I currently rehab properties and sell them for profit. Recently, my name has been given to a few investors who want to invest and partner on upcoming projects with myself. They strictly want to invest their money and do not want to participate in the work. They are asking that I put together a business plan outlining what their returns would be on properties that they would finance. Historically, I have been using my line of credit that I established at a local bank. However, I am handicapped, because my LOC can only take me so far.
My question is, “What is a reasonable return to a private lender?” In addition to interest on their money, do they expect a percentage of the profit and if so, what seems to be the “norm” if there is such a thing?
I want it to be a win/win for both myself and the lender. I would appreciate any assistance that anyone could give.
What benefits would working with them have vs a hard money lender? Obviously if they won’t give you benefits over a traditional HML I would think you could offer them similar rates to what an HML would charge. If they want more of a return and don’t offer anything above a regular HML I would say its time to start using HMLs to increase your buying power rather than use private lenders.
HML’s usually charge origination fees 3-6% in addition to 12% or more interest. I think your advantage with a private money lender is you could offer 10-12% and not pay any origination fees. That would probably be your least expensive route.
The other way I’ve worked with private lenders is to have them fund the deal, carrying costs and materials and then split the profit 50/50 (that usually costs you more, but you have less at risk).
From my limited experience and what i have learned, Private is always better than a HML.
HML charges many points both front end and back end
Private is basically an IOU with interest and they do not split the profit or place a lien on the property.
I would go with private and start with an offer of 10% and no more that 15%.
and whether it be monthly or a balloon payment or a combo of the two.