How to let a Private Lender Know I am Serious as a Beginner

Question

Good Afternoon Everyone!

I have a private lender in mind that I would like to pitch a deal to. I ran all the numbers on the deal and it all looks great. It is a 3 house portfolio for sale with an 18.8% cap rate and cash flows about $3,200/month. I want to ask this potential lender to fund the deal 100% but I am hesitant to ask because I have not invested in real estate before. I know I can handle this though because I live near all 3 houses and can manage them and they are turnkey properties currently being rented out, so I know they do not need any major repairs. With the current rental income and my W2 income, I can afford to pay all my personal expenses, save enough for potential vacancy or repairs, and still offer the lender an interest rate of 18%. I am thinking about pitching the deal to him as a 24 month loan where I pay him 18% interest only payments for 24 months then at the end I would give him a balloon payment of the principle. Thats a 36% return on his investment over two years. The reason I am justifying such a high interest rate is because I do not currently have skin in the game and this is the price I am willing to pay to start my portfolio. It is the only way I can think of to be appealing to a private lender.

Would anyone here advise against this and why?

Scott Wolf · Answer

@Chris Hicks, this post is very confusing. $2500 for taxes and insurance for 3 houses seems very low. 18% interest is probably usury in most parts of the country, and you can definitely find a lender that will give better rates, perhaps a DSCR loan closer to the 4-6% rate.Lastly, $2,850 per year for 18%, if we're just talking interest, is a $15,833 loan. Are you sure all your numbers are right or is that a monthly number, and you're looking for $190,000?

Matthew Crivelli · Answer

Asking someone to give you 100% of the total project costs as a new investor will most likely result in a NO. This is considered extremely risky and most are not willing to carry the full cost as a means of self protection. If something was to happen and you went belly up it would end up costing the lien holder money to recoup the losses at 100%. If their is 20% equity in the deal the lender can sell the property at a discounted price and pay for all the sale/legal costs without taking a loss.

Account Closed · Answer

What would be your monthly operating costs? What would you do if a house went vacant for 3 months? What would you do if a water heater or HVAC needed to be replaced? What if property taxes go up? And a dozen other questions.Lenders like to know they are going to get their money back.

Tom S. · Answer

@Chris Hicks I think the biggest issue you have to address how to refinance out of 100% financing - you'll definitely have to bring a large amount of cash to the closing table. Most lenders will finance 75% of an investment property, so you'll have to bring 25% per property, plus closing costs. And what if prices decrease 10% over the next two years, what's the backup plan?Finally, you should be prepared to address to the private lender what if you can't refinance at all: say you get laid off of work right before the end of the 2 years?

Chris Hicks · Answer

@Scott Wolf I was thinking the same thing for the insurance and taxes but I verified the taxes on the county assessor website and the insurance was checked against the packet provided by the broker advertising the portfolio. However, other houses in the area seem to have higher insurance premiums. I figured either the packet has wrong information or the current owner might have some sort of blanket policy that lowers the premium. And the loan I am talking about would be $190,000. I apologize for the confusion, I appreciate you pointing that out.

Jesse Rivera · Answer

What's your relationship to the private lender? I sound like a broker record on this forum, but private lenders are all about relationships. Would you lend money to someone you didn't know? Even if it was a smoking deal?

Chris Hicks · Answer

@Chris Wilson Thank you for you response sir, I misspoke, it would not actually be the real cash flow since it does not include the payment I would be making to the lender, so I guess what I actually meant was that the rental income would be $3200 ($3185) a month with the current tenants and then the yearly taxes, insurance, and msd would be $2523. So, the $38220 in rental income minus $2523 for the insurance, taxes, msd would be $35,697. Giving me an actual cash flow of $35,697/12 = $2975/mo minus whatever I pay the lender monthly (proposed 18% interest per year would be $2850), so only a very small margin left of $125. However, this would only be for the 2 year long loan term, and I do have a W2 that pays me well enough to fund any upgrades or potential repairs, etc. Then, after the 2 years I would refinance, pay the balloon payment, and collect rents while paying a lower blanket mortgage over longer term. Thank you for your question, it helped me expose some weaknesses in my thought process.So what would your assessment be of the plan now? I know you still dont have the entire picture but maybe just initial concerns that pop out to you. What expenses do you think I would be missing besides repairs or vacancies?

Chris Wilson · Answer

The cash flow seems high for 3 houses? Do you mind posting the numbers you calculated to get you to a cash flow of $3,200?