(NOTE: What it's like to write a $1,000,000 check for a sweet piece of undervalued real estate … even if your bank account is overdrawn and you owe the local lawn boy $20? This special report shows you step-by-step.)
Hello Moguls! Our good friend and genius REI guy, Patrick Riddle, has gone and done it again. He continues to provide us all with interesting and super-helpful investing info.
We’ve gotten lots of questions about Private Money and specifically, how to structure a deal involving private money…
Have no fear, Patrick is here to answer that riddle (see what I did there with the play on his name?!) and give us the goods. Read on, friends.
How do I Structure Private Money Loans?
I hear from people fairly often who feel a little “fuzzy” on how to best structure their private money (PM) loans. So today I’d like to offer a little helpful insight, using a couple of our students as willful guinea pigs.
The fact is, there are really two PM loan structures that I (and most every investor I know) use regularly: Equity investment or debt investment.
Private Money Structuring – Equity vs. Debt
With an equity investment, you give your private lender a portion of the ownership in the property. What portion? It’s up to you. Could be 50/50…70/30… (I’ll give you an example from one of our students below.) But essentially, you’re making your private money lender into a true partner in the deal.
With a debt investment, your private lender is paid a specific rate of return. And rather than having part ownership in the property, they get a lien against the property (note + mortgage or deed of trust) to secure their interest.
This is how I’ve structured most of my private money loans. Why? Because most of the time, it’s more profitable for me. And by retaining 100% ownership of the property, I remain in full control.
Neither structure is right or wrong… just different.
How Justin Wilmot Structures his Private Money
Justin Wilmot, one of our Private Money Blueprint students, has been kicking serious butt in the Florida market for some time now – he’s a hybrid wholesaler/rehabber taking down three or so deals monthly. He scores around $10k per wholesale deal, and rehabs are $25k profit on average.
Anyway, Justin’s secured many millions in private deal funding now, and he always prefers the equity investment route, structuring a straight 50/50 partnership with his private lender.
Right from the start, he brought in one private lender with deep pockets and started doing deal splits, sharing 50% of the net profits after all costs associated with the deal are factored in.
The reason he shares “so much” is because that’s just 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 his deals, as he has a tap of private funds ready and willing. He simply focuses on finding and closing great deals, and he doesn’t even have any monthly payments on his loans, which is HUGE. Also as a 50/50 partner, Justin’s only assuming half the risk of the deal.
How Rob Russell Structures his Private Money
Rob Russell, one of our students in Oregon, chose to go the debt route. Rob offers anywhere from 5% to 10% interest per annum (interest only, no payments) and consistently gets private money on the low end of that range. Yay, Rob!
Rob shared a cool story with me about a “Loaded Dentist” who contacted him through his PMBP website. After chatting a couple times and meeting, he got a private money commitment at 7% per annum… no fees, no points, no hoops, no B.S.
This is also my preferred structure most of the time. With the debt investment route, you assume more risk in the deal in a manner of speaking, but you also tend to make more money on the deal.
Question: How Does Your Private Lender get Paid?
Answer: It’s always negotiable, and also depends on the situation.
For an equity investment, it’s often ideal to setup an LLC with both you and your PM equity partner as members, and you as the managing member. Then, when the deal is done, you can just make a profit distribution from the LLC to each member. (But please consult your attorney and tax professional – I’m not one.
For the debt investment model, you’ll typically have your title company draft a note with agreed terms, and a mortgage (or deed of trust) to secure it. (Hint: You could set it up with or without monthly payments to your private lender.)
If you’re doing long-term private loans (anything more than 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.
I typically structure my flip deals as simple one-to-one transactions, and always go for low interest and no payments until the deal is sold if I can get it.
Bottom line, there is no right or wrong. It’s up to you to determine, so do whatever makes sense based on your deals and your business model.
Holla at us
Did this clear up the private-money deal structuring for ya? I wanna hear how you were able to apply this to your REI business. Give us a shout in the comments section below.
Understand that a private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction.
Learn the difference between an equity investment and a debt investment. (PS – I’ve explained them both above.)
Remember that neither structure is wrong, you just have to figure out which structure will work best for your specific deal.
Patrick Riddle
has been investing in real estate ever since he got the bug in college at Clemson University and - to his parents dismay - dropped out of college to dive full-time into real estate at the age of 22 with a couple friends/partners from school.
The first few deals were rough for them, mainly using their own cash, credit, and hard money loans. But, soon he found out that was a rough and unsustainable way to build a real estate business.
After "on the job" learning through the school of hard knocks at first, he found the key that helped their company get deals done more quickly, with higher profit, less risk, without having to go to banks or use their own cash.
Fast forward to today, their company has closed over 130 real estate transactions and has put over $6 million in private money into their own transactions.