Using Private Money?
Hey All,
Don't know if this is the correct place to post this question, but here goes. I found a landlord who has $300k sitting in the bank looking for a place to put his money. I told him that I find houses that would get a good return on his money each month. He said he'd be interested in working with me.
My question is: Since I was shooting from the hip while talking to him (I've never used private money), but have read lots on this method, what would be my next step with this gentleman? I need to know how to structure a deal with him to secure his money, give him a decent return and make a profit for myself. Anyone using private money and want to share with a newbie in this arena? Thanks for all the help on this board.... 
Todd
Hello Todd,
I will give you my experience over the last 18 months or so of utilizing private money. I initially established what would be a fair interest rate for both the investor and myself. The prevailing rate for private money in my area is around 15% or so and a private broker will charge 5 points or so. Without being a broker, a lender is not allowed to collect points up front, (although there are ways with prepayment penalties and the like to effectively charge addl fees equating to points.)
Initially, the ground rules were to obtain an ARV (After Repaired Value) with an appraisal and limit his LTV ratio to 70-75%. This loan from him would cover purchase of property, interim interest for 6 months, repair costs and all holding costs. (You always have to buy at the right price or none of this works) His name would be on the closing documents and would be beneficiary of insurance totally protecting him in case of disaster or if I defaulted. 75% would be a safe loan to value to make him very comfortable. We didn't include any minimum time line or prepayment penalties. (Make it as favorable as possible for you as well as fair to him). After he became more comfortable with me and my monthly payment arriving on time each month, we began to operate on more of a promissory note basis. Without tying money to specific properties, I had much more flexibility moving money around between properties. (There were still always very strict guidelines of where I could use the money.) I realize that we have what is probably a very unique relationship with this much flexibility, but by always doing exactly what you say, making sure your numbers are accurate and showing the potential lender a very detailed plan of your guidelines, it can be a very lucrative situation for both of you. A return of 12-15% secured by Real Estate at 70-75% is a pretty good deal for any investor looking for an excellent return and a private source of money to be able to offer cash for properties is well worth the interest you pay to him. The savings in points alone is huge, just make sure you always follow your guidelines and take care of his/her money at least as carefully as you would your own.
I hope this helps.
Good Luck,
Jerry[ Edited by jquinc on Date 03/09/2004 ]
Thanks Jerry!
If you don't mind, could you send me a copy of your detailed guidelines you use with private lenders? It would be great to look at what you do and exactly how you structure things in this kind of situation. If you'd like, you can PM me or call . Thanks again...this board is a great resource!!!
Todd[ Edited by nebulousd on Date 03/09/2004 ]
Jerry's info is great.
You can structure things a lot of different ways (lower interest but a profit split for example).
The real key is to make the first few deals simple and clean so the investor comes to really like working with you. You want them to recommend you to other friends with money. You want them to develop a sense of trust so when you need them to act quickly, etc they will take your call and execute.
Make sure they are always covered (secure the funds, have the insurance lined up, etc). This is partially because you or they might have a health issue and if someone else steps in you want the details clearly agreed and not easy for someone else to just unwind.
John
John, your response got me thinking. Speaking of health, this gentleman is 74...said his dad lived to be 96. The older I get (41 now) the younger that seems. Would you or have you ever set up deals like this in a trust just in case one party passes on to the other side? Wouldn't that keep the property from being tied up in estate and probate? Just a thought.
Todd