Private Lenders Interest Rates


Our private money
series continues. Today’s video, how much should
you pay a private lender? Let’s dive into it. Hey, everybody, welcome back. My name is Clayton Morris. I’m a longtime real
estate investor. And I’ve flipped
hundreds of properties. And we own many, many properties
in our personal portfolio of rental properties. This whole channel is devoted
to helping you become a buy and hold real estate investor
for the purposes of creating passive income and cash flow. That is the goal. So today we’re going
to talk about– we’ve been continuing our series
here on private money. How to build your
private money portfolio. How to go out there meet
with private investors. How to present to them. We have a whole
series of those videos here in this playlist
on private money. And so today we’re
going to talk about how much should a private
investor earn from you? How much should they make? How much should you pay
your private investor that is lending you the money? Now, first, let me just
say that there are no hard and fast rules for this. So, yes, you could
find a private investor that you’re going to
pay 5% interest to. That might be your grandma. Or she might charge you 1%. Well, sonny, just make sure
you make a good investment, and I’m just going to let you
borrow it for a 1% because I’m your grandma. As a private investor
there are no rules. There are no rules. So you can structure
it however you want. So in broad strokes I’m going
to go over four specific areas that you can structure
private money deals. And I’ll show you different
ways of compensating your private investor. Let me just start
off by saying this, though– that a
private investor is going to want to work with
you if it’s a win for them and if it’s a win for you. So you want to be able
to compensate them well so that they think that
they’ve made some good money and they want to come back
and work with you again. That is the key. If they’re not making
any money with you, then why would they
even bother lending you the money in the first place? So you want to reward
them because they’re letting you use their
money and then you can get your piece of real estate. Then you can give you
your money back to them. And then they can
come back again and you can buy another
property using their money. So this relationship’s
incredibly important. So one thing I would
say, first off, is to look at your
local market where you’re purchasing properties. For instance, I’m in
the state of New Jersey. And I know that a
lot of my friends who flip properties in the
state of New Jersey who do those $300,000,
$400,000, $500,000 flips that spend 7, 8,
9 months in construction on a house, when they
use hard money loans or they use private
money, typically they’re going to be
paying 10%, 11%, 12% even with a point on top of that. So they’re going to
pay for that money. They’re going to pay 12%. That’s kind of a common number. And you might go
to other markets where you might be able to find
that your typical private money loans are around 10%. So just go to your local
real estate meeting and ask, find out what
is kind of the going rate for money here, for
private money in this area? Is it 8%? Is it 10%? You may even find
it’s upwards of 15%. So, again, I’ve
worked with investors who will say if I can borrow
at 15% but I’m making 20%, I’ll take that
money all day long. So you just need to know
what your local market is. So now we’re going to dive
into the four key areas there where you can then
add some extra value for your investor. The first area of
compensation that you may find with the
private lender is what’s known as a profit
split, or sometimes people call it a joint venture. So a profit split is number one. Now this is where a lot
of people start out. And it is considered, really,
the most expensive form of private money because
it’s really a trade, right? You’ve got the time, and
they’ve got the money. So you’re going to
go into this project, you’re going to
rehab this project, and you’re going to spend
all the time doing the rehab. And that person is going
to make 50% of the profit because they lent you the money. So they can sit back
and basically do nothing while you’re out
there hammer and nails and rehabbing the property. So it is a good
way to get started. It is more expensive,
though, because you’re giving over 50% of your profit. If you’ve spent 8 months
working on a rehab on a property and you’re going to give– at
the end of it, after you close, and your closing costs, and all
of that, and you make $100,000, you’re going to give
over $50,000 right back to that private lender. And, you know, that may be like
kind of a punch in the gut. You may think, wow, I
just did all that work and now I have to give over 50%? So that is one way to do it. It’s the split. It’s a good way to
get started because it can get your feet wet in the
business and get started. You’re going to get the money. You’re going to do all the work. Also in this split
agreement is something known as preferred interest. So typically in
these agreements you may end up paying a lender
a preferred interest, which basically means that a
preferred rate of return. So when this project
becomes profitable, they are going to get
paid first, not you. So even in this
50/50 split, they’re going to get paid
before you get paid. Very important. All right, the
second way that you can compensate a private
lender– and this is probably the most
common way, it’s the way that I think
most people would use. It’s called guaranteed interest. That’s number two. And this works like
a typical loan. So a private lender may give
you a 12-month loan on– and they want to see
that you’re going to put some money into
the game, typically. So if 100% of the pie is
there, you’re putting in 20%. They’re going to give you
an 80% loan on the project. And it may be the after
repaired value of the property. So let’s say you’re
going to rehab a property and you know that
you’re going to spend– it’s going to after
repair the sales price and you’re going to show
comparable properties after it’s done, its going
to be worth $300,000. They may lend you up
to 80% of that value at a maybe 12% interest. So it’s guaranteed interest. So for 12 months they’re loaning
you a certain amount of money in order to do this project. You have some skin in the
game as a down payment. You’re going to be paying them
back this loan 12% interest over the course of that rehab. So that’s when people talk about
holding costs and the amount of time it takes to rehab. That’s why they want to
move as quickly as they can because every
month that goes by, you’re paying more interest. You’re paying more
interest on that money that’s being borrowed. But, again, that
guaranteed interest to your investor,
that’s one of the most economical and
straightforward ways that most people are
going to lend money on a particular rehab project
or even a rental property. The third way to
compensate a private lender is with points– points. And you probably heard this
that– I’m to borrow at 12% and at 1 point or
12% and 2 points. A point simply is up to
1% of the overall loan that you’re paying upfront. So if you’re going
to borrow $60,000, you would then upfront, you’re
going to pay that 1 point and then you’re
going to pay interest over the course of that loan. So I’m kind of a wishy-washy
on when it comes to points. To me, hard money loans,
you’re going to pay points. Private money lenders, you
shouldn’t be paying points. If you’re working with a
good private money lender, they’re going to
know that they’re going to want to work
with you for many years. So points, in my world, we
don’t really pay points. That’s not something that
we’re dealing with when we’re working with private lenders. Pay the interest,
that’s what you do. You’re not paying points
on top of the loan. And you can find lenders that
aren’t going to use points, and most won’t. And they also, quite
honestly, won’t worry about prepayment penalties. Because a private
lender is going to want to keep
their money burning and churning and running. So if you can get in and out
of a project in four months instead of six months, great. Pay it back. Pay the loan back as
quickly as you can. And then that means they have
their money again to lend to you on your second project. So there’s not a big problem
in paying things off quickly. And you shouldn’t
be paying points. But that, again, is a nice
way to sweeten the pot. So if you think that your lender
is on the fence about lending to you because it might
seem like a risky investment to them, sweeten the
pot a little bit and let them know that you’ll pay
a point as well in order to get that private
money for your project. And the fourth and
final way that you can compensate your private
lender are exit fees. And they are exactly
what they sound like. They are exits on the project. So this is another
way to maybe sweeten the pot for a potential
private lender so that, on the back end, when
you’re selling your property or you’re completed
with the project, then you’re going to pay them
a percentage of the loan amount at the end or even some points
at the end of the transaction. I’ve seen different
projects with exit fees go as high as 25%, that 25
points of the overall loan value. It’s kind of rare. But, again, it is a
nice way to say, hey, when this project
sells, you’re going to get a nice chunk of change
also as an added exit fee bonus on this property. So let me recap the
four different ways that you can compensate a
private lender– a profit split, maybe you go 50/50
on a project together. You do all the work, they put
up the money, 100% of the money. And they’re going to get
50% of the overall profits. Number two is
guaranteed interest. That’s the most
common way, really, of probably getting a loan
in place on a private deal. Number three, lender points. You’re going to put
up points on the deal. These are kind of rare in
the world of private money. When you go more
hard money loans, you’re going to pay points. But, again, I think that
most private lenders are not doing points these days. And if they want
it, say, you know what, I don’t think you’re
the right fit for me. Let me find another private
lender that’s going to do it. And the fourth and
final way are exit fees. Again, when the
project wraps up, you’re going to pay
them a percentage of the overall
profit of the deal. It’s another way to
sort of sweeten the pot. And that may come into play
if you’re doing a larger commercial project, you’re
building a big apartment complex or something like that–
a bigger commercial development project. On smaller residential
deals– probably not. There you go. I’d love to hear your thoughts
about using private money, what experiences you’ve
had in doing it. It’s certainly a killer
strategy in order for you to build your
real estate portfolio. We have other videos in
this private money series. You can click on the playlist
and watch more of them. Also, be sure to
subscribe to our channel. Just click on the
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on investing in real estate and helping you become a
better real estate investor. Go out there, everyone, take
action and become a real estate investor. I’m Clayton Morris. We’ll see you back
here next time.

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