How To structure deal with private lender

Question

Jay Hinrichs · Answer

@Aaron Wyssmann

I did 350 rental homes in this manner:

Investor remained a lender so they did not have any liability issues of being a landlord.

In the prom note there was simply an equity participation clause which spelled out the business deal. along with the interest rate on the face of the note... therefore you as the operator or owner if you do well make some upside on rents.. but if your not as brilliant at it as your investor was hoping your investor still gets their % return and you feed the deal or it breaks even. And then when you sell Investor gets paid off interest if any due is paid and whatever net profits are left over you split according to the equity participation in the Note.

I did many of these with small builder developers here in Oregon.. and in the day as the Investor we did very very well on the upside deals. I did one were I lent 300k he rolled the property for 800k in 9 months my equity participation called for a flat fee of 200k plus my 14% interest.  He did well as I funded it and he made 300k or so... I made a hard money loan and a profit on top of it of 200k... this was my go to deal.. made lots of money with this approach over the years.

Aaron Wyssmann · Answer

@Dwight Sands Yeah the two that I worked this way were flips.  It depends on the state and how it is that you take title to a property but in MO it is a Deed state.  So my private lender simply had a Deed of Trust that listed him as the lender.  It completely protected him because I couldn't sell the property without him being paid off.

I'm looking now with the same guy at doing some long terms holds.  Brandon Turner has talked about this on some podcasts and I believe it is also in his book but we are just planning to do some sort of a percentage split, either 50/50 or maybe even 60/40 in his favor.  I will be the one managing the property so I'll take a management fee but all other profit will be determined by the split.  He will either pay cash for the property or get financing in his name and I will be listed on the Deed of Trust as an owner.  That's the best we've come up with so far.

Good luck, let me know if I can help in any other way.  I'd also love to know what you work out with your lender.

Will Barnard · Answer

Points plus interest on a private money loan? Be careful to not exceed the usury limits in your state, your lender could be at risk in such a case.

The simple way to do this is a straight interest rate for a set term, lender gets promissory note, deed of trust, and named insured on the hazard policy. You can also add personal guarantees, of course those with no assets, a personal guarantee is not worth anything.

Aaron Wyssmann · Answer

There are literally tons of ways that this can be done. Be as creative as possible and make it a win-win for the both of you.

The most recent way that worked with one is a flat 8% APR and then I gave him 10% of the profit. I didn't have any of my ow out of pocket expenses and he was paid when it sold. I just added my swear equity. Just be willing to always make sure he wins before you do. Then you will have a partner for life.

Jesse LeBlanc · Answer

@Shawn Roberson did you ever get the note and mortgage docs?  I've finally got a private lender waiting for me and I need to get my contracts in order and schedule a meeting with him right away. Can you help me out?

Shawn Roberson · Answer

Hello friends,

I am in need of a note  and a mortgage doc for a private lender. If anyone can help me that would be awesome

Thanks.

Shawn

Taylor Shields · Answer

@Jay Hinrichs

What did a typical equity participation look like when you were doing the rentals?

Could it be structured in a such a way that the owner or operator could buy out the investor along with interest on a portion of the properties using his equity. The investor could then sell the rest.

For example: You do 6 properties like this and the owner operator has enough equity to buy out 3 of the properties and pay the investor his interest. He then owns them free and clear and the investor owns the other 3 free and clear which he can sell or rent himself.

Joshua Houchins · Answer

@Aaron Wyssmann as mentioned before there are a million ways to structure the deal but what I have found to work the best is 2 point at closing 12% interest paid upon closing lender is in the first lien position.  If you can't pay the points roll them into the loan.

Buy and holds if your lender is paying cash have his company or himself however he is structured be in the first lien position. Now you two form an llc or a new entity just for your portfolio together have the operating agreement lay out how you all will receive profits or how you will pay for a loss as well as every other detail involved. This keeps his original principle covered with a DOT and 1st lien position but also keeps your interest in the property as well.

If he decides to bring on a third party to obtain credit for the purchase have the loan made to you and your partners new entity. Of course in todays banking world they will make him sign a personal gurantee on the note.  This again keeps you in the deal no matter what.

By forming that entity in a professional operating agreement drawn up by your attorney that will lay a good ground work for your deals.. Good luck

Dwight Sands · Answer

I've been starting to look into this too. @Aaron Wyssmann I like the idea of making sure they win before you do. It sounds like your deal was a flip, any suggestions on a held property? Also, how did you go about the loan on paper? I know there are some hurdles to clear to avoid the accredited investor requirements.

How To structure deal with private lender

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