| There's a source of some debate about whether | | | | with a private investor who has a 3-5 year time |
| private money is better suited for a 'buy and hold' | | | | frame. If you plan on holding it for the rest of your |
| approach or a 'flipping' strategy for real estate | | | | life (and your kids' lives) then it isn't far fetched to |
| investing. Real estate investors correctly point out | | | | consider buying your equity investor out with your |
| that their private investors will want to exit (or the | | | | share of the cash flows (it nets out to be the same |
| availability of exit) from their investment at a future | | | | cash on cash return for you) or setting up the note |
| date, which could cause financing issues with the | | | | to be amortized, where you pay off part principal |
| project.You don't want to mess with a good thing if | | | | and interest each month. |
| you have a nice cash flowing property. So, which is | | | | However, private money equity partners are better |
| private money best for: flipping or holding? | | | | than lenders for buy & hold properties. The |
| First of all, you shouldn't think in terms of either/or. | | | | investor comes into the project as a profit sharing |
| You can successfully flip and hold properties with | | | | partner with you and, thus, you both have the same |
| private money. How you structure the deal, though, | | | | time frame for investment going in. Many private |
| will determine the extent of your profitability with | | | | investors would welcome a buy and hold investment, |
| each.When it comes to flipping, turning properties | | | | as it reduces their worry about how to turn the |
| over quickly can generate healthy profits for you, but | | | | funds over when the investment redeems. |
| you must be careful to pay your private investors an | | | | Private Money Re-finance |
| appropriate rate. Set it up so that you pay them an | | | | Another option to use on buy and hold with an |
| 'annualized' return on their money. Here's an | | | | investor that has a shorter time frame than project |
| example:Private Money Investment: $100,000 | | | | length is to replace their funds with those of another |
| Annual Interest Rate: 10% | | | | private investor. It can be much easier to bring a |
| Deal Profits: $25,000 | | | | new private investor into your business on an already |
| Money Invested for: 45 days | | | | performing project than an altogether new |
| Cost of Funds: $1,250 | | | | investment. Keep this in mind to bring in new funds |
| *The cost of funds should not be total points on the | | | | continually. You can set up the deal so that down the |
| amount borrowed - is should be prorated annually. | | | | road, one investor can sell their interest in the project |
| In the above example, you are borrowing private | | | | to another private investor or they can sell the note. |
| money to buy and sell the property, you are making | | | | Take care to structure your promissory notes so |
| a net profit of $23,750 after you pay your investor | | | | that they can be sold from one investor to another |
| $1,250. While this may seem disproportionate in your | | | | or set it up so that one investor pays off the note |
| favor, the investor still got a great return on their | | | | and another investor re-loans you the money. Think |
| money. You must protect your profits. Too many | | | | of it as refinancing one private investor with another, |
| real estate investors would be willing to give up more | | | | just like a bank would do. |
| than necessary on this type of deal - you don't have | | | | The best thing about working with private money is |
| to if you know how to set things up with the | | | | the financing flexibility you achieve with it. As long as |
| investor at the outset. | | | | the returns on there for you and the investor, |
| You can impair profits if you finance a long term hold | | | | everybody wins. |