Private Lending for Buy & Hold

[David Beard]

I was interested to hear what others might be doing in securing non-bank financing. We all have a circle of potential lenders/acquaintances that we could tap, without the hassle (or outright impossibility) of dealing with banks.

What approach has worked for you, and what terms. I was thinking generally (and hypothetically) along these lines:

* Deal with folks where we have pre-existing relationships
* 10yr fixed rate - pay around 7.25% fixed for 10 years (this would be set at loan origination around the 10yr tsy plus 5.0%, or possibly the 30yr avg fixed rate + 2.5-3.0%); interest only ideally, or possibly 30-year amort
* Right by borrower to substitute collateral to maintain the LTV (if we want to sell a property)
* 1st mtg, 75% LTV on new appraisal value
* One investor per property, in 1st lien position
* Property rehabbed, seasoned for at least 90 days with tenant in place with term lease

How have you addressed lender concerns around investment safety and illiquidity?

Do you discuss that there is a market for buying/selling seasoned notes? Do you make any other hard/soft assurances for getting some or all of their funds back to them early? Penalties?

Seems it would be good to always have a waiting list or pipeline to provide potential liquidity to your current investors.

Obviously comparisons to equity market volatility and low bond/CD yields are your chief selling point, and are compelling.

Very simple really. Buy/rehab/lease properties at 25-35% gross returns, season for 90 days, re-appraise, seek 75% private financing, which should typically recover all of your initial investment. One investor per property.

What approaches have worked for you for different categories of lenders? Early retirees (65-75), high earning pre-retirees (55-65), middle age accumulators (45-55), groups where safety and liquidity have varying degrees of importance.

Thanks.

[David Beard]

Thanks Chris, for the thoughtful and informative reply. I have an enormous amount of respect for you and your company (and no affiliation!)

On your points:

1. It seems that all investors are at least somewhat concerned about liquidity (unforeseen events can crop up), even though it's not their foremost concern. Those where it is the foremost concern should not be considered, I agree. For others, it would seem helpful to talk to being tied into a network of note brokers, having a sizable group of other active lenders, etc., though with no assurance of course that they'll recapture their investment at par.

2. Great points about security.

3. On LTV, I certainly understand where you're coming from, but I'm thinking of the scenario where we are looking for financing on seasoned, performing properties (let's say rehabbed, leased, and tenant paying for 90 days). Typically you are forcing alot of appreciation into the property through the process of buying distressed and rehabbing. It seems reasonable, after appropriate seasoning, to tie value to the new appraised value, and not the purchase/rehab costs. Banks are willing to do it this way, and for much lower spreads. Perhaps 65% of new appraised value, rather than 75%, would be in order. Again, not looking for purchase/rehab financing, just back-end financing of seasoned properties in a pipeline approach.

The terms you mention seem incredibly attractive to the lender on a well-secured investment, and are too close to the net cap rate of the property for my comfort. I have thought about also offering a loan similar to what a bank would offer for its portfolio: fixed for 5 years, then floating for 5 years, but wasn't sure if this would seem confusing to a typical individual lender.

Also, I expect in a few years that bank financing will be easier, and we'd have access to bank financing if needed.

Appreciate your input!