Does This Sound Logical? (Private Money)
Just another idea of mine:
I have an interest in RE, but I am reminded of the story where the first guy to make a million bucks during the gold rush was the guy selling mining tools.
As far as RE is concerned I want to be the guy selling the tools. The tools in this case is money. Is there a need for small private loans not exceeding $50,000?
How do I protect my money? Would a rate of 20% FLY? Would investors be willing to borrow this money for a short amount of time, say, 2-3 months.....
thanks
ps sorry for the double post.
There is a market for that money. In my recent experience 18% is the generic number. I am not sure if people will have a need for 2-3 months. I would offer a year, with some disencentives starting after that. Perhaps, the legal max interest rate. I do most of my borrowing from a broker friend of mine that always likes to tell me about his 20/20 program. That's 20 points 20%. Of course I pay 0/13.5, but 20/20 has a nice ring. Enough about that.
As for securing the note. Ask yourself, Would I like to have the property for his first plus what he owes me. Also, what's the FICO. It is easy to complain about that crappy rating system, until your the one loaning the money. Last, what is the compentency of the people you are dealing with. Unfortunately, if you are asking about these types of loans, you may not be qualified to judge them. This is litterally just the starting point, but I will let others pile on with advice, and criticize mine.
[addsig]
From the point of view of an investor, yes, I also think there is a market for these loans. 20% seems a bit steep to me, but I would probably still do it if the deal made sense (unless someone else came in cheaper).
I am also not a loan professional, but if you were to offer private money as a second mortgage to help investors with the downpayment you would get a lot of people interested. There are a lot of people posting here that are looking for exactly that.
Analyse the cash flow as if you were going to by the building. If it cash flows nicely with the buyer paying you 20%, then it is likely below market, and your risk is minimal (of course, you would need to take into account whether or not you could sell the building if you needed your money back).
Equity partnerships might be another idea. You buy the property in a partnership (so you are not taking a lien), and the partnership agreement states that you get paid X% each month. You might be able to put in a clause stating that if loan payments fall behind you take over management or something like that.
I am just thinking out loud, I am sure others will know better than I if these things could work.
Good luck, let us all know if you decide to get started. But of course, don't advertise in the forums here
In your area I am sure that a lot of investors are looking for amounts less than 50K.
As for the rate 4 points and 16% will work. But most will want a one year loan. It will usually be paid for in less than that so your return will be higher than 20%.
Just besure that you follow state laws, never lend more than 65% of the ARV and use an escrow account for repair funds.
Don't you have to have a Lic to let people borrow money?
marcher,
You sad:
"Equity partnerships might be another idea. You buy the property in a partnership (so you are not taking a lien)"
Maybe you should clarify HOW do you buy property in partnership without taking a lien?
Self Made Man - the good news is that you aren't inventing the wheel here. Being a hard money lender/private money lender has been going on forever, there are references to it in the Bible. For every person who has money to lend there are 10 people who want it.
So once you do some research on hard money lending you should be able to find lots of info to educate yourself rather quickly and easily, and see that it is an industry unto it self.
Typically rehabbers are looking/and being offered hard money loans with 6-12 month terms, rates of 10-15% with 1-4% origination costs @ 65% -75% of the FMV of the house being used as collateral. The persons credit usually isn't at issue, essentially you are loaning the money using the house as collateral, that is why you want at least a 25-35% equity position in the house, in case you end up owning it.[ Edited by The-Rehabinator on Date 12/19/2003 ]
Factor points into the equasion.
$100K at 12% interest and 2 points ends up being a $5000 charge over 3 months. that's 20% interest (APR)
If you do it over 2 months it's 24%
...and 2 points is considered low! Many charge 4-8 points.
The other thing you can do is say "I'll give you $100K, just pay me $2000 per month until you pay me back. Many unsophistocated investors won't realize that it is 24%, but if the numbers work they'll do it.[ Edited by hibby76 on Date 12/19/2003 ]
Omega1
First, I made a mistake, I meant to say a money partner, not an equity partner.
Second, as I stated, I am not a loan professional, and I have never done this, I was just throwing ideas at there.
I did try to do this though, on one property. 75% first down, and then the LLC buys the property. That LLC has two members, me and the money partner. Each has invested a certain share into the company.
Alas, it sounded good, but I didn't get much further than that. I guess the partnership agreement would state how the funds are to be divided, and the money partner's share would be x% of his contribution. And since he has no lien and can't foreclose, the agreement would also have to give him decision making authority if I messed up. And then of course the right/obligation to buy him out at some point in time.
In theory it sounds to me like it would work. Let's hope one of the experts can comment on the reality.
Cheers