Apartment Private lending money Explained?

[Leah Bonner]

Being overwhelmed with all the info about investing in multifamily! 
The best advice i got is to find someone in my area (syndicator/investor) currently doing what im doing and sort of become a apprentice so i'm currently working on that.. I believe it will help me build credibility, knowledge and once I do begin to find deals I think it will help me have private lending options to help raise money

OK so getting to my main question it still confuses me HOW the private money lending works. Creating a hypothetical situation to get a better understanding

I find a deal that is 1 million dollars DO I 1) get private lenders to raise the down payment of around 300,000 to then get a bank loan.. OR DO I 2) get the private lenders to basically raise the whole 800k try to get the seller to offer financing as well.

So say in this scenario its an 8% cap rate, So my noi is around 80k.

If i go the route to get private lenders to raise money for the down payment that means out of that 80k I pay the bank loan so i probably net around $34,168  (that's just after the bank loan assuming its around 4% interest) so then out of that 34k I then take out ANOTHER percentage of that money to consistently give to my investors(lenders) or how does that work? I know there are many different options to offer like interest only, 50/50 the whole deal, preferred percentage etc etc.

I know this isn't a short and simple answer and there are different variations but for now im just trying to get a simple understanding 

[Chase Keller]

Hey @Leah Bonner,

You're certainly on the right track.  I would agree with finding someone that is already doing what you want to do.  That's what I did and it made a huge difference.  

From your original question, it usually makes sense to utilize bank financing.  An investor is typically going to require a lot more interest and/or equity that what a bank will.  In my experience, it's tough to get investor money cheaper than 8%.  I've done lower in some cases, but only with family.  
There are deals where banks are going to have difficult time financing; huge vacancy, really poor condition...

You are correct that out of that $80k, you'll need to pay the debt service as well as your investors in whatever capacity you've agreed, then yourself.  

After your debt service, your $34k gives you a Cash on Cash return of 11%.  I typically do a preferred return, in this case I'd probably do around 8%, then split the rest 70/30(70 going to investors).  That gives you a $3,000 income.  Not much, but that's the example here.  I have deals that work the exact same way with fairly similar numbers.  

As long as you write it into the agreement upfront, you can have the option to refinance later on, pay off the investors and end up with the property all to yourself!A few ways to get a better return for yourself; 

1)  Find a better deal, which is tough in today's market.  But it happens.

2)  Utilize fees - acquisition fee, asset management fee, refinance fee...  Just know that these can dilute the returns for the investors, so do it wisely.

I hope that helped a little!

Let me know what other questions you have, I'd be happy to help you any way I can!