Working with Private Money Lenders: Possible Loan Term Options

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Earlier this week, my husband and I refinanced one of our rental properties working with a private money lender.  It was the simplest transaction ever.  Our private money lender is thrilled because she’s getting a fantastic return on her investment (using her self-directed IRA funds) and we’re happy because not only is she happy, but we were also able to structure the loan in a way that saved us money on upfront fees plus increases our monthly positive net cashflow.

The experience just reminded me of how great it is to work with private money lenders because there are so many options made available to you with regards to structuring the loan terms. For example:

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Available Loan Term Options when Working with Private Money Lenders

Short Term Loans

You can do short term 6-month loans for your rehab flips.  You can pay your lender 1 point on the loan or no points at all.  You can offer to make monthly interest payments with a balloon payment at the end of the 6 months.  You can make no monthly interest payments at all, but rather pay a higher interest rate on the loan and just have the one balloon payment at the end after you’ve sold the property. There are so many options available to you, and it’s just a matter of determining (by asking) what is important to the potential lender.

You may find some lenders who want to receive payments the first time around with you, but once that loan is paid off and they are ready to do another one, they may be willing to wait the entire 6 months without payment for the next round because of the established trust.

Mid-Term Loans

Perhaps your exit strategy is to do lease options and you only anticipate holding properties for 18 months – 3 years.  Or, you have an awesome deal that will cash flow well and you haven’t found a lender willing to hold for a long term yet, but you want to establish a relationship and get a loan started.   In these cases a mid-term length (typically 2-5 years) interest-only loan may suit you.

The risk is that you may be forced to refinance or pay off the property in the short-term, but if you don’t overextend yourself with these mid-term loans by doing too many at once, the risk isn’t all that bad.  You can either work towards a conventional loan when refinancing or refinance with another private lender (like we just did). Don’t be surprised when a lender who originally agreed to only 2 years later decides that he or she wants to continue the loan after the term is up.  The yields that lender is getting from you very likely exceeds what they are getting in the stock market and certainly exceeds the low yields from CDs, bonds, and the like.  Check out the average yields on CDs on November 24, 2010 (source: Bankrate.com):

Product Yield Last week
1 Yr CD 1.04% 1.05%
5 Yr CD 2.22% 2.25%
6 Mo CD 0.75% 0.77%
1 Yr Jumbo CD 0.90% 0.88%


Long Term Loans

If you’re a buy and hold investor, obtaining a long term (10 years or more) loan from a private money lender is like finding gold.  While these lenders may be harder to find, they absolutely exist so don’t rule out the possibilities.   Remember that even if you’re offering an interest rate as low as 6% (substantially lower than what you may offer on short and mid-term loans), that rate will attractive to some lenders depending on their current portfolio and investment strategy.

Second Mortgage Loans

Don’t forget about the option of having private lenders hold a second lien holder position on a property.  Let’s say that you are need of a small loan of $10-20K to do renovation work on a property.  There are individuals who will be willing to loan you money for this and hold a second mortgage for you.  In fact, I run into a number of people who have small retirement accounts and want to put their money to work in asset backed investments such as real estate.  These are the perfect types of loans for them.  My only caution is that you want to ensure you have equity in the property and provide your lender with the peace of mind that if the property was ever foreclosed on, there would be enough money to pay them back too!

Again, there are numerous options made available to you when you’re working with private money lenders.  If you’re a rehabber or buy and hold investor, I strongly recommend making it a goal to work on securing them!

About Author

Shae Bynes is a real estate investor in Sunny South Florida. On her blog, GoodFaithInvesting.com, she provides helpful tips and an inside look at her real estate investing adventures -- obstacles, failures, & successes!

12 Comments

  1. Shae,

    Private money lenders are an excellent resource for real estate investors.

    I routinely use private money lenders/investors in my lending business.

    What techniques do you find work best to find/acquire your private investors? What rates do you typically offer your investors?

    One word of caution, you have to be careful in how you advertise for your private lenders, making guarantees, and failing to disclose the risks involved.

    Regards,

    wade

    • Wade,

      You’re absolutely correct that you have to be careful about advertising and making claims/guarantees. Thanks for making that important point. Personally, I only work with people within my warm market to avoid the extra steps, but I know there are people who legitimately secure private money lenders outside of their warm market.

      As far as techniques for securing them, my best strategy can be found in a previous post I did here on BiggerPockets: https://www.biggerpockets.com/renewsblog/2010/09/16/storytelling-is-powerful-for-your-real-estate-business/

      As far as terms, they definitely vary based on length of time for the loan and what the exit strategy is for the property. If you’d like to talk about specifics and exchange notes, feel free to send me a message through BiggerPockets!

      Thanks for your comments!

  2. What a great summary Shae!! There really are so many options when it comes to working with a private lender like you said. You have to understand what you need and what the lender wants and come up with a solution that works for both! Great stuff!

    • Hi Charlie, I actually haven’t secured a long term lender yet….only mid-term and short-term. However, I can tell you that I’m on the look out for people who put substantial funds in low-yield vehicles such as bonds and CDs.

  3. I agree about the “wonderfulness” of private money lenders. My current loan is from a private party – interest-only, 5 year, 8%. While that sounds high, it’s on a manufactured home, so it is actually comparable to bank loans on that type of property. Unlike banks he was willing to make a small loan (under $100k), on a first investment property (the bank I’d had an account with for 29 years would only lend in investment property if I’d already owned investment property ….um….?). So far so good, though I do need to get things lined up so that if he doesn’t extend I can get a conventional loan. Maybe in 4 years my bank will consider lending me money on it since I should have at least 50% + equity by that point (and I will already own an investment property) . Im fairly confident of my equity position, since it was a distressed fixer (now fixed) and the county assessor had already tried to assess at 230% of purchase price as it’s “fair market value” at time of purchase because of the size (it’s almost 2,000sq ft) . Talked to a lawer, filed all the paperwork, & likely headed for a hearing on that one.

  4. Joseline Avendano on

    since there is an opportunity in the distressed bank notes or what they cal non-performing assets of banks or lenders, I would like to tap into this niche. Just wondering whether private money lenders finance this kind of transaction, and of course, considering I present an excellent exit strategy for the investment?

  5. Hello,
    I currently have a few private investors interested in doing business with us, but I don’t have much experience with this since up until now, I have been using my own funds. I understand the basics of private money lending, but can anyone tell me how you properly structure this on paper? Do most people just use a simple contract outlining everything, or do you just use a note and record a mortgage on the property each time? This is the part this is tripping me up. One investor is fairly new to this so he doesn’t have the answers either. If a contract is used does anyone have a template or source for these? Thanks!

  6. Just need feedback on some 9.5- 10% money we have,
    75% LTV – non bank qualified loans, 15 – 30 year fixed.
    65k – 300k loans for investors

    commercial property from 350- 2.5 million
    same type terms (9.5 – 11)

    if you can find a rich uncle , its a nice alternative.

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