Should I use private money for a down payment or entire purchase?

Question

I am presenting to a private money lender this week and basically I can't decide if I should try to convince him to loan the entire purchase or just the down payment. I have done the numbers for weeks now and it seems I will be making more cash flow by just the down payment.

This is because his interest rate is higher than a conventional mortgage. To simply put:

Down payment option: Mortgage is $1,145 at 4% and his rate is $400 at 8% so total per month is $1545

Total Purchase option: His rate is  $2000 at 8% so total per month is $2000

My plan is to refinance after a year or 2 and then pay him out with that. If anyone has any advice that would be great! Also, I was thinking we could buy more properties with the amount of money he would use to buy the whole house and generate even more cash flow!

Nathan Gesner · Answer

Private money is always loaned at a higher interest rate, which will cost you more. You've already crunched the numbers and proven the point. Why would you pay $2,000 a month when you could pay $1545?

Hard money lenders should only be used when traditional financing is not an option. You found a great deal but don't have the down-payment saved up, so you can borrow from a hard-money lender, a family member, a local investor, or my cousin Guido. Try to find someone reputable (not my cousin!). Try to avoid family and friends because it ruins relationships.

When using a non-traditional lender, it is even more important that you purchase below market so you have immediate equity. You can refinance with a traditional lender after 1-2 years (sometimes even less) and get your entire interest rate down to something reasonable instead of the 8 - 12% the hard money lender will charge you.

Anthony Dadlani · Answer

John,

Of course the more money you invest yourself the less you have to pay in fees and interest to any lender.

Best of luck in all your endeavors