Working out the Math of a Private Lending Deal, anyone?

[Rabih El-Khoury]

Hi. 

I'm trying to figure out the math on a privately funded real estate deal and would appreciate your help. 

Time and again I've heard podcasts and read articles/posts on how private lenders get 10%-15% ROI but no source i've come across actually walks you through the math.

Here's how i'm seeing it; let's keep it simple and assume the following: 

$140,000: property price
$3,000: closing fees
$143,000: total cost to acquire property
$100,000: funds i provide
$43,000: funds provided by private lenders
$8,992: NOI (@ 1% rental income rate, 5% vacancy, 2% property tax, 5% Capex provision, 5% repair provision, $100/mo. property management fee, $588 home insurance, and another $700 misc)

$7,798: net annual cash flow after tax (CFAT)

Terms* with the private lender: 12% per year (non-compounded) on their investment, 1 balloon payment at the end of the 3rd year. In other words, at end of Year 3, they receive $43,000 + (12% x 43,000) = $58,480. 

*I like these terms (assuming they work, hence this post) because: (a) they're the kind of terms that would attract funding from my network of friends and associates; (b) I want their names off the deed in 3 years; (c) I do not want to have to sell the property to pay them back. 

Now, accounting for annual rent and expense increases, the CFAT for Years 1-3 are: $7,798, $7,909, and $8,022 for a total of $23,729. I owe the private lender $58,480, meaning I have to fork out $34,751 (the balance) to own the title clear and fulfill my promise to the investor. 

Is this how the private lending model works, or am i missing something here? 

Thanks!

[Rabih El-Khoury]

Thanks for the feedback gents. 

@Jefferson Smith in the manner i presented the case, unless i'm running a ponzi scheme, the deal itself doesn't/can't provide for the balance on the balloon payment. The only way the $34k would be made available is like @Jeff V. said, by re-financing. And the better chances for that re-fi to come up with that capital is if this is a BRRR project.

This is the conclusion I was looking for, and thanks for the help/confirmation guys: private funding only works within the context of BRRR.