How does private lender make $$ on SFH rentals?

Question

Howdy again, I poked around a bit and didn't really find the answer to this question.  If it's already here, please link me in the right direction :)

If I have a private lender who has money to spend, what's my "sales pitch" if I'm interested in rentals as well as rehabbing?  I have a pretty good grasp of the numbers for rehabbing, and how it benefits him.  But I'm at a standstill regarding how he would recoop his $$ and make some on SFH rentals.  Please help!!!

Thanks as always,
Shane

Dion DePaoli · Answer

The investor can investor with you in two primary fashions:

1) in the form of debt, where he lends you money and you give him a mortgage and note.   You pay him back at the interest rate on the note.  If the note is fully amortizing he will get his principal back along with the interest in the payments.

2) in the form of equity, where you and the investor join inside a company, like an LLC and he provides the capital into the company bank account.  You ratio of ownership and who runs the company and how every one works together is detailed in the operating agreement.

You can have some form of hybrid of both of those approaches as well.  For instance, he gets a mortgage at 8% and 30% of the net profits.  You and he just have to hash it out and document how he is comfortable.

You plan to take advantage of two different ways to create return on the investment.  Rental cash flow and gain from the sale of property.  While the investor is invested and you are collecting rents and distributing cash, if he is invested in the form of a loan you are just paying him back according the loan documents, if he is a partner or member with equity you can distribute net cash flow to him.  Sometimes folks do this while not paying the principal investment back and vice versa.  If you pay down his principal investment with net proceeds from the rent, you will just have to establish a yield he wants to make pay that and then any additional funds function as principal investment reduction.

You don't have to reduce his invested capital basis because he is secured in the house, so at the time of a sale you would return his principal investment back.  So if that is what you negotiate any payments from rents until sale are just yield to the investor and his total return is a combination of yield from rent and gain from sale.

Cheryl C. · Answer

Ann, as a HML, would you ever consider a partnership?  If so, on what terms?  You are coming from the perspective of Shane's prospective partner and, as such, have an inside view.  I could see a HML looking at something like this as a way to get some rentals without using too much cash and also getting a high return on the cash in.  My concern would be relying on the ability of the investor (Shane).

I'm in a position to be the cash partner, but I'd have a hard time believing that someone that needs my money/credit would do that great a job.

Ann Bellamy · Answer

If he wants a straight short term loan opportunity, you could borrow his money, use it to fix up, rent out the property and then refinance conventional to get his money back.

You'll need to:

1.  Make sure you can refi
2.  Possibly buy a few properties and refi as a commercial blanket loan

Ann Bellamy · Answer

Aaron Kelley, I'm not the right person to go into detail about commercial blanket loans since I don't do them.  You might want to start a new thread asking about it, and referencing this thread so the reader can gain context.

Aaron Kelley · Answer

Thanks Shane Woods for starting this topic thread. I've been doing my research and talking to other investors about this same topic. I've learned a lot from all of the posts here, Dion DePaoli, Cheryl C., Ann Bellamy, Michael X, Bill Gulley,and  Brian Rhodes. Thanks to all of you for adding great information.

I want to use private investors for rentals but similar to Shane, my investors aren't interested in long term investing. But they will be interested in the refi options. Ann could you or anyone elaborate on the refi as a commercial blanket loan option?

Shane Woods · Answer

Thanks Brian Rhodes.  I've been having those discussions this week and as of right now, he is absolutely not interested in rentals, which is fine by me for now.  No sales pitch needed when the expectations and goals are clear :)

I need to start another topic about our most recent conversations...I think it's finally going to happen...and it's on me 100% if it doesn't.

Shane Woods · Answer

Haha no offense taken!  To speak to your point and position...Thanks to BP, J  Scott's blog, and Tom Tarrant's blog (and a few others but mostly these 3), I know more than my potential investor, and teaching him everything I know, which isn't much compared to y'all...and pointed him in the direction of BP.  He's not interested in rentals so we're going to table that discussion for now.  But I'll still watch this thread for my own benefit.   :)

Brian Rhodes · Answer

Shane,

Most of the answers here have covered your question very well. One think I didn't see answered completely is your "sales pitch" question of rentals vs. rehabbing. We have private lenders that do both and some only want rentals (3-15-year term) and some only want to do rehabs (Typically 1-year term).

The best way to determine what category they fit into for your business is to ask them what their goals are. Some people just feel better about a short-term loan and they fact they are getting their money back fast. Others like the fact that their money is constantly working for them. For our lenders that only do rehab deals it is a bit of a pain to have to qualify a deal, wire money to buy, get payoffs when you go to sell, etc. Again as long as you explain all of that and ask the right questions you should have a fairly easy time giving your investor the deals that match their needs.

All the best in your success,
Brian

Cheryl C. · Answer

Me too Ann.  I need to see it, touch it, comp it, etc.  My $$$ and me are quite attached.  I can't imagine that anyone needing me as a partner knows more than I do.  I don't need any partner.  And there is no way on God's green earth that I'm putting money into anything that I have to fly to.

Ann Bellamy · Answer

Cheryl C., I do partner, but I don't partner in buy and holds unless the following hold true:

1.  The other guy knows more about buy and hold management than I do.  And while there are plenty who know more than I do, most of them don't need my money.  Or if they want it, they don't want or need to pay enough for it.
2.  The property is local.  I'm not just lending, I want an equity position, and I'm not just flying in once a year.  I want to be able to drive by and see what's going on.

I do partner in flips, I fund for a percentage of the profit, but there is a minimum interest payment in case the profit isn't high enough, and the flipper has to be someone I've known for a while and worked with on multiple projects.  I'm hands off on these, only offering suggestions which he is free to use or not.  He knows more than I do, once again.

I have yet to partner long distance, and considering the kind of control freak I am, it will probably never happen.  :-)  Nothing personal to Shane Woods or anyone else, it's just my personal comfort level.

How does private lender make $$ on SFH rentals?

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