Private Money Partner Scenarios in a BRRRR deal - Advice Needed

Washington, District of Columbia
Private Lending & Conventional Mortgage Advice
3yFollow

Private Money Partner Scenarios in a BRRRR deal - Advice Needed

Brandon Russell
Silver Spring, MD · Member since 2014 · 8 posts · 2 votes

Hello All,

I'm just starting out on my real estate journey and I'm starting to gather information to structure my first deal. Right now I'm interested in doing a multi-tenant BRRRR deal. In the scenario I'm working I'm trying to use other people's money for the downpayment. I have a partner who is interested in contributing but I'm trying to figure out how to structure the deal to make it lucrative for them. My thought is that I would work with a hard money lender who in turn is going to ask for 20% down. This partner would bring the 20% to the table. In exchange, i'd pay them interest on their payment (12% sounds like it's pretty standard). But here is where I begin to get confused. I'm figuring i'd offer them 12% which would be amortized over a year and I'd pay them when once refinance occurs (am I doing this right?). So, if the project took me 4 months to complete i'd pay them at that 12% for 4 months.

Essentially I'm looking for them to be a passive investor without doing much and just bank on that. However, in my head that does not seem like it's lucrative enough for them. Perhaps I could offer them a percentage of equity in the home after refinance. How is that generally structured when people do that? Are there any other scenarios that may work to help make it more lucrative for them. Not sure if someone could help me out with a math example here of how this would work. 

Lastly, I'm open to this person being more involved but in exchange for perhaps more money or some of their time, i'd be willing to offer more incentives. 

I'm curious how some of you guys handle this with partners. 

Thanks!

P.S. One more thing. Brandon Turner talks about not operating with an LLC in these scenarios as then you can't buy a property with a conventional loan or you'll get higher interest rates. How do I protect my partner's interest while not operating under the protection of an LLC?

1Reply
18 views

3 Replies

Jump to latestLatest
  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    @Brandon Russell

    Will you be contributing any money to the deal? The hard money lender will be lending 80% (in your example); they will be secured by having a first-position lien on the property. The second lender; how are they going to be secured? Will the hard money lender allow a second position on the property? If the second position is unsecured, they are (most likely) going to require a higher return. If you want to pay both the hard money lender and the second lender when you refinance; will they accept this? They will want a higher interest rate for having their payments delayed. Will the hard money lender be lending on the renovations as well? Purchasing the property is one part of it; performing the renovations is another part. Lastly, if you are refinancing instead of selling; do you have funds available if required? For example; you purchase a property (100% financed) for $100k plus the hard money lender loans an additional $15k for renovations. After 6 months of financing; you owe $122k. The property is now appraised for $150k and the bank will loan you 75%-80% ($112k-$120k) of the new value($150k); where is the difference coming from? In addition, you will need funds for; closing costs, cost overruns, holding costs, etc.

    0Reply
  • Brandon Russell
    OP
    Silver Spring, MD · Member since 2014 · 8 posts · 2 votes
    3y
    Quote from @Charles Carillo:

    @Brandon Russell

    Will you be contributing any money to the deal? The hard money lender will be lending 80% (in your example); they will be secured by having a first-position lien on the property. The second lender; how are they going to be secured? Will the hard money lender allow a second position on the property? If the second position is unsecured, they are (most likely) going to require a higher return. If you want to pay both the hard money lender and the second lender when you refinance; will they accept this? They will want a higher interest rate for having their payments delayed. Will the hard money lender be lending on the renovations as well? Purchasing the property is one part of it; performing the renovations is another part. Lastly, if you are refinancing instead of selling; do you have funds available if required? For example; you purchase a property (100% financed) for $100k plus the hard money lender loans an additional $15k for renovations. After 6 months of financing; you owe $122k. The property is now appraised for $150k and the bank will loan you 75%-80% ($112k-$120k) of the new value($150k); where is the difference coming from? In addition, you will need funds for; closing costs, cost overruns, holding costs, etc.

     Hi @Charles Carillo,

    Thanks for your response.

    I would not be contributing money to the deal. I will check on the second position issue, and be sure to ask lenders this question. I'd imagine i'd want this person to be there. In my scenario the hard money lender would be funding the repairs as well in this scenario. I'd want to factor in holding costs as part of this, which essentially would also increase the down payment from the partner as well, right? Also i'd want to work the deal so there is enough space so that the funds can come from the new 75%-80% LTV. But interesting you pose this scenario because I guess it's something i'd need to be prepared for. I would have some access to money if needed but it'd probably be 10-20k at most, but i'd prefer to not use it.

    Lastly the refinance thing is interesting. I think now i'm beginning to realize that in order to get the cash back out i'd have to do "cash-out refinance". Definitely missed that little nugget in all of my months of reading. A standard refinance would not work as I would not be able to get my cash back. It'd be at least a 6 month cooling period before I could do this, correct? Also I live in the DC area and while I make good money, i'm not sure that a standard lender would work as I currently own a home. 
    I imagine I'd need a DSCR loan as it's unlikely i'd qualify if the home was 600k or up like many homes in this area can be. I currently have my own home and I couldn't pay the mortgage on this other property without a tenant in place.

    All of these "gotcha's" are things i'd want to make sure I can discuss with my partner so they understand these risks. Perhaps they'd be willing to step in and handle some of them for "a fee". And i'd want it to be discussed upfront so they aren't surprised if they come up. 

    All this upfront research is really to get a handle on this before beginning to work any deals.

    0Reply
  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    @Brandon Russell

    This loan I am talking about would be a cashout refinance. You are replacing the current debt with another, bigger mortgage. My point is, that you most likely are going to be coming out of pocket; unless you find a very undervalued deal or you find a bank that is going to lend you 85%, 90%+ of the property value during the refinance. Yes, and to your point; you need to qualify for the refinancing. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free