Private Money Lender Question

[Anthony Bain-alves]

Hello BP community, I am very new to the world of real estate (and I mean VERY new) Like a lot of others I’m not super rich so I don’t have a lot of money to just throw at properties. There is one thig that has been on my mind since I started learning about real estate, as far as private money lenders go, what is usually the relationship between the lender and the buyer? More specifically, what is the process at which you pay back the lender? Does it come out of the cash flow every month? Is it expected in full payment at a specific time? Obviously I would like to be able to work with private lenders because it seems like one of the more accessible options for me, but I’m just confused as to how these lenders get their money back from the buyer. Any information or advice on this would be greatly appreciated and I apologize if this is a stupid question I just don’t want to jump into sometjing without knowing how exactly it works. Thanks guys! Hope to hear from a lot of you as I’m sure everybody has different advice to bring to the table. :)

[Patrick Hermans]

@Anthony Bain-alves Every lender is different and even the same lender will handle different deals in different ways. What kind of investing would you be looking to do with the hard money?

[Anthony Bain-alves]

@Patrick Hermans I think I'm gonna shoot for rental properties. Specifically single family homes but I'm open to the occasional duplex or triplex. I plan on using the BRRRR strategy when I start making my investments but I still have a lot to learn before I actually buy any properties. I also have to do some research on the market in my area as I'd like to start local and grow from there.

[Patrick Hermans]

@Anthony Bain-alves That is a great strategy. It can help you grow a portfolio rapidly. It takes a lot of skill to pull of though.

[Anthony Bain-alves]

@Patrick Hermans You’re not kidding haha. This is why I’m trying to learn as much as possible before actually starting to buy any properties. Do you have any experience in this field? Any tips or advice you could give would be greatly appreciated but of course don’t feel obligated haha

[Mike Malloy]

Buy and hold borrowers will usually take out a short term (6-12mo) loan to get the property, do rehab, and secure a tenant. Once the property is presentable and has cash flow it will usually be refinanced by a bank or other lender at a lower rate. The private/hard money is generally used to get a good deal and do so quickly. Another option is a longer term arrangement with monthly payments that still allow some cashfolw. As others have said, it can be a quick way to grow your property holdings. 

[Kariann Bowles]

Great question, I have been wondering the same thing. After you refinance the property and pay back the private lender how do you buy the next property, borrow again from a different lender? What if your initial private lender is family? I also apologize if this is a dumb question, I’m trying to learn how this BRRR method works with financing each property. Thanks!

[Mary Ware]

Originally posted by @Kariann Bowles:

Great question, I have been wondering the same thing. After you refinance the property and pay back the private lender how do you buy the next property, borrow again from a different lender? What if your initial private lender is family? I also apologize if this is a dumb question, I'm trying to learn how this BRRR method works with financing each property. Thanks!

Great question- I'm wondering the same. I'm about to close on my first deal through a HML, but I have a goal of 5 investments by the end of the year. What happens when I eventually hit a wall with the DTI ratio?

[Nghi Le]

Usually, people use private money or hard money for the initial acquisition and rehab of the property. After the property is renovated and rented, then you get a long-term loan from either a bank or an asset-based lender, which will be more expensive but you won't be restricted by bank rules like DTI, W2 income, etc. The long-term loan is essentially to refinance, or pay off, your initial lender and lock you in with lower rates so you can cashflow better. Once they're paid back, you can re-use them for the next deal, or you can just use another lender.

[Anthony Bain-alves]

Woah I’m seeing a lot of great feedback! Thanks guys! Glad to see I’m not the only one with these questions haha.