I may have found a private investor, but now what???

Question

Hey guys...today I had a conversation with someone (who I distantly know/is a successful entrepreneur) about investing in rental properties.  After a bunch of back-and-forth, he said he'd be willing to finance some deals upon further discussion.

Now my questions: 
What general terms do private investors typically look for?

What method of buying would potentially be in my best interest -buy, re-fi then repay in a lump sum (considering the deal is good enough to support that) or simply repaying over time?

What is usually the lifespan of this type of loan?

I'll be prepared with a potential deal in hand and numbers to support it, but I need to be better prepared in terms of expectations and ideas.

Any help is greatly appreciated

Thanks, 
Fred

Jon Holdman · Answer

Typically property specific since they're secured by a deed of trust or a mortgage.

Fred Shandler · Answer

Are private loans typically given only for specific properties? In other words, if an individual borrows X amount for 12 months, can they simply buy/refi/reinvest, while continuing to re-pay on the agreed re-payment schedule? Or are private loans typically property specific?

Mark McGlothlin · Answer

Fred, good for you to have found someone who is interested in working with you.  The more often you have that conversation with people the easier it will flow.  Kudos for getting started.

One of my mentors suggested that I approach every potential investor this way - does it make more sense for them to be a debt partner on the project, or an equity partner?

The type of project (asset class), your funding needs, duration of hold, and exit strategy will affect how your investor might work with you, as well as what you're comfortable structuring given your own experiences and probably in fact those of your advisors as well.

Pending the project we're doing, we like to approach a potential investor with the overview of the project, and often present the scenarios for him/ her as a debt investor and / or an equity investor, leading with whatever option we think makes the most sense.

Finally, it doesn't seem that anybody emphasized sitting down with your potential investor and simply asking him what his expectations are - that will often clarify issues very specifically, and you can tailor your detail presentation to him in light of his preference.

We just had a very enlightening experience in this area - we gave what we thought was a good presentation to someone who had expressed interest in a particular project - he decided almost immediately that he wasn't interested, but his attorney soon came on board with the project with almost 3 times the investment amount that the first guy had discussed.  You just never know.......

Jon Holdman · Answer

Sounds like you want to have this investor lend you money to buy and fix up the house, then you will refi into long term financing.  That's the basic "hard money" lender situation.  You're just dealing directly with the lender.  A hard money lender would indeed expect to have the loan out for only a few months.  Three months, typically.

The two of you can negotiate the rate and points.  Short term loans like this, especially if they include rehab costs, have fairly high points and interest.  That's what makes it worthwhile for the investor to do the loan for only a few months.

If this guy wants to have his money invested for the longer term, you need to get him to give you rates comparable to what a bank would give you.  If he want's 10+%, you really can't afford to use him long term.  If he's willing to take 7%, you might just let him do it.  If your credit is a problem, you might have to pay a higher rate.

Bob McIntosh · Answer

Most likely not.  A private investor is going to want some profit for his money going into the house.  His profit would generally come from either a rehab, or rental income.  In a market like this where houses are generally not appreciating, or may even be depreciating, these are really about the only two options a private investor would have if you were to borrow and then refi later on.

In my opinion you would likely do well to do an equity split.  You each get 50% of the equity, as well as the monthly (or yearly) profit (or loss).  However make sure that you explicitly lay out in the contract for this deal how either party can buy out the other.  How it happens who gets what, etc... don't leave any details out.

It *sounds* like this guy has money but no time, so you are his "time", and he is your "money".  Use his money and make what you can from the deal, especially if it's something you couldn't otherwise afford.  You may even be able to convince this guy to do this on multiple properties.  Then at the end maybe you split them half and half, this way you walk away with some real estate for only your time...

Fred Shandler · Answer

Rich, thanks for your response -greatly appreciated.  My initial thoughts were to borrow, then refi and repay my investor.  But, quite frankly, whats in it for the investor (in this scenerio)?  If I refi after only a short time, the profit for the investor is marginal.

If I borrow 40k, then refi after two months (for example), is it reasonable to expect to only pay a high interest payment for those two months, with no additional fees upon repayment?

Rich Urban · Answer

Although the post above is a great idea, and wholesaling has made me quite a bit of money, that's not going to really help you here.  This guy doesn't want to do the rehab or any work for that matter...he just wants a return on his money.

Since you'll be holding this property for a long term, you DO NOT want to use him as a hard money lender either.  Going back to "Everything is negotiable", there are a few ways that you can go about doing this deal.  Actually, there's hundreds of strategies that you can use for this...entire books are written on the topic.  Here's a few that I'm most comfortable with:

1.  You can use this investor to secure immediate financing on deals at the high rate of interest above, and then you can refinance out to more reasonable terms.

2.  You can do a complete partnership where the investor puts up his capital, and in return for: finding the deal, managing the deal, and maintaining the property will receive a 50% share in profits and equity in the property.

3.  You could see if he wants to act as "The Bank".  He's going to want a bit higher interest rate than the average bank will pay, but not quite so much as hard money would cost you.  I don't know how your credit history is, so it's hard to give you a figure on what you'll be paying in interest.  Prime is at 5% right now..you're probably looking at 9%-10% interest...but see what he has to offer.  "He Who Speaks First, Loses"..:)

Points should be minimal, I try to pay no points, but he may want  1 or 2 points. These are just guidelines and can be tweaked to ensure that both parties are satisfied.

Make sure that there is not a Prepayment Penalty clause.  Chances are, you'll eventually want to refinance or maybe cash out early.  Even with great planning, life can tend to be somewhat unpredictable.  What if you desperately need cash and you decide to sell this rental property for the capital.  You don't want to have him cutting into your profits because you are paying him back too soon.  If he insists on a Prepayment Penalty, make it is short as possible.

4.  You could even have your investor purchase the property, and lease option it to you at a low monthly rent  (with rights to sublease the property).  You would then sub lease the property to your tenant & exercise your option, purchasing the house at a later date when you can get more traditional financing. (This would be the last pick because you have very little control over the deal in this one).

Best Of Luck,

Rich

Account Closed · Answer

Well, the question I have is  you just need the $$ for purchase? Then I expect you intend to refinance the property into more conventional money so that you can use the private funds on your next purchase right?

If so, your TERM of the loan should be based on how long it will take you to refinance, with Title Seasoning, underwriting lengths, etc.

Michael Juve · Answer

I'm pretty new myself so I don't know all the quirks of doing things a certain way. But how about wholesaling the property to him. You get your cut that is deemed fair.

You do that until you can afford to buy yourself.

Just a thought.

Fred Shandler · Answer

good idea, but thats not what he's interested in.

Anyone else?