Terms for Private Loan for Income Producing Rental Property

[Oliver Platts-Mills]

We are under contract to purchase our fifth investment property in Virginia. The property is a large house that was split into six apartments and is currently fully leased. Over the past year my wife and I have transitioned to working on real estate full-time and our lack of W-2 form (and less than 2 year record on two of our properties) makes it difficult to secure FHA financing.

We are working with a private lender (Friends & Family network) to lend us $200,000 and I'm wondering what terms we should be offering/suggesting? Does anyone have any recent experience? I was hoping to get a 10 or 15 year note for around 5-7%. The property is operating at close to a 14% capitalization rate. Our other option (currently available) is to use a HELOC to finance the purchase but we would like to hold this property for some time and I don't want the interest rate risk on a floating rate loan.

Thanks,

Oliver

[Roy N.]

@Oliver Platts-Mills

While there are many on here who's lending experience exceeds ours, here are how we approach private lending from either side.

When lending, or borrowing, privately we are typically looking at shorter term financing: 12 months - 5 years.   

As a lender, my preference is a 12-24 months, with the option to renew. Borrower pays all origination and administration costs. The note and mortgage are registered in first or second position (whichever the case may be) against the title of the property. If LTV is high - over 75-80% - we may also require pledging of other assets (such as being registered against a second property).

The terms of the mortgage can be anything you and the lender agree upon - within the confines of the law.  In practice, they should conform to conventional mortgage and notes, but probably be as simple as possible.

As a borrower, I am securing private financing primarily in two forms:

1) Vendor Carry / Vendor take back - Financing of up to 5-years, preferably interest only, carried by the vendor on the property.  This can also be helpful to the vendor by allowing them to defer capital gains taxes over the life of the loan.

2) Third-party private note - basically the same as what you are proposing here.  As a borrower, my preference is interest only with a final balloon or with an annual principal paydown schedule. I also look for no pre-payment restrictions.