How to Structure Private Money Loans
Posted by Patrick_Riddle
Filed under Private Money Articles
There are two primary ways that private money loans are structured… as an equity or debt investment.
Private Money Loan Structuring – Equity vs. Debt
With an equity investment, you’re giving your private lender a portion of the ownership in the property. What portion? It’s up to you. But, I’ll give you an example from one of our students below.
With a debt investment, your private lender is paid a specific rate of return. This is how I’ve structured most of my private money loans. Why? Because most of the time, it’s more profitable. And by retaining 100% ownership of the property, you remain in full control.
Neither structure is right or wrong… just different.
How PMBP Student Justin Wilmot Structures Loans
Justin Wilmot, one of our students kicking serious butt in the Florida market (he’s done more than a dozen deals in the last year since getting started), structures all of his deals straight 50/50 partnership with his private lender.
So, he chose the equity investment route.
… and he never has to worry about financing again.
He brought in one private lender with deep pockets and started doing deal splits. It worked out great for him and his lender so they decided to go into business together.
With cash to close deals at Justin’s disposal, he simply focuses on finding and closing great deals.
How PMBP Student Rob Russell Structures Loans
Rob Russell, one of our Platinum students in Oregon, structures his loans completely different. He chose to go the debt route.
He offers anywhere from 5 to 10% interest per annum and consistently gets private money on the low end of that range. Whoohoo!
Rob shared a cool story about a “Loaded Dentist” recently who contacted him through his PMBP website. After chatting a couple times and meeting, he had a commitment for private money at 7% per annum… no fees, no points, no hoops, no B.S.
Also, you may be wondering…
How Does Your Private Money Lender Get Paid?
It’s negotiable.
Do whatever makes sense based on your deals, your business model.
If you’re doing long term private loans (anything over a year), maybe you distribute the interest earned or profits over time… through monthly, quarterly, or annual distributions.
For short term loans, you could let it accrue until you cash it out.
It’s up to you to determine.
Got a comment or question?
Toss it into the comment area… let us know how we can help.
– Patrick
P.S. – In our full Private Money Blueprint system, module 4 is called The Nuts and Bolts: The Essentials and Specific Steps to Every Private Money Transaction. We cover – step by step – exactly how to close a transaction and give you all the paperwork… and that’s just one small component of our overall private money getting system.
P.P.S. – Need some inspiration? Check this out 🙂
please call me at 951 905 0156 i need a private lender i am ready to get in this i am a contor
What is your total private money blue print about can you send me some introduction info??
and what is the cost??
Thanks
PRS
How do we get provate money from a list of p l that we do not know personally and stay legal with the Security Exchange?
RE: How to Structure Private Money Loans
Hello,
You didn’t tell us “How to Structure Private Money Loans.” You simply identified two categories of private money loans.
Regards,
Daniel Brown
Hey Bruce… I understand you need some private money. The best way we can help is through our training information. Search the “private money articles” section here… everything there is free. Also, you may want to check out our private money YouTube channel… http://www.youtube.com/user/privatemoneylending
Hey Paul… check out this webpage… it has all the info on the Private Money Blueprint system and the pricing… http://www.privatemoneyblueprint.com/special.php
Carthel… you have to be very careful when marketing to get private money. Here are a couple articles that will help you understand…
http://www.privatemoneyblueprint.com/members/are-you-making-these-common-private-money-getting-mistakes/960/
http://www.privatemoneyblueprint.com/members/how-to-stay-sec-compliant-when-getting-private-money/1822/
Daniel… when it comes to structuring private loans, it’s pretty simple. You either go the equity or debt route… and I gave two examples above.
What specific questions about structuring can I help you with? Let me know in detail and I’m happy to help.
Thanks.
– Patrick
Hey Patrick,
If I were to wholesale a property with a private money lender that would be considered a debt investment right? Same goes for a rehab project with a term no longer than 6 months? And what do you think a good rate of return would be for a wholesale deal since its such a short term. Should the wholesale profit just be split 50/50 between you and private money lender?
Hey Chris, good questions…
On a wholesale deal, if you’re flipping it very quickly (less than a month), it may not make sense to pay a rate of return (debt investment)… because the amount they would earn would be so small. So you may set it up to just pay a specific amount for the borrowed funds (a flat fee based on whatever you’re willing to share with your lender to entice them into the deal… or split 50/50 profit or whatever percentage you think will work).
But if you’re borrowing the money for at least a few months, structuring as a debt investment could work.
Yep, with a rehab loan, can go either way… but debt would work.
– Patrick
If I’m doing a straight up 50/50 split with the Private Investor, when the house is flipped/sold do you cut a check to the PL’s company or do you cut a check to his IRA or what? Does one payout technique create a better tax impact than the other? I presume both parties pay capital gains tax on the net profits, right?
Hey Julie, good questions…
Depending on how the private lender wants to set up the investment, will depend on how you pay them back and who the check is cut to.
If a private lender invests through a self directed IRA, then the profits would go directly to the company who is servicing the IRA (a company like Equity Trust Company).
Some private lenders will invest through their personal name, some will want to use an entity. So you’ll make the check out to either them personally or their entity name.
Investing through an IRA can create some great tax benefits… but some of your private lenders may not have IRAs or theirs may not qualify to be self directed.
Yep, when sharing equity, you and your private lender will pay taxes on your gain. Best to seek advice from an accountant based on your personal situation for further info.
– Patrick
Please explain why Justin gives up such a generous [50%] equity position to his $$$ lender and is it 50% of the purchase or resale equity?
Hey Foster,
Justin shares 50% of the net profits… after all costs associated with a deal are factored in.
The reason he shares “so much” is because that’s the deal that he worked out with his lender.
For Justin, it makes great sense. He never has to worry about needing financing again for this deals as he has a private lender with DEEP pockets. The way he’s structuring his loans… he doesn’t even have any monthly payments on his loans (which is HUGE).
There are no right of wrong ways to structure loans. Do whatever works for you.
– Patrick
Patrick how’s it going, on the video finding private money you took us to Florida to look at recorded mortgages,the one gentleman got a 10 year commitment @6% per annum with a balloon payment of 275,234.00 plus any interest payment’s if due.Now he borrowed 300,000 am I to understand that half the interest payment’s wre going to principle to make the balloon payment 275,000 instead of the full 300k.My email is richardj.haynes@yahoo.com partner of Rod Leasure.Thank’s Patrick
Hey Richard / Rod,
That’s a good question. I’m not sure without being able to read the note to see the exact terms.
I typically set up interest only loans. But if you set up an amortized private loan, use an amortization calculator to figure out the payment schedule. You can google “amortization calculator” to check one out.
– Patrick
Hello Patrick,
Just joined and I’m excited about getting started. I have several questions. I’m looking at wholesale deals to buy, rehab and resale using investor fund.
1. Is this approach common among investors to use private investor funds to flip properties?
2. Also, when using private money, do you make your profit at the beginning (at the purchase) or the end (when you sell) the property using investor funds?
3. And if the property is sold for more than the private funds needed to purchase and rehab, who gets the difference?
Thanks,
Ernest
Hey Ernest, first off congrats on joining the program!
Ok, good questions…
1. Yes, a common way to fund flips is through private money.
2. Typically you make your money when you sell. But if you’re buying a property at a deep enough discount, you could pull out some profit up front (as long as you don’t put your private lender at risk). And the profit you pull out up front would be considered “proceeds of a loan”… and not taxable until you sell the property (a great benefit).
3. The difference is your profit in the deal and that would go to you, the owner of the property.
If we can help with anything else, let us know.
– Patrick
If I have to structurea multi- million dollar deal, ($6-8 million), what is the best strategy to get private money (single source or multiple???). For multiple sources, best way to structure with ownership?
I was thinking about creating shares …any ideas?
Frances, the way I structure my deals, I do simple one to one transactions. But most of my deals are in the lower price ranges.
For a deal in the $6-8 million range, it will probably be easiest to bring in multiple private money lenders… either set up a syndicate or a pool.
Susan Lassiter-Lyons (one of our PMBP faculty members) specializes in those strategies.
In the right hand side bar above, under “other resources,” click on “Susan’s site”… and check out some of her training on syndication and pooling.
– Patrick
Hey Patrick, I have a chance to get a 22 unit + 3 businesses for 1,500,000. and it is worth about 2,500,000 but I have to get the financing to close the deal what advice can you give me on this is it worth it
Eddie