9% interest as a private leander

[Kyle Kufeldt]

I'm a new real estate investor and have been spending some time over the last few months to learn and build up my network. I met an investor in my local REI club that needs some additional private funds to grow his business. Right now, he is only looking for an additional 50k which would seem to be a perfect starting off point. My question is around the terms he is offering an wondering if there is anything else I should be asking for.

50k, 9% interest amoritized over 15 years with a ballon payment due in 5 years. The loan would be secured by a property that he plans to buy, rehabbing and holding.

Does this sound like a good opportunity? Should I also be asking for any points up front? I was also thinking of reducing the balloon payment to 3 years so I can get out quicker if I decide I need the money for my own business. In doing my due diligence on this type of loan, I'm assuming I would treat this as if I were the bank and ask for the paperwork to see his track record and assumptions on the investment opportunity?

Regards,

Kyle

[Jeff S.]

"… I'm assuming I would treat this as if I were the bank and ask for the paperwork to see his track record and assumptions on the investment opportunity?"

Don't treat this as if you were the bank and ask for paperwork, @Kyle Kufeldt Treat this as if you were loaning money to a stranger, which it sound's like you might be. Anonymous paperwork might satisfy a bank. They base their loans, in part, on LTV, appraisals, and credit reports, and can spread their losses over many loans. You can't.

Get in a car and drive around with your borrower, looking at his current and previous properties. No experience, no loan. You don't want anyone learning on your dime. Go to lunch and get to know him a little. Are you comfortable loaning him your money for several years? Do you have a sense he cares about paying you back? Has he borrowed from others? Who? Call them.

Have you discussed your borrower's exit strategy with him? If he doesn't have the cash now, how will he have it in 5 years? Will he sell his property? Refinance? Pay you sooner from another sale? Don't assume he knows. Blank stares and raised shoulders are not exit strategies.

9% interest amortized over 15 years and due in 5 sounds like a great deal for your borrower. Do you understand how much the monthly payments will be to you and how much he will owe in 5 years? If you are comfortable with that, then fine. What if he's late or defaults? Where are you getting your loan documents?

Since you've never done this before, you'll want to either use an experienced broker to help you or, preferably, a lawyer experienced in lending. A local hard money lender might be able to originate this for you as well, and perhaps recommend a good lending attorney. Don't rely that your borrower's paperwork will serve your interests.

If you are happy with a 9% return, I suggest you make it interest only for as long as you are comfortable. Interest and points are regional and I don't know what your market, or this borrower, would bear. Most concerning is your comment,"…he is only looking for an additional 50k…." Additional?? Does this mean he already has a lender in front of you? Under no circumstances, with your experience level, do you want to loan in second position.

After you've checked out your borrower, the property, and the paperwork, make sure this is a first position loan only, secured by a specific property, with a lenders title policy, and adequate hazard insurance. The process is remarkably simple. Just be careful and get good advice from local professionals.

Good luck, Kyle.

Jeff