Funding can be one of the more challenging parts about investing in real estate.
And I’m not even referring to getting a private money loan itself.
I’m talking about structuring it: how do you structure short term private money loans?
Well, let me give you my two cents…
So, when I was learning the ropes, many of my private money prospects were at the point where they wanted to get started but didn’t want to tie up the funds for too long.
Or, they wanted to “try out” private lending on a short term to see how things worked before committing to a longer term loan.
And that meant I had to go the trial-and-error route and figure out a way to structure short-term private money loans.
You see, if you structure your investment opportunities as debt investments (which is how I primarily do it), your private lender wouldn’t make very much moolah for lending funds to you for just a month or two.
For example, if you borrowed $100k for 1 month at 8%, your private lender would earn less than $700 bucks. For many people, that’s not enough of an incentive to get ‘em to part with $100,000.
And if you’re wondering, “Why would I want short-term private money?”
For a lot of reasons…
- Maybe you already have a buyer in place and don’t want to try and juggle a double closing.
- Or you’re in one of the parts of the country where contract assignments are increasingly being frowned upon.
- Maybe it’s a “wholetale” deal in which you do minimal/clean-&-clear repairs to the property before you flip it to a wannabe armchair flipper, who’s fantasized about getting into the house flipping business from one of those TV shows — that’s a progressively profitable business model… a nice hybrid between rehabbing and wholesaling.
- Or, you have the ability to refinance the property but need purchase funding for whatever reason.
Short-term private money can definitely benefit your biz… so here are 2 strategies that I’ve successfully used to structure these types of opportunities:
Strategy #1 – Include a Prepayment Penalty in the Mortgage or Deed of Trust
Prepayment penalties are usually expressed as a percentage of the outstanding balance at the time of prepayment, or as a specified number of months of interest (this is how the deal below was structured).
Real Deal: I bought a house in Goose Creek, and a guy who I met at our local REIA funded it. I borrowed the funds for 4 months, but knew that I would flip it within a month or two.
He wanted to make sure it was worth his while. So, we included a prepayment penalty, which stated that he would get the full 4 months’ worth of interest… even if we paid it off a day after we purchased it. It was a win-win.
My private lender made a great return short term — and I didn’t have to use one penny of my own money or credit to do the deal… AND made over $21,000!
BOOM!
Strategy #2 – Negotiate a Flat Fee
This is the primary strategy that I use to get short-term funds. It’s simple. Easy to understand. And that goes a long way when getting private money.
Real Deal: I found a deal off Dorchester Road in North Charleston and got most of it seller financed. I only needed $20k in cash to close and planned on flipping it quickly.
To borrow the funds, I offered my private lender a $500 flat fee.
That may not seem like a lot… but I only borrowed $20k, and it was a heck of a lot more than my private lender would have made putting it back into a CD.
Another win-win.
There you go…
Now you know why it makes sense to use short-term private money…
…2 strategies for structuring these types of loans…
…and real world deals I’ve closed using these very strategies.
So, it’s your turn. You got this.