How to guarantee returns for private lender

Question

Hey BP! I've been learning as much as I can before doing my first deal and I'm exploring the possibility of utilizing a private lender. I have a few friends and relatives in mind that I'd like to present this opportunity to but want to have a good business plan prior to meeting with them. One of the questions I've struggled to provide an answer for is how I will guarantee their return on investment. If I offer an interest only return of let's say 6% for X amount, how can I prove to the lender that I can produce? I'm interested in pursuing SFR buy and holds that I can potentially refinance and pull cash out to pay the private lender and then repeat the process. The only way I can think to guarantee their return is to wait until I have a deal I hand and then present the numbers. Anyone have experience with this? Any advice would be greatly appreciated!

John Thedford · Answer

1st lien mortgage and note secure the property as a guaranty of your repayment. Of course, the lender should have some experience and knowledge. If you put down 30% or so, that gives the lender some assurance that you have something to lose and will not walk away. Even family member mess over other family members. I give all my lenders a mortgage and note, even family.

Rick Pozos · Answer

That is exactly what you do. When you have a deal, you go over the numbers with your potential lender. The biggest reason that they will lend you the money is that they have known you for 10, 20 or 30 years and trust YOU. You can tell them that the numbers work, but they probably only rely on what you SAY. You may have to prove the deal on the first few, but after that things get easier.My father in law has lent me some money in the past. He usually wants to see the property and asks what we are going to do with it. But in the end, he puts up the money with trust in me that he will get his money back and with some interest. It really just depends on how much of a trusting person your friend/relative is. Some friends have lent me money and never seen the property because they know what I do and they trust me. AND I do perform for the money borrowed.

Jay Hinrichs · Answer

you can borrow with unsecured promissory note.. this is quite common.. I have done it many times.. this is nice if your borrower actually has money .. because there is little to no defense from a unsecured Prom note.. you borrowed the money you owe it.. now it can be wiped out in Bankruptcy but if you think the borrower is a BK chance you don't lend to them in the first place

John Thedford · Answer

@Josh Stewart you are welcome. I borrowed some money a while back. About 3 weeks later, I went, got a mortgage and note prepared, filed it, and sent the lender a copy. They actually called and said "do I need that"! I stated "yes: if something happens to me I am making sure you get paid". It is great to have that trust, but making sure someone that lends you a hand is protected is not only good business, but a way to thank them for the trust.

Rick Pozos · Answer

You should never ever, ever borrow or lend money without a deed of trust AND note to secure your lender. Sorry, I just thought that went with out having to be said. All paperwork should be done through a title company to guarantee that you are getting good title, the lender has good title and that everything gets filed with the county properly.The recording of the documents is what puts everyone on notice that if you dont pay, the lender gets to take the property back through foreclosure.And to answer your question, the private lender or Chase Bank is never a partial owner. When you purchased with conventional financing, your lender had a lien on the property. The same would apply to your friend or relative. If you dont pay, he/she will foreclose on you and get the property back.

Bill Gulley · Answer

Love open forums! Someone can make an innocent comment and it takes pages to point out why something is not a good idea! Never borrow significant amounts of money from a private lender without providing collateral security! There are plenty of ways to burn an unsecured borrower under predatory dealings where you lender lacks knowledge and was "talked into acting". There are many other factors that go into borrowing and lending and following the norm is always best, don't do anything screwy!You interest at 6% is fine!It usually takes a track record before people will commit to lending money prior to contracting or prior to presenting the deal, most won't ever go there with the average operator, so have your ducks in a row before you ask. If you need 100% of the money, you'll need some other asset to pledge additional security to your lender, the idea is to make the feel secure, warm and fuzzy as well as properly secured. Private lenders? Trust is the key to the door. Don't take your first time lender to the DIY store, see an attorney, being business like with family is always best. (Example; what if you lender dies? Here comes the estate attorney and all the heirs, then they say what the h3ll were you pulling with Uncle Tom?....avoid issues, see an attorney!) :)

John Thedford · Answer

@Jay HinrichsJust did that Jay. Small loan of 50K very short term. My "sporting goods" business takes some bucks for inventory...sometimes 32,33,34k for one item. I picked two high dollar businesses and both require real money:) but they both pay REAL money! Promissory note is easy! Fast! No recording fees! No doc stamps! Save some money that way.

Josh Stewart · Answer

John Thedford - thanks for the advice John. Definitely makes more sense for the lender if they receive a mortgage and note. I want it to feel like an investment for them, not simply doing me a favor.

Josh Stewart · Answer

Rick Pozos - thanks for the info, I assumed that's how investors approached private money but wanted to make sure. What type of interest do you typically offer your lenders or do you negotiate on a case by case basis?

JD Martin · Answer

Aside from having a plan, one thing to keep in mind: there *is* no guarantee of return. If there was, there'd be little reason to charge someone beyond a percent or two interest. Higher interest is their hedge against the chance that you default.That said, there are basic protections that can be put into place besides just "your word", and a lot of them have already been listed so there's no need in restating (mortgage, alternative asset backing, etc,).