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Updated about 4 years ago on . Most recent reply
Using Private Money or JV for downpayment on HML advice
I spoke with some HML about using funds from another private lender (or partner) to serve as the downpayment on the loan. Some places offer 100% loan to cost, others require 10-15%. They suggested I could use a back room deal with another private investor for this purpose, or put them on the llc and it would work, so it seems possible. This is good, because it's my only way to proceed forward at this point. I don't have any funds at all!
Assuming this is possible, how would I structure the agreement with the private investor who will cover the downpayment on the HML? Do they get a second lien position, assuming the HML allows this? Or is the deal structured in some other way?
What percentage return should I offer them, or flat return, assuming I need 15K in capital?
Since I have no funds for the downpayment, I also have no funds if they structure the renovation drafts to reimbursable and they don't upfront the drafts, so potentially, there are two sources of financing I need to consider - downpayment on the loan itself and any upfront renovation drafts (reimbursed each time)
I realize I'm totally scrapping the bottom of the barrell with precious little as a starting point, but I'm sure others have made it in the past before and I'm hoping I can do the same following the wisdom of other investors every step of the process.
I'm also considering a rehab only loan, if the sellers would allow this and split the profit with him, thus negating a sizable downpayment on loan (if any) and I'm only need to contend myself with the much lower rennovation loan costs, to which HML or private investors would be an option.
Most Popular Reply
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@Tim Ivory ok my good man. Since I'm a Tennessee based HML, private lender, and rehabber, and also borrow HML and private money on my own projects, and do a lot of JVs, I believe I am well poised to answer this one.
1. You will not be able to qualify for a hml without cash reserves. So your partner would have to be the loan guarantor.
2. If you have the deal and they are getting the loan and providing funds, they are taking all of the risk. For that, a fair split would be giving them 65% of the equity.
3. Create a new LLC for this deal only with you and the partner as members. Outline the terms of the equity split on your operating agreement.
4. LLC name should be the buyer name on the contract. Now your partner applies for the hml, and closes the deal.
5. You do the work, sell the property, wire proceeds at closing, and dissolve the LLC.
That’s it. It’s really not too complicated. This is the right way to do it if you can’t qualify for a hard money loan, and don’t have a PL that will
Lend you 100%. Hard money lenders won’t allow second mortgages, so debt partnerships are out. But if you did have a PL that would lend you 100%, just do a promissory note for 12-15% interest only for 1 year, so that they have the security of a first position lien.
I hope this is helpful! Feel free to PM me if you have any other questions.