Seeking a private lender

[Sean Starkey]

I am seeking a private lender for my next deal. I want to build a relationship with someone to help scale my portfolio and also increase your return on your investment. Can someone give me an example of what a private lender’s terms could be? Would they fund the entire down payment on a house? What would be some ideal terms they would ask for? 

[Alex Breshears]

Hi Sean!

I will say a private lender in the sense of an individual or their entity lending out their own capital is more of a relationship model like you mentioned, but they also tend to have very different terms.  The loan terms are often set by the lender in regards to the individual lending opportunity, so no two loans are going to be exactly the same. Generally they are going to be shorter loan lengths (think months not years), annualized interest only payments, sometimes requiring things like personal guarantees, lenders title insurance, being added as a mortgagee to the hazard insurance, etc.  I will say there are a lot of variable to consider other than origination points and annualized interest rates, but generally I'd say origination points are likely between 1-3% of the loan amount (paid either upfront, at payoff or a combination of both), and 10%+ interest only payments for 12 months (could be more or less) and generally want a 1st lien only. Some private lenders are willing to do 2nd liens, but realistically only when the combined loan to value will be about 75% or less.  Private lenders are not going to provide funds for a 20% downpayment or want to have the capital be unsecured (so there will need to be a lien on a property). Again, terms can be all over the place, but these are generally the parameters private individual lenders are going to stick to.  You can learn more from the private lending book in the BiggerPockets bookstore that just came out last week. That will tell you everything you need to get going on your first loan. As an active investor you can use this information to your benefit to educate people in your network about how to do a private loan and all the ways they can be protected in the deal.  

Hope that helps!