Structuring Private Money Deals

[Evan Ventura]

Was wondering if anyone can offer advice on structuring private money loans. I am new in REI and am currently seeking out my first deal. When that first deal finally does present itself, I want to be ready and move on it with confidence.

I currently have two eager private money lenders on board, one a relative of my business partners, the other a contact I had made at a previous job. While these lenders are motivated to get deals underway, we have only spoke in generalities; no hard numbers. I would like to structure deals in a manner that is sustainable and highly beneficial to all parties, and would like these relationships to be long term and attract other lenders from their circles. 

With that being said, I have read of investors paying anywhere from 6-12% interest, points or no points (though more so with hard money than private). I will be conducting all of my business in New Jersey with the goal of flipping homes to supplement paying down a large rental portfolio. I plan on finding these properties predominantly through wholesalers and auctions, and perhaps the MLS if one ever slips through. Here are my questions:

1. What do you believe is a fair interest rate? 

2. Points or no points? If so, how many?

3. Is it wise to wrap as much or as little into the loan as possible (down payment, principal, rehab, misc)?

4. What is a fair flip time frame?

5. What is a fair buy and hold time frame?

6. If seasoning a rental until refinance, do you begin paying down the lenders interest using cashflow or do you wait and pay the full balance upon refi?

Additionally, if there is any other information I have not asked you feel is important for me to consider, please advise!

[Ben Stoodley]

Hi @Evan Ventura ,

Many good replies here. I am sure you have realized by now that private/hard money lenders are as different from lender to lender as investors are. So, everything I am about to suggest is from my experience as a hard money lender on the West coast, but should apply to the private lending industry as a whole.

• Find a reputable lender, not the "best rates" - hard money is hard money, it is expensive for a reason, they are short term and used for investment purposes with little to no borrower requirements, asset based underwriting and FAST closing. Don't be fooled by some of the newer companies offering lower rates, they aren't experienced, likely not their own money, and almost always have numerous requirements that take the advantage of hard money away.
• FAST and easy - after you've found a lender with a great track record, make sure they can close fast. Fix n Flip Investment real estate is an extremely competitive industry. Speed is of the utmost importance. Find a lender that is your financial partner and can provide quotes, LOIs and funds quickly. This will help your personal track record as an investor and help provide a competitive advantage over other investors.
• NO junk fees - every lender will have some fees, this is how they make money and can continue lending money. You need to call and ask to be provided with "all fees associated with the loan, including any processing, underwriting, draw, prepayments, etc fees". HMLs are notoroious for leaving this part out until they show up on the HUD
• NO PPP - no prepayment penalty, should never really charged, but I would strongly suggest finding a lender that is flexible on term of loan and doesn't charge a PPP
• DIRECT lenders only - I stress this for obvious reasons, that relate to my first bullet point. The worst thing to have happen is that your lender "runs out of money" or the loan doesn't get approved by back end investors, and this typically happens in the 11th hour, leaving you the borrower hanging with 1 day to close and your full EMD at risk. Direct lenders are the actual check writers and underwriters, they will be able to move much quicker, and provide better rates over the long term
• FEES in general - my experience has shown that interest rates are generally between 9-14% annualized, with between 2-5 points. I've seen different combinations of this, such as 16% interest but no points, but somewhere around 12% and 3 points is fairly common. A doc fee of somewhere around $400-$700 is common. Other than that, there should be no other fees. Anything you see below 9% and 2pts are generally reserved for very experienced investors or are set up on a line of credit. 

I hope this helps, feel free to reach out to me at anytime with further questions. I am happy to assist in anyway. Once again, NJ will be different than CA and other states I lend in , but it should be fairly close to the ranges I have provided. Take you time vetting your HMLs. You want a good one you can build a relationship with.

All the Best,