Real Estate Investing Model and Private Lenders

In my last post I defined what our current investing model is.  If you go back and read it, we plan to buy, rehab, and sell to first time home buyers in the $120,000 to $150,000 price range in western Jackson County Missouri or eastern Johnson County Kansas. 

We plan on utilizing a private lender for the purchase and rehab funds.  That means the people that we know or who know us who are sick and tired of seeing negative returns on investment on their retirment portfolios in the stock market, who want to see positive returns and who want to invest for at least 4 to 6 months, and are willing to tie up for up to 2 years, will lend us the funds for purchase and repair costs.  We will pay them a return on their investment in the form of simple interest on the money they lend.

At the best case scenario for us, we borrow purchase and rehab funds.  We buy and rehab the house in 30 to 45 days, market it to find a buyer in 30 to 60 days, and sell and close with in 3 to 6 months and the private lender gets their principle back plus interest. 

Example:

• Price to Purchase  House:  $70,000
• Price to Rehab House:  $30,000
• Holding Costs:  $2,000 (utilities, mowing, insurnace)
• Buying and Selling Title Company Fees:  $2,000
• Staging Fees:  $1,000
• Sell the House:  $130,000
• We pay 6% in Realtor Commission ($7,800)
• We pay the private lender $4000  ($70,000 plus $30,000 x 8% interest for 6 months)
• We make $23,200 (if we can cut out realtor commission, rehab cheaper, and we make a little more

Note that we never contemplate a rehab on a house unless the project profit is at least 20,000 and the purchase and rehab costs are 70% or less of the end sale price.

Now we all know the market could shift and end prices could go down a bit.  So we need a back up plan or two.  So back up number one would be to do the same as above, but in month 7 we would find a lease to own buyer who would buy in 2 years at the $130,000 price.  In this case the private lender may be paid off the interest for the first 6 months and then refinanced at a longer term rate, maybe 6.5%.  The private lender is then pocketing about $80 in principle and $480 in interest, but does not have a lot of paperwork or need to move their money around a lot.  If we plug the $90,000 loan into an amortization chart for 30 years, the monthly payment would be about:  $568 with taxes of about $100 a month and insurance about $50.  Our total PITI would be $718, and we would need a lease to own payment of $900 to $1000 a month.  We make a little each month on the  monthly payments.  Then we work with the buyer to get their financing in order so they can buy, and we make our profit when the finally cash us out and the private lender makes profit each month.

Back up plan #3 would be if we can sell to a financed buyer right now and if we can sell lease to own, our last resort would be a renter.  In this scenario, the private lender would again be getting the same payments as above, but our rent payment would probably be less than a lease to own payment.  We would probably be renting for right around $800 a month so we would essentially be break even.  The plan being that in the next 2 years we would refinance to bank lending at 75% loan to value and cash the private lender out , if they wanted to cash out.  Or if the private lender wanted to go really long term at a lower rate and shorter amortization, we might want to refinance with the private lender at something like 6% with a 20 year amortization.  It would all depending on the going rate of funding from the bank at that time.

Please note that these are just examples to put real live numbers so you can get a really good feel of how a private lender deal would work in terms of numbers.  We can always be negotiable by the deal.  If you would like to learn more about becoming a private lender with us, please give us a call at 816-523-4400.  And see our next post on how we structure the paperwork to protect our private investor.