When Should You Pay Back Your Private Lender?

Posted on July 3, 2017 By

When should you pay back your private lender? It’s another video in our private money series. Let’s dive into it. Hey, everyone. Welcome into another video in our private money series. I’m Clayton Morris. I’m a longtime real estate investor, and I’m the founder of a company, Morris Invest. You can visit our website if you like and learn more about what we do. But today, we’re going to talk about private money. And we have a whole series of videos on private money. And this is really one of the most important videos you’re going to watch in this series because it has to do with when will that private lender get his or her money back from you.

You’ve borrowed it. When do they get it back? So we’re going to go through the different steps and strategies that you can talk to your private money lender about to let them know that they are safe and secure and that their money is going to be coming back to them in a timely manner. So first, let me broadly say that when you are borrowing money from anyone, it is your fiduciary responsibility to make sure that they get paid back no matter what.

No matter what. Obviously, they’re taking on some risk in lending money to you. But you want to make it your ultimate steadfast goal to make sure that they are safely securely in this deal, and they’re going to get paid back in a timely manner. I’m sure you’ve often heard it said that private lenders– people who have a lot of money and they lend money out– their number one thing that they’re concerned about is capital preservation. They want to know what will the exit strategy look like.

How will I get my money back. So for many of them, they may want to take first position on their mortgage with you, right? You’re going to borrow their money. You’re going to create a mortgage note with that private lender. Then they’re typically going to be in first position on your house. If you don’t pay them back, they can foreclose on the house. They get the house. That’s their exit strategy. That’s their capital preservation, right? They’re going to lien against the asset. So lenders are always going to be thinking about capital preservation. It’s the thing that they care about more than anything else. They don’t want to let you borrow $100,000 thinking that I may never see it again– no.

They want to know that that $100,000 is either going to come back to them in the form of $100,000, or they’re going to make a good profit on it as well. But they don’t want to ever lose their $100,000. They want to keep using that to lend over the course of their lifetime. Now very important to remember that any conversation you have with a private lender– when you’re setting up your credibility package, when you’re walking them through the deal– you want to make sure that that conversation centers around them getting paid back. So we’re going to dive into a few tips here on how you can really make sure that they are safe and secure.

It all starts with exit strategy. If a lender is letting you borrow money on a rehab project for instance, well, what is the exit strategy? The exit strategy is they’re going to be paid back the mortgage plus interest when your property sells. You did the rehab. You’re selling it. What is that going to look like? When will they be paid back? They’re going to, of course, be paid back at the close of escrow, after that house sells. So they know that at that closing table they’re going to make their money back plus interest. Very important that you know what that exit strategy looks like– how much money you’re going to be coming out of pocket back to that private lender. One of the most important ways that you can secure this and make your private investor feel secure is to offer some security. And one way to do that is to actually put a mortgage on the property– actually write it up in the form of a mortgage note.

The title company can handle this, right? They’re going to be in a position on the property. You can also create a deed of trust because that answers the question for them. This is a question that private investors will ask. Well, what happens if you just run off with my money to Mexico? Well, now there’s a mortgage on that property, a deed of trust, which means that they’re going to take ownership of that property if you run off. So that $5 million apartment project that you were working on that you suddenly just bailed on and ran to Mexico– they now take ownership of that property, and it’s theirs. Or they can go through the foreclosure process et cetera. But that mortgage on that property is their security. So making sure you put that piece in that note in place really goes a long way to making sure that that person feels secure in their investment with you.

One more point on the security of a mortgage is that of course if they’re loaning money to you on a particular property, then, of course, there’s going to be a mortgage in place. That goes without saying, really. But this is more for those joint venture opportunities that we talked about in the last video on the profit split. Because they may be putting up the money and expecting a 50% return after you sell the property, but there’s not necessarily a mortgage there. They’ve just lent you the money to do the project. In that situation that’s a joint venture, you may also want to construct a mortgage note, even though that’s not typical, in order to give them that extra blanket of security. The next way to offer some security for your private lender is to set realistic time frames. If you think in your heart that this property is going to be rehabbed in 90 days, I wouldn’t say 90 days to your private lender.

I’d be realistic and maybe push it out a little bit further, maybe add on an additional month or two just to be safe and secure. Because I’m telling you, when you’re dealing with city bureaucracies, and the inspector needs to come through and offer permits and tags and things like that, and the town needs to sign off on those things to get you permits– sometimes that can delay things by weeks. I know in the state of New Jersey we have builders that we work with all the time that they can be delayed. They literally cannot do anything until the city comes in and signs off on it and they get those permits to move forward. So that can put a real slow down to your project. And now you’ve promised that lender 90 days, and you’re at 80 days and the rehab is still not done– it’s always better to under promise and over deliver. So push it out to six months if you need to. And you know it’s going to be done in three months– great. Push it out to six months so that there are realistic time frames in place so that thee security in your lender’s mind is there and is rock solid.

Now, what about buy and hold real estate exit strategies for your private lender? That’s what my whole YouTube channel is all about– buy and hold. We really don’t do rehabs and flips. So what about you? What about me? So you may be borrowing money for six months to a year in order to purchase a bunch of rental properties. Now what is the exit strategy then for your private lender? You may say to them, great, in that year, I’m going to pay you back over that year.

And I’m going to refinance into a conventional loan. OK, but you need to be aware that conventional loans are difficult to get on rental properties. Under the Dodd-Frank law– now, we may see some loosening of those restrictions and regulations under the Trump administration– but right now, as it currently sits, it’s difficult to get conventional loans on rental properties. And you may find it more difficult to have an exit strategy. So just getting a refinance is not what a lender’s going to want to hear . That’s great. Of course, that’s what they think you’re going to do, right? So that’s step one. Yes, I’m going to refinance into a longer term loan.

Great. Well, what are your backup options? Make sure that you have in place option B and option C. There are a lot of private lenders out there who are willing to do 5 and 10-year notes. So maybe you can’t go with the conventional route. Well, then maybe you should start talking to some private lenders. There are a lot of people out there who have their self-directed IRAs, and they would love to have longer term notes in their self-directed IRAs. So you can do a 5, 10-year note with someone else. So say, hey John, in a year I’m going to pay you back. I’m going to try conventional refinancing first. Second, I’ve also lined up as a backup plan our 5 or 10-year private lender who wants to do it. Now, it’s going to cost me a little bit more. The interest rate will be a little bit higher. My payments a month are going to be higher because it’s not 30 years. But nevertheless, we’re going to make sure we have backup plans in place so that if the conventional loan route doesn’t go, then we have backup plans in the form of private Lenders.

Make sure you go through these processes and take care of your private lender. Don’t just rely on conventional banks because they can be a pain in the butt. Another great way to provide an exit strategy for a buy and hold investor– if you can’t get conventional financing and your year of borrowing is coming due– you may try to sell that note on the open market. You could say, hey John, thanks for lending me this $100,000. I’m having a difficult time getting conventional financing. I’m going to sell your note. Now, it won’t cost them anything. But you could sell out this note to somebody who wants to hold it for longer, and they actually will get the full value back plus points, perhaps. So there are people who are willing to pay for a performing note, and they’re done. They get their money back. Your private lender is happy. Now, this new person owns the note and maybe constructs new terms. So there are all kinds of ways that you can put that note there, on the open market, and see if anyone bites.

And one final big way to save your bacon in all of this if you feel like you’re going to have trouble getting your money back to your private lender is to simply then get a hard money loan. So now your private lender gets that money back. Now, you go to a hard money lender. A hard money lender is going to be typically a higher percentage point. They’re also going to charge points on the loan, right? So that’s 1% of the value of the loan plus the percentage points of interest that you’re going to pay on the loan. But getting that money from the hard money lender is a way to pay off your private lender and make that person happy.

And then you can figure out how you’re going to refinance out of those loans. So anyway, there are multiple strategies that you want to have in place to make sure your private lender gets paid back and is happy. That is your primary fiduciary responsibility when you borrow money. I’d love to hear your comments after today’s video. You can go to the comments threads below and let me know. Plus, we’ve got so many other great videos in this series on private money. You can check the playlist right here. We’ve also got other videos on how to figure out your ROI and how to buy rental properties– so many videos on this channel. And don’t forget to subscribe. Just click the little bubble over here and hit subscribe to our channel. We publish videos multiple times a week. I’m Clayton Morris. My whole goal is for you to get out there, take action, and become a real estate investor. We’ll see you next time everyone..

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