Private Lending interest rates?

Question

I was wondering, for those who are or have used private lending, what interest rates are?

I have friends and family who are interested in helping fund some investments, but I'm unsure of what interest rates everyone gives their family and friends.

Thanks in advance!

Jeff S. · Answer

Wow!!  What button did I just push?

And you’ve known these people for 15 years, Steve?  Friends?  Family?

Do you think the money your private lenders entrust to you fell from the sky?  I bet your lenders, like most of us, worked their butt’s off earning the money they loan to you. Have you no respect for their time and labor?

I wonder if they realize the judgment you harbor against those who loan their hard-earned money to you.

“I provide my lender with the full title report and a copy of the title insurance commitment I'm getting.”

You protect yourself with title insurance, but not those with which you have a 15-year relationship?  Does this seem a bit selfish?  You do realize that an owner’s title report doesn’t protect the lender, don’t you?  Or, perhaps you don’t care?

Just curious, and probably rhetorical, but what in your past caused you this resentment against your lenders?

“I'll do without the lender altogether.”

If they only knew …

Kyle J. · Answer

@Jc Galang Keep in mind if your family/friends are providing most/all of the money then they're taking on most/all of the risk too. In my opinion, it's fine if they want to give you a little bit of a discount, but you don't want to ask for too much of a discount from them. After all, you want to appropriately compensate them for taking on that level of risk AND be happy with their return so they want to keep lending you money.

Just my two cents.

Kenneth Garrett · Answer

@Jc Galang

The rate varies quite a bit.

There is the family discounted rate which is probably 6%.

Then there is the standard lender rate which is somewhere between 8%-12%.  generally no points.

Steve Vaughan · Answer

I provide my lender with the full title report and a copy of the title insurance commitment I'm getting.   They will also be in first position and a beneficiary of my hazard insurance policy.

If a lender orf mine wants more insurance, they can buy it.  I'll do without the lender altogether. Talking about $1200 ish flushed down the crapper just in lenders insurance.  Throw in points and a funding fee and we're talking real dollars.

Lenders are very good at making borrowers pay for their protections. Appraisals and lenders insurance should be lender costs.  The 3 quads I'm buying now would cost me $2100 in appraisals alone and don't do shot for me. But what do lenders care if they make everything a borrowers expense?

Dennis Cosgrave · Answer

Jeff S. I think when a private lender is charging you 12-16% for a loan, which is more than double the market rate, they can easily afford to insure themselves. Asking the borrower to cover those extra costs is adding insult to injury.

Jeff S. · Answer

@Steve Vaughan wrote:

“No points, fees, or lender's insurance required but we have known each other professionally for 15 years.”

Whoa, hold on here, Steve.  Lender’s title insurance should always be required. This is not something you exclude because you know the borrower and have a 15-year relationship, any more than you’d exclude fire insurance because you know one another.  Would that make sense?  Lenders insurance protects the lender from past title issues and is unrelated to the relationship.

There’s a fine line between requesting a “friends and family” discount because you know someone, and taking advantage of them, @Jc Galang.  As a real estate investor, you probably wouldn’t buy a property if you knew you’d only earn 6%.  I know the argument is to compare it to sub-1% savings account interest, but if your friends want to diversify and lend on real estate, they could earn much more investing in professionally originated real estate loans through a local HML.

Lenders typically earn a lower return than their borrowers because they are taking less risk.  A lender’s risk is mitigated because they loan at a relatively low LTV, to experienced borrowers, and have a mortgage or deed of trust which provides recourse to the property.  Helping out a son or daughter is one thing, and a super low-interest rate to help you get on your feet could be appropriate.  Offering someone an investment is another.

Once you start asking for high LTV loans, or second position loans (don’t do this), or on high-risk properties, you should consider being fair and paying closer to the market rate in your area.  In this case, you’re not asking for a favor, but helping each other out.

Best of luck to you Jc.

Kenneth Garrett · Answer

@Steve Vaughan

Nice job on building a great relationship to get 6.5% on private lending.

Steve Vaughan · Answer

I shoot to borrow at 6%, but my main lender likes 6.5%.  No points, fees or lender's insurance required but we have known each other professionally for 15 years.

Unproven yet, arms-length, would be closer to 10% I'd imagine.  Local references help, so build relationships and don't miss a payment or deadline no matter what

Kenneth Garrett · Answer

@Jc Galang

I have borrowed and lent using private lending.  The rate in my area is 10%-12%.  Sometimes points.  It definitely needs to work for both parties as @Kyle J. has stated.  Your investing in the individual as much as in the deal.  You need a win win relationship.

Timothy Hero · Answer

I'm getting anywhere from 6-7.5% with my network.

Private Lending interest rates?

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