Private Money Lender question?

Question

As you all know, I am new to this real estate investing arena. My question is if I get a Private Money lender to fund my purchase, How do I make money after flipping the property if they charge a rate of 12 percent? I probably sound like a complete idiot but would appreciate any response. Thanks

Account Closed · Answer

@BJ Johnson there should room for profit in the scenario you asked about.

The key to any profit in real estate investing is buying right in the first place. You make your money when you buy not when you sell.

Most private money lenders will look to loan up to 65%-75% of the after repair value of the subject property. For example, if a property is going to be worth $120,000 once repaired a private lender might loan you $78,000 - $90,000 for this venture. The key on your end as is always the case is to get the best purchase price you can. The rehab costs then come into play. If you go above the lender loan amount you will usually be bringing money (the difference) to closing.

100% financing doesn't mean private lender is going to give you $120,000 (in my example scenario) it means the lender would propose giving you a loan up to the LTV threshold without you having to put money into the deal.

There is still room for profit even after calculating a 12% annual return to a PML. Also, a flip shouldn't take you 12 months to begin with (usually) so ideally you sell much sooner than 12 months and save yourself interest, carrying costs, etc. Make sure the PML doesn't have a pre-payment penalty :)

There are a lot of usual expenses to include in a flip deal. I'm assuming you are talking about a flip deal although you just mentioned purchase. Usual expenses include taxes, insurance, utility costs, carrying costs (interest payments, etc), real estate fees, title costs, HOA dues when applicable, and others. You can find a lot of good information here on BP regarding flips and how to accurately calculate your expected profits. It's important not matter what type of financing you do ultimately get you still know exactly how to calculate the numbers.

Good luck!

Richard Gaston · Answer

Account Closed  I would like to thank you as well. I had posted a question in a seperate forum here about an Angel Investor and without even asking I had just done what you said, about how to figure in my profit on a Loan that I am supposedly approved for. I have been approved for a loan that I set at 65% to 75% ARV even though the guy said I can get a 100% LTV I didn't want that, if I did a 100% LTV then I wouldn't make a decent profit margin :)

BJ Johnson · Answer

@sydney

Account Closed thank you so much. I really appreciate the feedback.

Richard Gaston · Answer

Bill Gulley  if he don't want to do the PL he can always buy low and sell low (a little higher for a profit margin). For instance, I am working on closing a deal right now, its a real fixer. The seller is really highly motivated so I can really get a good deal. Close the deal but instead of going to a HML or a PL to get a loan to fix the place up as well as purchase the house, I was thinking of just flipping the contract at a little higher rate then what I negotiated, find a title company (or a RE Attorney) that can do double closings, do the final closing with both and walk away with a nice profit margin, without having to do any fixing. And the purchasing Investor will have a nice profit margin as well when he sells to the end buyer after all the repairs are done so it will be a win-win-win deal. Everybody wins.

Carlos Burgo · Answer

I have this same thing going on my friends mom is in bad shape they have a home thats needs some work and there almost giving it to me but I don't have the money to buy or fix it up call me and let me know how to do it please, this could be my first investment property I've been going to meetings and reading book, can use the help

Carlos Burgo · Answer

I have another question I think I'm just going to flip contracts and were do I get the forms to start this process

Richard Gaston · Answer

@Carlos Burgo Howdy in Slidell, I have kin there in Slidell, how is the weather :) ok first as the other guys were mentioning, how much are your relitives willing to sell is your key factor, seeing that you said they are practical giving you the house I am assuming its a low ball price. You need to factor that in, then you need to find a very good General Contactor (or if you're good at it yourself you can do this yourself) figure how much its going to cost in repairs. Then follow the others advice on figuring the ARP (After Repair Price), this is whats going to be almost your final figure, after you figure in the price you paid for the house, the repair costs and other expenses that you're going to need to pay at closing, find a very good Private Lender or Hard Money Lender, get a loan. Most of those guys don't worry about credit ratings all they worry about is if the house is worth it with the After Repair Value which as J.J. said, then they will loan you the needed funds which will pay for the house and all the needed repairs, make sure you read up on their terms of agreement though, part of the funds for the house will be repairs and they will pay in incriments (stages) so a very good GC who works with Private Lenders or Hard Money Lenders who knows the rules will be a very valuable asset to you. If you're still not sure about anything, ask one of the experts here and I am sure they will be more then happy to walk you through the details. Happy Investing :)

Bill Gulley · Answer

Carlos, don't post in all caps on BP, you'll go to time out.

When you're flipping, you need to assess your holding costs, that includes your debt service (loan payments or interest).

Yes, he can certainly change his strategy as to taking a profit. :)

Account Closed · Answer

Richard You are also most welcome,