Private Lender and how does that work?

Question

Hi everyone,

I just joined BP pro membership last week and excited to learn more about real estate investment. I joined a seminar yesterday at Detroit area and they discussed about utilizing private lender to buy your investment property especially for young and early investors like me. However, I still don't quite get how the process work.

Can anyone offer their 2 cents on what is the process and what I should look out for?

Any advice or suggestions are appreciated.

Cheers,

Gilbert Dominguez · Answer

The private lender is not interested in owning property either for fix and flip or buy and hold, they are only interested in having someone use their money and pay them interest or make their money grow. Obviously these are people who are not in the business of lending money every day otherwise they would be a hard money lender or own and operate some kind of finance company. They are what the name implies private persons but now days these people tend to be very savvy and informed people, expect that they will know what they are doing. Their lending rates can be and probably usually are rightup there with hard money lenders, like I said they are informed people.

Some times you can find these people may ask for a slightly lower rate than hard money lenders or maybe not ask for points up front like the typical hard money lender. Usually those that do not do much lending, and  lend their own personal funds will offer more favorable rates but it does not take long before they learn the value of their money and will know how to better offer their money on terms more favorable to them as well.

Its like anything, the longer someone does something the more they will learn and take a more professional business approach to how they go about lending their money, However these lenders do not do a lot of volume lending like a professional lender would do. They may lend their money out here and there but not too often . It depends on their own personal goals. They say these people should usually be someone in your own circle of known associates or even personal friends or a family member but in reality many have actually become professional lenders all the same.

Brandon Sturgill · Answer

@Geoffrey Tanudjaja "Private" lending means a whole host of things and is not always someone's rich uncle. More times than not these are very savvy individuals that are regulated by the same lending constraints as all mortgage loan originators.

Mitch Messer · Answer

@Geoffrey Tanudjaja Almost: No banks are needed, so no DP or 30-year mortgage.

The private lender would lend you the $50K to purchase the property. You would fix and flip the property, collect your profit, and then pay the private lender for the use of their funds. Or, you would buy and hold the property, paying the private lender while you are leasing it out.

How (and how much) you pay the private lender (interest and/or equity) would be negotiated between you and them.

Geoffrey Tanudjaja · Answer

Hi everyone,

I know that the interest/equity that I need to pay the private lender are based on our negotiated term. However, anyone have any ideas what is the norm that we are looking at? What is the rough ballpark number?

@Mitch Messer

Thank you again for all the help!

Cheers,

Geoffrey Tanudjaja · Answer

@Mitch Messer Thank you for your explanation Mitch!

Derrick Brown · Answer

Great point and explanation!

Geoffrey Tanudjaja · Answer

@Mitch Messer Thank you Mitch!

So, for example if I would like to purchase a property costing $50,000 with 20% DP and 30 year fixed rate. The private lender will lend me that 20% for DP and I will help him/her manage that property (either hiring a contractor to fix it, or property manager to maintain it), and when I sell, we either split 50-50 or depends on our initial agreement.

If I'm doing buy-and-hold, we will also split the cash flow that we get from the property.

Am I right to look at it this way? or am I completely wrong about it?

Thank you Mitch for your help beforehand!

Cheers,

Mitch Messer · Answer

Hi @Geoffrey Tanudjaja and welcome to BiggerPockets!

Private lenders are people already within your personal network who have funds to invest (often in an IRA) but who are looking for better returns than they are currently getting. They usually don't want to be active in the real estate business, preferring to receive passive income from a loan.

As an investor, you can be a huge help to these folks. You can find great real estate deals and then use private lender money to finance the deal. You'll do all the work, whether it's a fix-and-flip or a buy-and-hold. As long as you're using their money, you will pay them interest at a higher rate than they used to get. Their interest payments are funded from your profits in the deal. Done right, everyone gets what they need!

Private Lender and how does that work?

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