Working out the Math of a Private Lending Deal, anyone?

Question

Hi.

I'm trying to figure out the math on a privately funded real estate deal and would appreciate your help.

Time and again I've heard podcasts and read articles/posts on how private lenders get 10%-15% ROI but no source i've come across actually walks you through the math.

Here's how i'm seeing it; let's keep it simple and assume the following:

$140,000: property price$3,000: closing fees$143,000: total cost to acquire property$100,000: funds i provide$43,000: funds provided by private lenders$8,992: NOI (@ 1% rental income rate, 5% vacancy, 2% property tax, 5% Capex provision, 5% repair provision, $100/mo. property management fee, $588 home insurance, and another $700 misc)

$7,798: net annual cash flow after tax (CFAT)

Terms* with the private lender: 12% per year (non-compounded) on their investment, 1 balloon payment at the end of the 3rd year. In other words, at end of Year 3, they receive $43,000 + (12% x 43,000) = $58,480.

*I like these terms (assuming they work, hence this post) because: (a) they're the kind of terms that would attract funding from my network of friends and associates; (b) I want their names off the deed in 3 years; (c) I do not want to have to sell the property to pay them back.

Now, accounting for annual rent and expense increases, the CFAT for Years 1-3 are: $7,798, $7,909, and $8,022 for a total of $23,729. I owe the private lender $58,480, meaning I have to fork out $34,751 (the balance) to own the title clear and fulfill my promise to the investor.

Is this how the private lending model works, or am i missing something here?

Thanks!

Rabih El-Khoury · Answer

Thanks for the feedback gents.

@Jefferson Smith in the manner i presented the case, unless i'm running a ponzi scheme, the deal itself doesn't/can't provide for the balance on the balloon payment. The only way the $34k would be made available is like @Jeff V. said, by re-financing. And the better chances for that re-fi to come up with that capital is if this is a BRRR project.

This is the conclusion I was looking for, and thanks for the help/confirmation guys: private funding only works within the context of BRRR.

Jeff V. · Answer

@Rabih El-Khoury

Your missing the Cash Out Refinance that you would have to do in 3 yrs to pay off the private lender.  You wouldn't pay them off with just cashflow in only 3 years...

Also, private lender name shouldn't be on the deed other than as a lienholder, which will be paid off when you re-finance them out in the third year.

We had a recent deal where we borrowed 30k for purchase and 30k for rehab.  We then rented for a year and did a refinance for $65k.  Refinance netted us $5k plus a years cashflow and we have no money in the deal now.  Property appraised for $112k so we ended up with another $47k in equity to boot.

Funding source was not private money but could have been just the same.

Hope this helps.

Jeff V

Jefferson Smith · Answer

I'm a newbie. That said, "how the private lending model works" depends entirely on the terms of the deal.

If your intent is to make payments equivalent to the CFAT each year, then your $34,751 math looks right to me. The question I have in that scenario is how do you intend to pay back the balloon payment if you're not selling the property. Do you intend to get other financing in three years? That is, is this an intended BRRRR?