@Dan Hertler, @Ryan Shannon, @Dylan H. thanks!
I'm going to try and address each question in turn w/ enough depth to hopefully give some insight into the project and how I planned to execute it. If I miss something or make a mistake, let me know!
Cashflow is sitting around $285/month. The private loan was unsecured and didn't require any down payment. The terms were 6% annually, interest only, for 12 months w/ an additional $2,000 payment on top of principal owed when paid back in full. The additional $2k helps boost the lender's overall yield. Also, no prepayment penalty. This set-up can work pretty well for both you and the lender if you're doing them often enough to make it worth the lender's while. What do I mean by that? Well, if you can conduct this transaction every 3 months, the lender will make a lot more money than they would if you only do this once every year. See examples below.
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Example 1:
Say you pay the loan back in 3 months; the lender gets $1,800 (interest payments for 3 months @ $600/mo) plus $2,000 on top of their original 120k back. This nets the lender a total of $3,800 for three months. In effect, the lender earned $1,266.66/mo for 3 months. Annualized, this would yield ~12.66%, not too shabby for a passive lender.
This only works out for the lender if you conduct transactions like this every few months. If you do this once a year or once every 8 months, the lender's overall yield goes down.
Example 2:
Let's say that you only have the one deal this year and you plan on conducting a cash-out refi at month 8 to pay the lender back. Then the math goes like this:
$4,800 interest-only payments ($600/mo for 8 months)
$2,000 additional fee at the time of principal pay-back
Total payment = $6,800 for 8 months.
This yields ~ $850/mo which annualized would yield the lender ~8.5% ROI. Still not bad, but not as good as 12% for the lender.
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The Cash-out refi; I don't think it'll appraise much higher than 120k, probably around 135k. Its in an area that's being gentrified and there's a lot of business development happening near there (i.e. Publix is being built, Panera Bread, etc.), but values are still suppressed. The cash-flow will sustain the property and give me a few bucks, but I'm hopeful that it'll appreciate greater than normal as well over the next 5 years.
That being said, I anticipate that the cash-out refi will only get me to 75% of what I paid initially. Thus, I expect to get around $90k from the cash out, and will have to put-up an additional $32k to pay-back the private lender. With that, my total investment would shoot up to ~$33k, which gets me ~10% CoC ROI @ $285/mo cashflow. These numbers sit well with me, and I'd normally be good with just that, however, with this project I'm trying something a little different.
Instead, I have a fix & flip project going concurrently that I plan on using to fund the rental. Therefore, the private lender would be paid back by the proceeds of the flip + cash-out refi. This might reduce my take-home profit on the flip, but it'll basically get me the rental for no money out of pocket.
If I missed anything or something's not clear, let me know. Also, if y'all have any ideas that might have been better or more efficient, I'm all ears!
