Question About How to Structure Deals Using Private Money

[Phil Petite]

I feel a bit stuck in this scenario, and I could use some advice.

I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:

• Loan amount from investor: $110k
• Yearly Interest Paid to Investor: 7%
• Monthly Rent from Property: $1300
• Monthly Interest-Only Payment to Investor: $642
• Monthly Property Taxes: $71
• Monthly Insurance Payment: $71
• Property Management fees: $104
• Net Cashflow: $412

Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!

[Mitch Messer]

Quote from @Phil Petite:

I feel a bit stuck in this scenario, and I could use some advice.

I'm raising some money from private investors and wanted to run some options by more experienced posters, because I'm a bit unclear as to what the best way is to structure my deals with private investors, or if there are better options that I'm not considering.
Here are some rough numbers to capture a deal that is on my radar:

• Loan amount from investor: $110k
• Yearly Interest Paid to Investor: 7%
• Monthly Rent from Property: $1300
• Monthly Interest-Only Payment to Investor: $642
• Monthly Property Taxes: $71
• Monthly Insurance Payment: $71
• Property Management fees: $104
• Net Cashflow: $412

Now, this is not a bad outcome, and I am fine with it, but I am wondering what someone else might do differently if you were in my position - Should I charge an upfront fee to my investor (maybe $5k or so for this deal and also keep the cashflow as my monthly management fee), or would you instead use the $110k from the investor to BRRRR a bunch of deals, or would you try to just use the capital for one deal at a time? Any advice would be great!

Congrats on finding willing private lenders!

A few observations:

1. Your cash flow calculation is missing vacancy, maintenance costs, and capital expenses. Taken together, they'll likely cut your estimated cash flow in half.

2. You don't specify, but if you're using $110K in borrowed funds to purchase a property worth $110K, you're asking your private lenders for a 100% loan-to-value (LTV) loan, which is super risky for them and for you.

3. Most private lenders don't plan to lend forever, so you should consider how and when you'll get them cashed off.

4. The going rate for private money is considerably more than 7% (generally 10-14% in 10/2024). Your lenders may not know this yet, but eventually they're going to find out. You should plan accordingly.

If these are "friends-and-family" type private lenders, I would urge you to tread very carefully. Borrowing from loved ones is a minefield if not done properly.

Ask me how I know this...