give them a return every month on their money and no equity 


Thanks for the reply! It sounds like everything is negotiable from what you are telling me. So I was curious to see if there was a way to raise private money to take care of the initial downpayment and closing costs and also give the lender their money back (with interest) without having to include them in the deal over the long run. 

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:48
Quote from @Andrew Syrios:

It's generally hard to use a private lender as a second on top of a bank loan. Yes you can do it but banks usually will prohibit it so you have to either not attach it to the property (which the private lender won't like) or do it behind the bank's back. You can also use the private lender for all the purchase and refinance later at appraised value (the BRRRR method) or have the private money bring the downpayment and get part of the equity (a syndication, usually for bigger deals).

 @Andrew Syrios Thanks for the info!

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:49
Quote from @Brock Mogensen:

There are several ways you can structure it. But likely want to either have it as Joint Venture or Syndication.  If you are looking to have investors for all the equity you will likely be looking at a syndication where you will have a GP/LP structure. I suggest connecting with an attorney that is familiar with Operating Agreements as there could be other ways to structure it.

 @Brock Mogensen A syndication may be a strategy I look forward to using down the line. I was more so curious to see if there was a way for me to get the lender in and out of the deal ASAP while also giving them a return.

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:50
Quote from @Grant Shipman:

I'm glad you are getting ahead of the ball with this @Keleen Culberson!  Here's what I think your best options would be IMO.

1) Make it a private loan.  This avoids a lot of things like the SEC regs, taxes, syndication rules and makes things simple- you pay the mortgage, pay your private lender, and manage your tenants.  The downside is the rental income has to cover both the mortgage and the private loan and leave enough for you to make it worthwhile to you.  Pro tip: seasoning. If money is in your bank account for 2 months, then the bank doesn't care/ask where it comes from. This means you can get the private money loan put into your bank account. Then buy a house 2 months later (after two bank statements).  Write it into the private note (loan agreement) that 1st payment is (Date), and choose a date that is AFTER you've started collecting rent and can pay it.  I'm happy to send you my editable private money loan agreement if you email me. Remember, if you close as close to the 1st of the month as possible, then you have more time before the first mortgage payment is due.  Currently, I'm getting private money lenders at 8%, amortized over 30 years, balloon payment in 5 years. You can use this website to calculate how much your money payment would be. https://www.mortgagecalculator

2) Make is a Joint Venture: You only do this if you'd rather have the money person share in the risks/rewards THAN simply paying them back. If you do this, I recommend using an LLC depending on how much it costs in your state to file (start) and renew (annual). I have a short video lesson on this as part of the online course I teach- I'm happy to email this to you (it's private or I'd post it here). I love JV's and used them w/my first 7 properties. Huge win-win if you take the time to do it well. If you do a JV, you still need to season the money UNLESS your partner is on the loan. Upside is your partner doesn't make money unless you do, so you will never have to pay your partner money you don't have. Downside is your partner will share all the upside- rents/equity/tec.

BIGGEST DEAL is to get the loan with as little cash as possible b/c this ups your Cash ROI. Look into CHFA, downpayment assistance programs, USDA zero down loan, VA loans, FHA loan.

I'd encourage you to NOT count on a refinance.  This is never a good idea, but especially now.  The Fed, which effects the rates, are acting unlike any time in the past, so who knows when the rates will go down.  Personally, I am not counting on any refinances w/in the next 2 years, but I will be happy if the rates drop and they happen. 

@Grant Shipman This is amazing info.  A lot but good info to digest lol. Thank you!

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:51
Quote from @Alex Breshears:

Hi Keleen! I love your enthusiasm and how you are looking forward. There are a few things you could do, depending on experience and goals.

First, let's be clear that raising money from passive investors in any investment falls within the guidelines of the SEC. If you are looking for joint venture partners, or someone to be secured debt on a property, that is still something they are actively participating in. I'm not an attorney and don't play one on TV, but this is something to be mindful of when thinking about a business plan for acquisitions.

I personally know several active investors that have based then entire business model around private funds from private individuals for long periods of time. These are usually individuals who want the consistent monthly cashflow - so they may not even identify as investors or private lenders for that matter. the easiest way to find these individuals is to start talking to others in your network about what you are doing, how you are are doing it, where, and when.  These people have a way of working themselves into your network, watching what you are doing for awhile and then offering to work with you on a deal.  They usually don't want the hassle of owning a rental, want consistent income from a monthly payment (usually to help offset their own monthly expenses) or they have retirement capital they want to pull out of the stock market.

As far as raising specifically for a downpayment and closing costs, as a private lender I want to just caution your thought process a bit on this part.  Realize that 1) the downpayment is the equity in a property MOST at risk of being lost. When the property doesn't appraise, is damaged, falls into disrepair or has a major mechanical failure you cannot pay for, the value is decreased. Some factors are entirely out of your control as an individual investor such as the broader economy affecting the values, maybe a major employer scales back employment in that market and the housing market takes a hit, etc etc.  If you are going to reach out to others for this capital, please do your best to either safeguard it by mitigating those risks OR make them ABUNDANTLY clear that their capital is going to be used for this. IN the case of paying for closing costs - that money isn't even going into equity for the property, so now they are upside down in the property from a debt standpoint. We don't have the strong booming market we had in past years, so banking on appreciation is not a viable strategy in my opinion. 

I happen to be one of the authors of a book about private lending from BP. While the book is written from the standpoint of someone wanting to do a private loan - it also works great as a tool for active investors to be the knowledge base for their network to show how you will safeguard their capital in the deal.

The book can be found here: https://store.biggerpockets.co...

I hope that helps!

 @Alex Breshears Thank you Alex! Private lending is something I continue to learn about almost daily and I look forward to leveraging this for my benefit!

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Keleen Culberson
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Keleen Culberson
Replied Nov 22 2022, 15:52
Quote from @Jay Thomas:

Of course, every situation is different and you will need to negotiate the terms of your partnership based on the unique needs of your business. However, it is important to keep in mind that everything is negotiable and you should not be afraid to ask for what you want.

 @Jay Thomas Thank you Jay.  I agree!

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Andrew Syrios
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  • Kansas City, MO
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Andrew Syrios
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  • Kansas City, MO
ModeratorReplied Nov 22 2022, 20:17
Quote from @Keleen Culberson:
Quote from @Andrew Syrios:

It's generally hard to use a private lender as a second on top of a bank loan. Yes you can do it but banks usually will prohibit it so you have to either not attach it to the property (which the private lender won't like) or do it behind the bank's back. You can also use the private lender for all the purchase and refinance later at appraised value (the BRRRR method) or have the private money bring the downpayment and get part of the equity (a syndication, usually for bigger deals).

 @Andrew Syrios Thanks for the info!


 Sure thing Keleen, good luck!