There is structure to how private money loans are broken down. This concerns your money and it is wise to understand exactly how the private money loan is broken down.
Sometimes when a borrower doesn’t have the money that is required for upfront fees the money can be wrapped into the total loan amount. The easiest way to understand this is to break it down. Let’s look at an example.
EXAMPLE OF A PRIVATE MONEY LOAN
John has decided to get into the real estate game. He has been researching fix and flips and watching a lot of HGTV. John has even found the perfect property to rehab. But, John has no money. He turns to a private money lender.
John found a house with a purchase price of $50,000—this includes the closing costs. The closing costs include transfer tax, title insurance and closing fees. However, then there are some fees that John has to pay upfront—these are fees that can’t be paid at the end of the deal.
Along with the purchase price, John also has a $600 bird dog fee. A bird dog is an investing term that refers to someone who spends their time locating properties with substantial investment potential. Usually, investors use bird dogs to increase the area in where they are looking for property. John has a $500 insurance bill that was required to be paid upfront, as well. He also has Self Directed IRA fees (SDIRA). These are fees that an investor can potentially get charged. It is not the lender’s responsibility to pay money while they are lending. Therefore, it becomes the borrower’s responsibility. John has a $400 SDIRA fee that he needed to reimburse the investor for. He also has to pay $650 in loan points.
All in all John now has $2,150 in fees that need to be paid upfront before he can get his $50,000 loan for his property. What can he do? John simply borrows the fees, as well. Instead of $50,000, he is now at $52,150. However, John is not finished. He also has rehab costs. Rehab funds are not given all at once. These are called “draws.” An investor doesn’t just give all the rehab costs to the borrower. Instead, they are given bit by bit as projects progress. The investor will need proof that these repairs are needed and completed. So, John has $20,000 in rehab draws. In total John will borrow $72,150. The ARV on this property was $100,000. John’s lender financed 100%, so John had no out of money expenses. After interest rates and so on, John profited close to $25,000 with no money down.
It is important to understand where your money goes when dealing with private money loans.
Make sure you are dealing with a lender that explains everything to you. Have them sit down and show you where every penny will go. Not knowing the structure of your private money loan is you walking blindly into a real estate deal.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.