Lender · Pennysylvania · Member since 2018 · 139 posts · 68 votes
Good morning, BP. Any lenders funding rehabs/flips ever combine a typical loan structure (interest, points over 6-12 months) with an equity component upon sale or refinance? Curious how you may have structured the terms (lower interest rate to compensate for the equity, interest paid at end, etc) more importantly how you structured the equity side of the deal.
Why did/do you include equity in your loans?
Did/do you end up making more money with equity or less?
How do you present this idea a borrower to share some of the equity?
Are some deals better than others for taking equity? Perhaps a short term deal might be a 50/50 split on funds and no interest but longer might offer 5%, 10% in equity and interest.
I understand that if I take an equity stake I can not use my SDIRA funds as I would be considered a disqualified person. But I do believe that by having equity, hours spent on the project can be counted towards real trades activity.
We have done equity participation notes/ mortgages, especially when we have a newbie who wants a loan. We are then mentoring them through the process. Typically, this would be in a flip scenario with a 6 month term. The percentage of equity is case by case but there's always an interest rate that is charged besides the equity. It works well for all parties as long as you have a way to get control of the property if the borrower is not performing correctly.