How Do You Structure Short-Term Private Money Loans?

I was talking on the phone with one of our PMBP members last week and a common question surfaced…“How do you structure short-term private money loans? “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. So 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 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 one 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 a hundred grand.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 (if you mess this up, you could lose the entire deal)…

… or you want to do minimal repairs to the property before you flip it…

… or you have the ability to refinance the property but need purchase funding…

Short-term private money can definitely benefit your biz… so now it’s time to learn…

How to Structure Short-Term Private Money Loans

Here are two strategies that have worked for me before:

Strategy #1 – include a prepayment penalty in the mortgage or deed of trust

Prepayment penalties are usually expressed as a percent 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 World 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 that stated that he would get the full 4 month’s worth of interest… even if we paid it off a day after we purchased.

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.

I’ll take it!

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 World 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 he would have made putting it back into a CD.

Another win-win.

There you go… two strategies for structuring short-term private money loans.

For more info on loan structuring, check out this article.

It shows you how two of our PMBP members structure their loans (and neither is right or wrong… just different).

Make sure to check out the discussion in the comment area. Lot’s of good questions from the PMBP clan and my responses to ’em.

You probably have some of the same questions on your mind.

Happy Private Money Getting!

– Patrick