Please help!!! What is a good percentage for Private funds???

Question

So here is the scenario...I have recently just got into the REI world. I got my RE license, set up my company and educated myself on flipping homes. I have now signed a contract on my first deal and close on Nov.20th. My father with whom I am as close as you could ever be just to give a little background is going to be my private investor. He will be putting up all of the funds in my account for the entire purchase and rehab. This will be his only function. We have talked about this around five times and he still is not sure what he wants to do as far as a percentage or a cut of the profit. Now that I have a contract pending I want to make this as professional as I would with anyone else and determine the loan arrangements.

So my question would be for anyone that has had experience with private lending with a family member, or anyone else for that matter. What is fair for both parties involved in this situation where he is bringing all of the money to the table and I am doing all of the work?

All help and advice is much appreciated.

So my question would be for anyone that has had experience with private lending with a family member, or anyone else for that matter.  What is fair for both parties involved in this situation where he is bringing all of the money to the table and I am doing all of the work?

All help and advice is much appreciated.

Ben Leybovich · Answer

When I started out, I offered people 12%-15% in 4-6 months.  You have to make it attractive, not to mention that there is a premium for being new...  Does anything change with this being your dad?  No - and in fact you should feel more, not less, pressure to perform.  He is giving you the money not so much based strictly on an an investment opportunity - he is doing it cause he loves you...

You should give him 50% - even partnership.  If not him, who will give you the money? Don't ask me how much to pay a private lender.  This is not a private lender.  A private lender is unlikely to even let you in the door at this point.  This is someone offering a path to success because love for you out-ways the incredible risk you represent.  50% - if you win, he wins.  That's just the right thing to do with your father at this time...

Good Luck, and remember - RE is about people!

Jon Holdman · Answer

I'm not sure what more you're looking for.  This isn't a complex question.  Bank CDs pay something like 2% (if you're lucky.)  But they have absolutely zero risk.  Mortgage rates are around 4-5%.  Hard money lenders charge 12-15%.   So, you're looking at something in between 5% and 12%.  Whatever the two of you agree on.

If he's funding 100% of a rehab project, a 50/50 split of the profit after all costs is the usual starting point.  No money should go into your pocket except your half of the profit.

Do keep in mind that the first flip project is very, very risky.  You just don't know what you don't know.  Personally I would recommend NEVER trying to do a fix and flip with none of your own cash.  Because when you go over budget if you have none of your own cash you have to go back to your lender.  There are a lot more costs than you expect up front.  If you have a 70% deal (purchase plus rehab is 70% of ARV) using private money you can expect a profit of about 20% of ARV, before taxes.  Tough to find those deals right now.   So, consider what your deal looks like to get an idea of the profit.  And then consider what happens when you go over budget (you will) and the property sells for less than you think (very possible unless you're REALLY good at valuation.)  If you're starting with an 80% deal, it doesn't take too many "oops" to have the profit shrink to zero.   If that happens, how are you going to pay dad back for the shortage?

Jeff S. · Answer

50% of the profit is one option. That way you won't lose money if your deal is thin.

J Scott · Answer

I'll throw in my vote for 10-12% annual interest.  You likely wouldn't get that from a non-family member due to your lack of experience, but your father likely wouldn't be able to trust a non-family member nearly as much (regardless of experience), so there are benefits and drawbacks for each of you.

Jon Klaus · Answer

I have successfully borrowed (and repaid) from family members in the 7%-11% range.  At the low end, they were doing me a favor. At the high end I was doing them a favor.

Talk to him about the things that could go wrong and your contingency plan to pay him back in those events.

Dell Schlabach · Answer

We currently use five different private lenders, lowest one is paid 6%, highest is 10% +1500 loan fee.

I consider 10%-12% very reasonable for rehab money.

Don Harris · Answer

I think Jon Holdman and Ben Leybovich have given you the best direction. Good luck!

Brian Cronin · Answer

Here's an old idea of what solvency ratios align with what credit ratings: https://www.moodys.com/sites/products/DefaultResea...

You can find credit spreads here: http://research.stlouisfed.org/fred2/release?rid=2...

10% sounds fair without additional quantitative metrics - he's making a secured loan (presumably) and is in the first or second lien position (presumably).

Amber Castro · Answer

This is considered a joint venture and should be a 50/50 split of the profit.

James Wise · Answer

We pay private lenders 10-12%. No points.

Please help!!! What is a good percentage for Private funds???

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