How To Pay Back Private Lender Loans

Question

If a relative is investing $100,000 for a rehab what is a  reasonable pay back strategy? Do you pay them am interest rate for the year on $100,000 or would you pay them a certain interest percatntage per profit, per property?

Erin Coker · Answer

@Cameron Whitehead Got it. Thank you for the advice. No, $20k isn’t a great deal. I was just making up a number to see if I pay them back a percentage of the profits or interest rate on loan. Hope that makes sense.

Cameron Whitehead · Answer

@Jay Morgan you are giving up a lot of profit there.... I have done it that way before when I first got started but then I switched to interest-only payments for the life of the loan and a couple of points. You get to keep a lot more of your profit and my investor is still happy about the return he is getting. Win-Win.

Erin Coker · Answer

@Jay Morgan Thank you. This makes sense. This is my father in law and he wants to help me and I want to give him a good return. I like this strategy or the pay interest like @Kyle J. suggested. I’ll discuss with options with my father in law and see what makes sense to him. Thank you everyone. I appreciate you.

Kyle J. · Answer

@Erin Coker  The easiest way to do it since it’s a loan on a single fix-and-flip property, is to just do a interest-only loan secured by that property. The interest rate can be whatever you two agree to.

To give you an idea how this would look, $100k borrowed at 10% interest would be monthly payments of $833.33. (Note: I did pick up on the fact that it seems you don’t want to make monthly payments and that you’d prefer to make one lump sum payment at the end when the property is sold. While that’s not as common, it is possible if your lender is agreeable.)

Lastly, do NOT do any sort of amortizing loan. It’s unnecessarily complicated, any monthly payments you were required to make would be much higher, and frankly it’s just not how private/hard money loans are done.

Also, if you were considering any sort of equity agreement, you have to ask yourself (and your lender) if they’re also willing to share in any loss should the deal end up losing money? If not, it’s probably best just to treat them as a debt investor/lender and go the route of the simpler interest-only loan I originally described.

Good luck.

Steve Morris · Answer

Depends does he want to be:

1) Lender - Then a regularly amortizing loan pmt at a rate you agree on

2) Equity partner - If he wants a share of the risk and potential for gain, I think I'd go for a min payment since he'll have the property as recourse (get someone that knows what they're doing to draft the agreement).

Goal(s) in either case are protecting both your interests and clearly understood terms BEFORE you go into contract with them.

Jay Morgan · Answer

@Cameron Whitehead if I were to do a flip, I would split the profit 50/50 with my investor. You do the work he makes money, win/win. Of course you can negotiate better or worse terms depending on the amount and relationship.

Cameron Whitehead · Answer

Absolutely, hope I was helpful.

Cameron Whitehead · Answer

If it was me I would structure it as a real private/hard money loan. 8-12% interest paid monthly. Pay the family member a couple of points on top of the interest to make it a fair deal.

If you are only going to make 20k profit best-case scenario I wouldn't do it. That deal could go bad quick with that thin profit margin.

A great deal turns into an okay deal. An okay deal turns into a bad deal almost every time. Only do great deals.

Erin Coker · Answer

@Cameron Whitehead This will be a fix and flip with cash.

@Jay Morgan For example, if relative gave me a $100k for fix and flip and we made $20k profit on the deal would you pay them 10% out of the $20k and the subsequent deals/ profits? That’s what I was thinking and wanted to see if that was fair.

Jay Morgan · Answer

Personal loans from the bank are 7-12% here. Maybe 10% simple interest. You will need to negotiate a payback period, IE 5 years or 30 years. For example 10% over 20 years would be $460/mo.

You can also take the percentage route if the property is cash flowing, aka 50% at 1000/month cash is 500 month payment to each of you. That woudl take 20 years in this example. Brrr will say to re-fi in two years and pay yor family back!