Private Lending with no BRRR? Confused?
Member since 2022 · 30 posts · 21 votes
Private Lending with no BRRR? Confused?
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Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
3yYou do a syndication. Your friends and family put up the 25 or 30% for the downpayment, BUT they get 70% of the deal. YOU get 30% of the deal and you manage the rehab and stabilization. YOU put your name on the loan which means YOU have a substantial net worth to get the $1mil or $2mil loan. PLUS you get a 2% acquisition fee for putting the deal together. BUT this is after you have significant net worth, experience and knowledge.
6 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Vishal Amin:
Hi,
How would a private lending deal work with no BRRR? I understand when you are doing a BRRR and getting that appreciated value to cash out refinance and eventually pay the private lender back with interest, by creating forced equity. This makes sense to go the private lending route.
But...
For Example: Purchasing a turn-key home for $150K which is under market value, the private lender would pay the down payment ($30k). In the current market condition, it is hard to refinance at a lower rate. The buyer would eventually have to come up with the $30k + interest.
The buyer would only have to rely on the appreciation of the house also in this market condition might take a long time to appreciate.
I am looking for some clarification on this part.
That is not how private lending works. For private lending they will lend up to approx. 70% of the acquisition cost. So a $150k home YOU would need to come up with the $30k and they would lend you $120k.
7e investments53 Reviews - Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes3y
@Vishal Amin, I agree with @Chris Seveney.
Also, you skip over the value you will add via "forced appreciation" by rehabbing the property and improving it. That is why most BRRRR deals do not involve buying a turn-key property. They usually involve buying a distressed property and rehabbing it because that is where you get the most forced appreciation for the money spent.
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
I've seen study after study over the years that show that the default rates are exponentially higher if the buyer/borrower is not putting down their hard-earned cash. Private lenders don't put up the downstroke for you. We look for that to come from you (or a gift in some cases). We're going to "source" the funds for the down payment, closing costs, and reserves...meaning we'll seek a paper trail for that cash (bank statements, etc). Keep in mind that Fannie Mae/Freddie Mac rates for non-owner-occupied/investment property are well above owner-occupied rates and they aren't that far off of DSCR rates. The 10 year treasury which drives interest rates is up 1.5% today with Mortgage News Daily stating that the national average 30-year fixed rate for an owner-occupied property being 6.49% at this second. There will be a risk premium built in for a Fannie/Freddie investment property...that will take you up over 7% with DSCR rates going between 7.5% and 8.5% depending upon buy downs, experience, credit score, LTV, prepayment penalty, etc. Bridge/Hard Money Rates for flips will be 11% - 12.5% right now. To my knowledge, there is no product on the market that will convert from hard money to a DSCR with a one-time-close. You'll likely need to do a bridge loan for the rehab with you putting down any down payment then convert it to a DSCR for the longer term once the project is done. That being said, most DSCR lenders will not use the appreciation (appraised value) unless you've owned the property for 6 months regardless of what you've done to improve it. I am not sure if that helped, but I wish you well.
- Member since 2022 · 30 posts · 21 votes3y
Quote from @Doug Smith:
I've seen study after study over the years that show that the default rates are exponentially higher if the buyer/borrower is not putting down their hard-earned cash. Private lenders don't put up the downstroke for you. We look for that to come from you (or a gift in some cases). We're going to "source" the funds for the down payment, closing costs, and reserves...meaning we'll seek a paper trail for that cash (bank statements, etc). Keep in mind that Fannie Mae/Freddie Mac rates for non-owner-occupied/investment property are well above owner-occupied rates and they aren't that far off of DSCR rates. The 10 year treasury which drives interest rates is up 1.5% today with Mortgage News Daily stating that the national average 30-year fixed rate for an owner-occupied property being 6.49% at this second. There will be a risk premium built in for a Fannie/Freddie investment property...that will take you up over 7% with DSCR rates going between 7.5% and 8.5% depending upon buy downs, experience, credit score, LTV, prepayment penalty, etc. Bridge/Hard Money Rates for flips will be 11% - 12.5% right now. To my knowledge, there is no product on the market that will convert from hard money to a DSCR with a one-time-close. You'll likely need to do a bridge loan for the rehab with you putting down any down payment then convert it to a DSCR for the longer term once the project is done. That being said, most DSCR lenders will not use the appreciation (appraised value) unless you've owned the property for 6 months regardless of what you've done to improve it. I am not sure if that helped, but I wish you well.
Hi Doug,
how would I go about structuring a private lending deal out of state for a 10 unit apartment deal. I have seen many people do a 100% funded by private money. How would that work?
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Quote from @Vishal Amin:
Quote from @Doug Smith:
I've seen study after study over the years that show that the default rates are exponentially higher if the buyer/borrower is not putting down their hard-earned cash. Private lenders don't put up the downstroke for you. We look for that to come from you (or a gift in some cases). We're going to "source" the funds for the down payment, closing costs, and reserves...meaning we'll seek a paper trail for that cash (bank statements, etc). Keep in mind that Fannie Mae/Freddie Mac rates for non-owner-occupied/investment property are well above owner-occupied rates and they aren't that far off of DSCR rates. The 10 year treasury which drives interest rates is up 1.5% today with Mortgage News Daily stating that the national average 30-year fixed rate for an owner-occupied property being 6.49% at this second. There will be a risk premium built in for a Fannie/Freddie investment property...that will take you up over 7% with DSCR rates going between 7.5% and 8.5% depending upon buy downs, experience, credit score, LTV, prepayment penalty, etc. Bridge/Hard Money Rates for flips will be 11% - 12.5% right now. To my knowledge, there is no product on the market that will convert from hard money to a DSCR with a one-time-close. You'll likely need to do a bridge loan for the rehab with you putting down any down payment then convert it to a DSCR for the longer term once the project is done. That being said, most DSCR lenders will not use the appreciation (appraised value) unless you've owned the property for 6 months regardless of what you've done to improve it. I am not sure if that helped, but I wish you well.
Hi Doug,
how would I go about structuring a private lending deal out of state for a 10 unit apartment deal. I have seen many people do a 100% funded by private money. How would that work?
Good Question. I don't know of anyone that would do 100% financing on an investment deal. I would think it would have to be an individual that you know well. It would be bad, bad underwriting to do an investment, non-owner-occupied property with no money injected from the borrower/buyer. I wish I could help, but no one that I know of would do it.
- Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes3y
You do a syndication. Your friends and family put up the 25 or 30% for the downpayment, BUT they get 70% of the deal. YOU get 30% of the deal and you manage the rehab and stabilization. YOU put your name on the loan which means YOU have a substantial net worth to get the $1mil or $2mil loan. PLUS you get a 2% acquisition fee for putting the deal together. BUT this is after you have significant net worth, experience and knowledge.
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