How does pml get paid back from buy and holds

Question

Want to get a better understanding about paying back a pml from a rental property buy. I know for flips that once the property sells that the pml gets paid back from the sale price. But how would I pay a lender back with a rental property since I won't have the purchase amount back with a sale. What's the process? Is it monthly with the cash flow of the property? Advice for pursuading a lender to invest in rental property when the lender wants to be paid back quickly or full payment...

Alexander Merritt · Answer

@Kenny Lewis

As @J Scott said... it's really up to you and your lender. Since your lender will be a family member you actually have more flexibility in the terms of the loan then a traditional Hard Money Lender (HML) or Private Money Lender (PML) because you already have a relationship with them and you won't need to go through a big background check.

So, if your family member lender will agree to a 30 year loan, then you can just pay it like a traditional mortgage. If the family member wants their money back with their return in a shorter period of time, then you'll need to work out exactly what terms they'll be willing to accept. For instance, if they want their money back in 1-3 years, you could agree that you won't pay them anything during the life of the loan, but then you'd pay them back fully with their return at the end of the loan. That way you wouldn't have to worry about paying them at all for the first 11ish months. During that time, you'll probably need to refinance the house into a traditional mortgage with a bank. You'd then use that money to pay back your family member.

To refinance, you'll need to make sure that the Appraised Value of the house is enough to cover the existing mortgage, plus any return you've promised your family member lender. So, the most common way to do that is to rehab the property (aka force a higher appraisal). When you get the back loan, then you can draw out some of the equity value in the house (called a cash-out-refinance), or you can possibly open a Home Equity Line of Credit (HELOC) and then use that, plus the mortgage, to pay back your family member.

I hope that answers your question.

Steve Vaughan · Answer

Yes, refinancing means you have to qualify for a mortgage loan.  Full orifice check, including credit, DTI, assets, income...

Borrowing from family can work, but I don't do it.  How many awkward Thanksgiving dinners would you like?  1 or 30?  Clear expectations are even more important with family.  If they are ok with a super long, slow payback period (didn't sound like they are- "advice when the lender wants paid back quickly") then whatever is best is whatever you agree on.   Don't screw up relationships over a stupid house @Kenny Lewis!

Steve Vaughan · Answer

I suppose the BRRR strategy may be best.  Buy, renovate, rent, refinance, repeat.

If your deal is a great buy and you force appreciation through improvements, you could refinance your private money lender out provided you can qualify with a bank.

In general, HMLs and other quick payback loans aren't a good fit for buy and holds, though @Kenny Lewis

J Scott · Answer

Basically, there is no right way to do this...as long as you and the lender figure out some terms and you're both happy, that's all that matters...

The two most common scenarios are:

-  The lender lends you money that you agree to pay back in some period of time (typically 3-5 years), and you need to figure out how to pay the money back in that time.  For example, refinancing into a long-term loan or saving the money in some way during that time.  Oftentimes, you'll make monthly interest payments as well.

-   You partner with the person instead of borrowing from them (they get "equity" in the deal).  If you do this, you need to ensure that your partner is getting sufficient value from bringing all the money.  Again, as long as you both agree, it's all good.

Kenny Lewis · Answer

@Kristina Inglis, I will be glad to help find you some investments in the Richmond area. Send me a message on what kind of homes you are looking for. Right now I am only working with cash buyers. And no, no more insight yet on paying back with rentals.

Kristina Inglis · Answer

@Kenny Lewis Hi!  I'd love to connect.  I know you are wholesaling in Newport News, but I'd be interested the Richmond area you ever found yourself with deals in that area.   I also have the same question about PML and how you would pay them back on buy and hold / rental.  Did you happen to get any more insight on this topic?

Many Thanks,

Kristina

Kenny Lewis · Answer

thank you J. It sucks to say, though, I'm not familiar with most of what you said. I meant that I'm brand new : )  could you elaborate in beginner terms if you have time? Thanks

J Scott · Answer

You can structure it in any way you and the lender is comfortable with.  You can have a long-term fully-amortized repayment; you can have a short-term amortized over a long period with a lump sum payment; you can do a profit share (equity vs. debt); you can do a hybrid equity/debt; or you can do anything else that you both think is fair and reasonable.

There is no right or wrong answer...

Kenny Lewis · Answer

thanks Steve. The family member lives in Texas so there aren't any thanksgiving dinners haha. So if I got a different pml, would I have to refinance to pay back the lender? Or would it be whatever we agree on?also, can you elaborate a little more how the process works with refinancing to pay back the lender?

Kenny Lewis · Answer

If everything goes to plan my pml will be a family member so it'll be pretty flexible. And by refinancing means I have to apply for a mortgage loan and run a hard credit check? I really don't want to have to apply for an loans if possible or have any money out of pocket.  Any other options? Or the main version to pay back is refinancing?  If the lender is a family member is a monthly payment agreement normal/best way to go?

How does pml get paid back from buy and holds

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