FUNDAMENTALS
PRIVATE LENDING
WHAT INVESTORS NEED TO KNOW ABOUT USING OTHER PEOPLE’S MONEY Navigating the Private LendingWorld
by Damon Riehl
n working with real estate investors, we have found that very few have unlimited capital with which
I
is a Rule of Thumb that many investors use: Purchase Price + Rehab Budget <= 70% of After Repair Value (ARV) Here are three keys to getting your largest private loan amount (aka the least amount of your money) in the transaction:
to buy properties and grow their portfolios. They build wealth using OPM (Other People’s Money.) This can come in the form of loans, equity, or JV partnerships, etc. This article will provide insights into the world of private lending and how to use these sources to build a sizeable portfolio of rentals or flip properties to generate current income. One key principle of lending is that Lenders want the borrower to have “skin in the game.” This comes in the form of cash in the deal called a down payment, which helps to ensure that if something goes wrong, the bor- rower has the proper level of incentive to stay engaged and work out any problems that arise. These problems could include cost overruns and other property issues undetected at the time of purchase. Additionally, inves- tors could have a period of vacancy that stresses their ability to continue to make mortgage payments. A down payment helps to ensure the owner continues to pay the mortgage obligation in fear of losing that investment. The key conflict to resolve is lenders want commitment in the form of down payment and investors want the least amount of funds tied up in any one property. You need to position yourself to make a lender comfortable with allowing you to commit the least amount of down pay- ment possible and get preferred lending terms. If investors purchase stabilized rent ready properties, they are generally required to provide a down payment of 20-25 percent of the purchase price. These funds are then stuck in that investment until the property appreciates or loan amortizes down to a level where equity is created. This could take years. Therefore, many of our clients are focused on “Value Add” properties. This minimizes capital outlay since lenders typically lend on the “As Repaired Value” or “After Repair Value” (ARV). For an experienced borrower, most can borrow between 85-100 percent of cost. (Purchase Price + Rehab costs). To ensure you minimize your capital in a property, here
1. Investing Experience 2. Good FICO Score 3. Ample Liquidity
INVESTING EXPERIENCE To get a maximum loan size, most lenders currently require experience in rehabbing similar size and priced properties or experience in owning rental properties. In the current private lending market, the key to getting the maximum loan size is being able to prove 3-5 completed projects and/or rental owned in the last 24-36 months. If you are unable to do that on your own, many lenders will allow you to partner with an experienced investor on the deal by adding them to your LLC and making them a bor - rower on the transaction. This partnership can help you get the higher loan amount and lower rates and fees to make the deal more profitable. FICO SCORE Most lenders require a satisfactory credit score to get the maximum loan amount. Many will begin reducing the loan amount if your score is below 680-700. It is worth your time to manage your credit report and increase it to those levels or higher. Our investors regularly experience situations where they have used credit cards to fund rehab projects, only to find out that their FICO score has declined by 60-100 points due to credit utilization. This is devastat- ing to many who planned to refinance the property into a long-term rental, only to find that they must leave more money in the property and the rates are much higher than they expected due to their much lower FICO score.
thinkrealty . com | 27
Made with FlippingBook Online newsletter