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Updated over 8 years ago, 06/02/2016
Borrowing Money
How much time are you given before being required to pay it back if you work with a money lender?
Completely dependent on your terms with the lender.
A traditional loan from a bank is typically amortized over 10-15-20-30 years. This means you pay a little principal back each year.
There also exists an "Interest Only" loan. These loans require you to make monthly interest payments and pay the entire principal back in one lump sum at the end of the loan (e.g. after one year).
For private lenders, things are typically on the shorter side. My personal experience has been that private lenders will typically want their money back within 1 year on a flip...maybe 3-5 on some other creative/ rental deal.
Between 6 and 18 months for private or portfolio flip loans. Between three and five years for portfolio rental loans. Between 15 and 30 years for conventional loans.
Interesting post. I am looking for a private individual to finance a flip and offering 12% interest only for $50,000 for about 6 months max. The paid for property will be used to secure the loan and it will be worth between 120 and 140k. I'm using my own money to do the re-hab and have skin in the game. Does this sound reasonable and what kind of paperwork would be required? I am approved by a hard money lender already but the rates are higher and fees are a bit pricey. I have spoken to a few lenders and most consider the loan too small for them. I would have thought the opposite since its such a small risk. Any thoughts?
@Charlie DiLisio, underwriting HML loan requires a lot of manual work so it takes the same amount of time for us to underwrite 50K loan of 500K loan. Infrastructure for most HML lenders is nowhere as efficient as one for conventional lenders so it is quite expensive to originate a loan. We did the math, and anything below100K is not ideal but we go as low as 75K for some clients.
Nothing to do with the risk, it is just not profitable enough to support the infrastructure.
- Boris Grinberg
@Boris Grin I understand the pricing structure for HML and don't blame them for the extra costs. I was just wondering why it wouldn't be attractive enough for a private lender since the rates are so low on most investments these days. $500 a month interest only for 6 months would be considerably more than they would make in traditional investments but finding private individuals is challenging but it is a win-win situation when it is fully secured by real estate worth double their investment. I have no problem with HML's but business is business and the bottom line is what matters. Thank you for your input Boris.
Originally posted by @Charlie DiLisio:
@Boris Grin I understand the pricing structure for HML and don't blame them for the extra costs. I was just wondering why it wouldn't be attractive enough for a private lender since the rates are so low on most investments these days. $500 a month interest only for 6 months would be considerably more than they would make in traditional investments but finding private individuals is challenging but it is a win-win situation when it is fully secured by real estate worth double their investment. I have no problem with HML's but business is business and the bottom line is what matters. Thank you for your input Boris.
I do a lot of private lending, and these terms are about what I look for (though generally a point or two upfront to cover my other costs). So, it's quite possible you should be able to find a private lender at this rates.
The bigger question is your level of experience. Private lenders will often want to see that you've done this a couple times before (successfully), as we don't like to have to take the properties...that's when things become unprofitable for us, regardless of the LTV...
Thanks for the reply J. I have done many re-habs part time in the past and well versed in the structure. I am transitioning to full time and building a great team. Looking to capitalize on the re-hab market here in south Florida and I'm all in with skin in the game and finance all of the re-hab and usually put in 20% down on my deals. Currently working on two at the moment and enjoy the business. I'm always open to new ventures and my work speaks for itself. A point or two is reasonable as well so I appreciate your input greatly. The opportunity is now and making things happen is very empowering. Much success to you and the BP community.
@Charlie DiLisio Would the 50k note be in first position? I think your terms are reasonable. I would recommend you shop it around locally so that your potential lenders can see the house/neighborhood/market and make an educated decision.
Example - I have a friend who is an engineer for a large company. He can take out a loan from his 401k for about 50k and has offered that to me to help finance rehabs. What you are describing would work really well with someone like that.
Yes on the first position. I will send out the opportunity to my local REIA and associates who can see the deal first hand. Thanks for the great idea. I appreciate the feedback.