Private Money Lender Investment Structure

[Kenneth Goldman]

I am approaching private money lenders for fix and flip deals on houses. What is the best way to structure their investment capital since I am not putting any money into the deal? What is a reasonable rate of return? What type of investment structure do I use?

[Adam Johnson]

Originally posted by Xavier Strong:

Adam. What and where does this last "draw" come from. Seeing that you borrowed the purchase price and funded the repairs yourself? Curious...

Sorry, should have been more clear about that. Here is a real example.

A couple years ago, I wrote an offer on a foreclosed 4-unit that was pretty rough. Because I had to close quick, I paid cash using a credit line BUT I also started talking to a hard money lender I had worked with before. I paid $ 17,000 for the property and it needed roughly $ 20,000 to allow me to get tenants into it. (we did further repairs AFTER the cash flow was fired up, so I used another form of OPM, rent). When all was said and done, I figured I would have about $ 40,000 into the initial purchase, closing costs, start-up, and repairs that were needed right away, so that is what I asked for in the mortgage.

When I closed on the mortgage, I was given a check for $ 20,000, (mortgage amount was still $ 40,000, I just couldn't have it all yet). This replaced MY money that I had used to close the purchase, which I then used again to fund the rehab. After about 2 months, all 4 units were occupied and I had completed the major repairs that I had told my lender I would complete. He then wrote me a check for the other $ 20,000 "draw", again replacing my money for me to use on other deals.

Why would the lender do that (allow me to be 100% leveraged with HIS money)? Partially because I had done other deals with him before and delivered on promises. That was a big factor. The other part of it was that he had a $ 40,000 mortgage on a property that grosses $ 2,300/month and had an after repair value of $ 60-65,000. As we continued with our repairs using the excess rental income, the value continued higher. Note that I used a hard money lender and paid a premium interest rate, in this case, 14%. Very expensive money, but the cash flow covers it and it allowed me to return almost ALL of my initial investment within a couple months and replace it with OPM.

I still own this property today and it performs very well.