New Private Lending Relationship

[Jason V.]

Good Afternoon BiggerPockets!

I recently had someone I'm very close with approach me about the potential of becoming a private lender for me. He is a retired business owner, lives a very comfortable life from the proceeds of his business, and is fed up with the returns he's getting in the stock market. He knows I've rehabbed houses in the past, and I've discussed some ongoing deals with him. I've never used Private money for Flipping, so I'm looking for some opinions here.

He has absolutely zero interest in dealing with either contractors or tenants - he just wants a better return on his money, because like a lot of people in the market, the returns aren't very good. So when I told him what I think of as 'typical' terms for short-term loans are, he was very interested.

I told him rates can vary from 6%-15%, 0 to 10 points, and anything from a couple of months to a couple of years, but that 9%-12% with a couple of points for 12 months was very standard.

So I'm interested in what the BP community feels is a fair arrangement. The most important thing for me is to maintain and/or improve this personal relationship in a way that gives us both what we want on the financial side.

What's a fair rate? Points? I'm perfectly happy to have the first deal more expensive for me, just to lay the foundation.

If I buy the property with my cash and borrow the rehab costs, how would that change the situation from if I borrowed the full amount? Interest only payments - raises rates and/or points? What are typical loan amounts as % of ARV?

Thanks All!

[Jeremy Brown]

For the first couple deals, you could come up with a profit-sharing arrangement. Say, his money plus your labor, then split the net profit 50/50.

If you contribute some capital, then another formula I've seen is you take 25% of the profit and then split the rest of the profit according to your relative contributions to the deal.

This kind of arrangement is quite likely to be more profitable for him (and less profitable for you). But, it allows you to focus more on maximizing the overall profit of the deal and reduces the pressure of holding costs and the compromises that might force you to make.

If you're calculating points and interest, that's a lot more decisions to make and numbers to track. Plus, if you're paying him 9%, but only holding his money for a couple months, he then has to figure out what to do with that money again when the deal is over. When you're not actively working a property, that money presumably sits idle somewhere earning closer to 0%. His annualized rate could end up being pretty low.