Hi Robert! We actually had a great time talking about this in our biweekly private lender discussion group last night! Well timed! The payment structure can be all over the map. Some private lenders don't want monthly payments and would rather be paid when you exit the loan, through sale or refinance. Some want monthly payments, and others may want prepaid interest. Knowing that ahead of time is crucial! As for your numbers, the $7000 is spread out over the course of the year, and you would only be paying interest for the length of time you have the loan. For example, if you have a buyer for the property and it is sold in 6 months, they you will have cumulatively paid $3500 in interest with $1400 in origination points when you bought the property. Generally, private lenders do simple interest only loans as a way of calculating interest, which is different than most conventional loans that use an amortized scale, so more interest is paid upfront while the principal balance slowly gets lower and lower. The promissory note should outline HOW the interest due is calculated, when that interest is paid, if there is default interest when that kicks in and what it is, and how you make those payments. Some lenders may choose to set up loan payment processing with a loan servicer versus having a borrower mail a check etc. Also - keep in mind many private lenders are looking at a loan to cost model, with an upper limit on loan to value. For example, a lender may say they will do 80% loan to cost (so the 60k +10k renovations, 8-% of 70k is $56k), but also keeping an eye on the equity buffer after renovations, and go up to 70% ARV, so 70% of 85k = $59.5k. Rather than focusing on the interest rate, really ask about the terms of the loan, what capital they are expecting you to have to actually close the deal. If your lender is using only ARV, then your loan amount will be $59,500 as an upper limit, but if they are looking at a loan to cost model - you will want to find out what percentage they lend on. Personally as a private lender, I would not do a 100% loan with a first time borrower, especially when my loan is at 80%+ of the ARV, and the borrower wants to keep it as a rental. Rate and term refinances are going to go up to possibly 75% of the ARV, which means as a borrower you are bringing money to closing to get out of the private loan. Depending on your available capital, this may not be an option and that would force you to sell it. Always keep the exit strategy in mind, and if you can get preapproved for a conventional or DSCR loan of a certain amount, showing that to a private lender to see you have been prequalified can help your chances of getting the loan with the private lender as well.
