Last week we talked about How We Fund Our Deals using private lenders. This week we wanted to give an example showing how this works by looking at a property we purchased last year with the help of a private lender. So let’s take a look at this property at 1041 Argyle, Pontiac, MI.
This was a picture taken of the property before we purchased it. Obviously there were some issues with the roof, but all-in-all the property was in very good condition. The interior needed a few cosmetic updates, but for the most part the house was solid.
To put the deal together we presented the following plan to our private investor:
- We required $25,000 to purchase and rehab the property.
- The rehab would take approximately 1 month, and after the rehab was complete we would place a tenant into the property.
- Once the tenant was in place, we would market the property for sale to international investors for a sale price of $45,000.
As you can see from our plan, we have two primary exit strategies built-in. The first is to rent the property out, and this will provide the cash flow to make the interest payments to the investor while the property is being held.
Here is a sample of the cash flow analysis which shows the property will generate approximately $535 in net income which is more than enough to pay the investor on a monthly basis.
The second exit strategy is to sell the property to an international investor. Our primary business (Michigan Turnkey) is set up very well to do this, and we have completed a number of sales to international clients, so this is a very viable exit strategy for us.
Now, in return for the private lender’s investment, we offered the following:
- 10 points which will be rolled into the loan. This means when we pay the investor back, he will receive his original $25,000 loan plus 10 points or 10% which equates to an additional $2,500. This is the first way he makes money.
- 10% interest paid in monthly installments which equates to $208.33 paid to the investor every month until the property sells.
Looking at the return for the investor, if the property were held under this scenario for 1 year, the investor would make $2500 in points paid for the loan, plus another $2500 in interest payments made over the year. This represents a return of 20% for the investor.
Now in addition to the interest payments and points, the investor also received the following instruments to secure his investment:
- A promissory note was given to the investor for $27,500
- A mortgage was recorded against the property with the investor in 1st lien position
- Insurance was taken out against the property listing the investor as an additional insured
As you can see, this investment was very fair and safe for the investor. He has multiple ways to profit from the deal, and there are multiple measures taken to secure his investment by providing a first lien position and insurance on the property.
As I stated in the beginning, this is a property that we did purchase, and currently still own today. Below is a picture of the home after we completed our rehab and rented it out.
So, this is how we do it, and if you’re interested in setting up a similar investment, we would be happy to talk with you. Just email me at email@example.com.