Quick Private Lending questions

[Gene Belaval]

Been reading up for the last 6 months or so and I want to get started!! Looking to rehab properties in Miami, Fl.

Just have to clear something up. What are the typical payment terms on a private loan. I have someone who is willing to invest, I just want to make sure I give him honest terms for his money.

10% to 12% is what we discussed. Projects could last 3 to 6 months if all goes well.

Do I pay him at the exit or monthly as well? If monthly how would it be calculated?

Should I have an attorney write up a note and lien on the property to protect him?

Should I offer him points for 100% loan?

Anything else that I may have missed?

Thanks!

[Jeff S.]

I strongly suggest you go through a licensed hard money lender for your first few properties, @Gene Belaval. HML's are used to these deals and can be a valuable second set of eyes to help you evaluate a potential flip, your associated finances, and keep you out of trouble. If they recommend avoiding a particular property, you might take heed and learn.

An experienced hard money lender will also have all the paperwork you need and be able to work with your closing attorney, title, and any other service providers used in your state (we use title and escrow here in CA). They will ensure your loan is originated properly to legally protect all parties.

I won't presume to know the prevailing lending rates or local terms for flips in FL. Since it doesn't make sense to amortize a 6-month loan, these are almost always for interest only. Out here, paying points at closing, monthly interest payments, and then paying the principal off when you sell are traditional. There are no rules however, and in this competitive environment, some lenders will allow you to pay everything off when you sell. This obviously preserves capital and is worth something.

Extension fees (which I loath) should be discussed and negotiated if possible up front. While I hear the claims all the time, I know no one who can purchase, rehab, sell, and close a property in 3 months. Six months plus is more the norm, so be careful you work with someone accommodating, pragmatic, and reasonable – especially since you are new to this.

After you've gotten your feet wet, understand the lending process, and with a proven track record, you might be able to save some money by borrowing from someone you know. My personal opinion is that borrowing from friends or family is a terrible idea, but this is also an argument I often lose. Either way, it never means the deals can be thinner or that you can cut corners with your paperwork or loan origination. You always have a responsibility to protect both yourself, your buyer, and your lender.

@Gene Belaval