Lifecycle of Private Money

General Real Estate Investing
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Lifecycle of Private Money

Andrew Gunther
New to Real Estate · Portland Oregon · Member since 2018 · 4 posts · 6 votes

Hello BP,

One of my Grandparents recently passed away and my Mother is inheriting a nice sum of money. They have talked with me of possibly funding some of my deals going into the future. My initial thoughts are that we would find BRRRR deals that I could refinance out of and get my parents their capital back + interest. We thought that they would be more along the lines of a silent investor just putting up funds and I use my connections and deal finding skills to do all of the work.

With that said I am wondering what the lifecycle of private money looks like. By this I mean how do they actually fund the deals (is escrow involved as a third party to hold funds?), what is a standard return look like for a private money investor, what forms would your recommend we get from a real estate attorney, and what legal entities are recommended for this?

I would also like to get some insight on what a refinance would looks like for something like this. Assuming we pay cash for the property and the rehab, how would I go about refinancing. I have recently started a mobile auto detailing llc out of college that has been a side hustle for the past few years. I do not have the two years of self employment tax returns that are required for most new home loans or any W-2 income since 2015 as I was in school and not working a regular job. Would I be able to refinance or what would my options be? I do not want to to move forward with them just to find out that they will be stuck with a property and cannot get out of it because of my financial situation. I have excellent credit, just not much paycheck history.

Thanks!

Andrew Gunther

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Andrew Gunther, this can take several forms. Your mom can act as a lender, with a mortgage and promissory note, which you as the owner sign. This gives her first lien position and can be recorded, with foreclosure rights. The loan could be fixed interest payment (private lenders are typically 8-10% APR), it could be floating rate loan, it could be deferred payments (i.e. you make no payments on the loan until refi, at which point you owe principal and accrued interest), etc.

    Alternatively, you could put her in a preferred equity position, likely through a jv structure, where she has a set return for her investment. With a JV structure, she will need at least some control in the asset to not be viewed as a passive investor, which then gets into you issuing securities and opens up a whole other can of worms. But for all intents and purposes, she does not need to be involved in the day to day operations.

    Lastly, she could be standard partner in an LLC, with a fixed return and cash out plan laid out in the limited partnership agreement.

    Regarding the refi, you are going to likely run into two hurdles: first, as you mention, you need a secure source of income to secure most loans. But also understand, that the minimum seasoning requirements is 6 months, with most being 12, so you will not be able to take out a loan based on appraised value from a bank for 6-12 months after your take ownership of the asset. 

    Second hurdle is finding a deal that will actually let you cash out your mom, especially if she is financing 100% of the deal (purchase and rehab). A cash out refi will be 80% LTV, max, but more common to find 75%. So if you are in a deal $150k, your ARV needs to be $187.5k+ to get $150k in loan proceeds to take out your mom as lender. If your lender caps you at 75% LTV, your ARV needs to be $200k. I am not saying deals with this spread are impossible to find, but they are certainly more challenging to find.

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