Should I ask for more? Private Lending Rates and current interest environment.

Question

I have been doing private lending in the Ohio area with a house flipper who is experienced, organized, and trustworthy. I see little risk that he will run into significant difficulties with any of his flips. I have been asking for 10% for the loans so far. Recently, my bank has raised the interest rate it pays on savings accounts from 0.5% to 4%.

I am curious if this is signalling a significant change in the interest environment and if I should consider asking for more.

Jimmy Lieu · Answer

Hi Curt, if he's experienced, organized, and trustworthy, then it may be worth it to keep it at a lower interest rate like 10%. If you think you can get better returns and maintain the same level of risk, by all means you should increase the interest rate. It depends on your risk appetite and how much you view risk versus reward. As a local Columbus Ohio investor and agent myself, I've done quite a few private money deals and have used private money myself, so if you have any questions or want to connect, feel free to reach out!

Doug Smith · Answer

One of our capital sources are smaller investors and people with money in IRAs that don't have the systems in place, the deal flow, or the underwriting expertise to run a portfolio. We set up a debt instrument with the investor and pay them a fixed return over a period of time...24-48 months depending upon their needs...and then we pool that money with our money and other investor money to lend out. 10% is right at what we normally pay out to the investor and then we mark up the deal a little bit when we lend it out for our operating costs and profit. I don't think you're 10% amount is out of line. We charge a bit more to investors for short-term money, but 10% is very attractive to a savvy investor.

Danielle B. · Answer

I do private lending at 14% interest and 4 points at closing. The return is great and hard to beat.

Jeff S. · Answer

This is a state-specific question, @Curt Bixel, and likely even more regional. How did you determine that 10% is the market value of your money in the first place?    No one apart from someone who makes loans in Columbus can tell you that your return is acceptable. My recommendation is to call some local hard money lenders and perhaps attend some local
real estate clubs to ask what others are paying or charging.

Yes, HML rates have been going up.  With Treasury and related rates such as SOFR on the increase, Wall Street is expecting greater returns from the HMLs they support, thus compressing their margins as they compete among themselves.  Thankfully, you’re not in that end of the business.  Rates for short-term bridge loans, typically for flips, have also increased slightly. Ask around locally for typical terms since these are the costs your borrower will have to pay.

Rest assured, if your borrower is active, then he or she fully understands the local rates.  You are not Walmart and don’t have to be the low-price leader so long as your other, non-financial, terms are competitive.

Even if you keep your interest rate the same, you’re missing an important component that you should be able to charge – points.  Raising your rate to 10.5% or 11% is a 5% or 10% absolute increase.  Leaving it the same but charging 2 points at origination is a 20% increase.  This also increases your net return.  Reasonable points are customary and nothing that should surprise a borrower.

I assume, of course, that you understand the usury restrictions in OH and will remain compliant.

Good luck to you, Curt.

Allan Smith · Answer

I borrow a lot for my flips from a doctor that was 8% and went to 9% recently. You could probably go up some too since the competition all has higher rates. Even a bank is freaking 8.5% now!! I would pay 11% probably to not have to deal with the red tape of banks.

Kerry Noble Jr · Answer

As interest rates rise.....I would consider asking for more so that you end up with 10% net or whatever you were actually netting previously

Should I ask for more? Private Lending Rates and current interest environment.

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