Blog » Private Lending » [Case Study] Private Money Lending for a 10% p.a. Return

[Case Study] Private Money Lending for a 10% p.a. Return

With interest rates on the rise, private investors are looking to cash in by replacing the bank and lending money to real estate investors. In this case study you'll see how a real life private money lending deal works, from origination through payoff

David Garner
David Garner
Published On: December 1st, 2022

Private Money Lending Case Study

Today I’m bringing you another real life case study from the Garnaco Private Lending Program.

You’ll see how D & P. put their hard earned savings to work earning more than 12% p.a. by lending money privately to an affordable housing developer in PA.

Pro Tip: Join 5,000+ investors and see fully-vetted private lending investment opportunities like this one in your inbox every Thursday

The Proposed Investment

A local affordable housing developer had agreed to purchase an off-market property from a retiring landlord at a significant discount to market value.

The property was in need of some renovation in order to make suitable for the local rental market, and would likely rent for around $700 to $800 per month once complete.

An experienced rehabber, the borrower has already completed multiple similar projects in the area and had built a portfolio of over 100 rental properties.

Property Images

This property at 408 Connor Avenue in New Castle, PA was vacant at the time of purchase, and the previous owner had deferred a lot of much-needed maintenance.

The previous tenant had also left the property is a poor state, leaving many of their belongings and a whole lot of dirt behind.

Private Money Lending case Study 408 Connor Ave Before

The Plan

The short-term plan for this house was to acquire, renovate, and lease the home to a long-term tenant.

The long-term plan was to obtain a refinance loan within 36 months to pay back the private money loan with a commercial lender and retain the property.

Here’s what the deal looked like for the Borrower.

  • Purchase Price: $11,000
  • Closing Costs: $2,650
  • Renovation Budget: $13,500
  • Total Project Budget: $27,150

A Brokers Price Opinion indicated an after repair value (ARV) of $38,550 once the renovation was complete.

The Borrower was looking for a private money lender prepared to lend up to 65% of the ARV, (90% of the project).

Private Money Loan Offer and Terms

The borrower submitted their loan request to a group of private money lenders via the Garnaco Private Lending Program along with some supporting documentation, including:

  • Purchase Contract
  • Brokers Price Opinion
  • Property Images
  • Scope of Work

After reviewing the loan request and the supporting documents, D. and P. B. – a married couple based out of Las Vegas –  offered to fund 100% of the project subject to due diligence and underwriting.

The  following loan terms were agreed:

  • Principal Balance: $28,500
  • Note Discount: ($1,000)
  • Net Funding Amount: $27,500
  • Term: 36 Months
  • Interest Rate: 10.00%
  • Lending Ratio: 71% to LTV (ARV)

In this case, D. & P. agreed to fund a loan of $28,500 at an interest rate of 10.00% p.a.

The loan was then also discounted by $1,000, meaning the lender funded $27,5000 at closing, but would receive interest on the full principal balance of $28,500, and would receive the full principal balance at payoff.

Form the lender’s perspective, if the investment were to run full term, it would look like this:

  • Net Investment: $27,500
  • Term: 36 Months
  • Interest Received: $8,550
  • Payoff: $28,500
  • Total Return: $37,050
  • Net Profit: $9,550
  • Total ROI: 34.70%
  • Annualized ROI: 11.6% p.a.

Because of the note discount, the lender’s ROI would increase if the Borrower were to pay back the loan ahead of time.

Private Lending Due Diligence and Underwriting

Both parties signed a Funding Agreement, and the Borrower made available the following documentation for due diligence and underwriting:

  • Company Registration Documents
  • Register of Members
  • Operating Agreement
  • Corporate Resolutions
  • Certificate of Good Standing
  • Principal’s Personal Credit Report
  • Principal’s Personal Background Check

In line with good private lending practice, the lender assessed the investment based on the 4 P’s

  1. People
  2. Property
  3. Paperwork
  4. Plan

After reviewing and verifying the supporting documentation, D. & P. concluded the Borrower had the competency, capability, and capacity to execute the project plan, and were satisfied with the property as security for their investment.

The lender also reviewed and approved the loan paperwork (promissory note and mortgage deed) provided via the Garnaco Private Lending Program.

Closing the Private Money Loan

Heritage Security and Service Co., conducted closing which was scheduled for 9th October, 2020.

The following documentation was provided to the Borrower at or before closing:

  • Lenders Title Insurance Policy
  • Property Insurance (lender named as Loss Payee)
  • Settlement Statement
  • Title Report

The lender funded escrow 24 hours prior to closing, and once the property purchase was complete, the borrower initiated the first pro-rated interest payment to the lender on 25th October.

Renovation, Loan Servicing and Payoff

The Borrower carried out the renovation of the property as per the Scope of Work.

The property was promptly leased to a long-term tenant for $700/month.

Private Money Lending case Study 408 Connor Ave After

Monthly interest payments were serviced directly between the lender and borrower, with automatic ACH transfers scheduled for 25th of every month.

The lender received monthly payments every month between October 2020 and November 2022.

In November 2022, due to the property’s appraised value increasing to $55,000, and monthly rent increasing to $750/month at lease renewal in October, 2022, the Borrower was able to secure a refinance loan for $38,000

The borrower’s new loan closed on 2nd December 2022, and D. & P. received a wire transfer for the full payoff amount of $28,500.

Overall, this relatively short-term investment lasted for 25 months total from funding through payoff.

In total, D. & P. earned a profit of $6,937.50, equating to an annualized 12.1% p.a. return on investment.

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