How to structure Private Money Deal

[Ben Pohle]

I'm trying to understand how to structure my first deal to pay for a rehab (1st attempt at BRRR) after I secure a property.

I’m planning on using private money to fund the rehab and then pay the lender back with the proceeds after I cash out refi. 

1- what ballpark interest should I expect to pay for the rehab fund?

2- how is the private lender protected if the deal goes south? 

3- does it make sense to set up the contract as 12 months to repay where the lender will just get the cash flow from the property up to the 12th month, then get some sort of bonus interest if it takes longer? Ex: 5% extra interest per 6 months overdue

4- and if it really goes south, the lender would have a 1st lien and personal recourse?

Any insight would be awesome! Thank you BP!

[David Seematter]

There are a number of ways to do this.  I am sure you will get great advice from people much more experienced than I am.  I have been the private lender on a few deals over the past few years.  

What you will pay in interest on the "rehab" fund depends upon your network of private lenders.  You will typically receive lower rates than what you would see with a hard money lender.  When I lend, I typically am getting a few interest rate points over traditional financing, but lower than what the borrower would get from a hard money lender.  The lender may ask for some points upfront on the deal.  I have actually been receiving on the back end of the deal when the property is sold.  Expect a couple of points either way.

To protect myself, I am in the first position on the property as the lender.  If the projects goes south, I take possession of the property or get paid first if they sell it out right.  I only lend on properties that I would like to own if the deal does fail.

12 or 24 months to give yourself some time.  Typically interest only during the terms with the balloon at the end.  You don't want it to be too short if it takes longer to sale than you expected.  I wouldn't try to commit to any cash flows on your end as you don't know when the tenant will be in place and you will have a lot of costs getting them in.  Someone might be interested in one rate for 12 months and then a stepped up rate for the next 6 months, but putting that out there upfront would send a message of concern to me as a lender.  

Typically the answer is yes on your 4th question.

Hope this helps.  Lots of more experienced members who might have additional (better) advice.  Good luck!