Cash Flow With Joe

Participation lenders

by | Feb 28, 2024 | Deal Structuring | 0 comments

Participation lenders



When you think of private money lenders, you typically think of either short-term lenders, or long-term lenders. Short-term lenders are the ones you use on quick moving deals like fix and flips and wholetail deals. And if you are not familiar with a wholetail deal, that’s a melding of the words wholesale and retail. What you do in this scenario is buy the house, clean up the yard, trash out the house and put it back on the market without doing any repairs, often listing it on the MLS. Sometimes after the cleanup the house is in good enough condition that a retail buyer can purchase it. Sometimes it still needs an investor to fix it up. But in either case, the wholetailer makes a better profit than just assigning the contract.

In the short-term loans, you’re going to pay points and a relatively high interest-only rate. A short-term loan is typically set up with a term of a year to 18 months. And people often refer to these types of loans as hard money loans because the interest and points are so high. But the tradeoff is the lender can move quickly and you can close in a couple of weeks. And instead of looking at the investor’s personal finances, they look at the investor’s skill level and at the equity in the deal to determine if they will loan or not.


Long-term private lenders look more like traditional financing. In these cases, individuals will loan to investors for terms between 10 to 30 plus years, and secure said loan against a rental property. These loans can be interest only, or they can be fully amortized over the length of the loan. These lenders also look at the deal versus the investors’ personal finances and can move quickly to close as well.


Those are a few of the main styles of private lending. And have been massively important in how Ashley and I built our real estate investing business. But as interest rates continue to rise, there is another form of private money lending you may want to consider that can increase, or at least stabilize, your cashflow. It comes in the form of a participation note.


Participation notes are where the lender and borrower partner together to receive different forms of income from the deal. Sometimes it’s a straight equity split — meaning both parties agree to a percentage of whatever profit gets made. This is often done on flips where an investor brings the deal and does the rehab while the lender fronts the money. Once the house is sold, each receives the percentage of the profit they agreed to.

This is great tactic for new investors because the loan will have no payments and less risk. And often, the investor is partnering with a veteran lender who in exchange for the equity split, is willing to teach the newbie along the way.


This also works for new lenders who aren’t sure what to do. They may partner with a very experienced investor who, in exchange for more of the profit split, will teach the newbie lender about how the deals work, pitfalls to watch out for and what makes it a good deal.


On rental property participation notes there is both equity and cashflow to consider as income. Because of that, sometimes the borrower gets all the cashflow and the lender gets all the equity, sometimes it’s the other way around. At other times they split both equity and cashflow 50/50. And then it can be a combination of all the things I just mentioned. It all depends on what the needs are of the investor and the lender.


For instance, we have a deal we bought back in 2014. At the time, we were still very new and trying to get our cashflow up and did a participation note with one of our financial friends. We got to have all the cashflow on the deal for the first five years. After that, he got all the cashflow until he was paid back his principle. Now, we split the cashflow on the house 50/50. And since he was willing to give us all of the cashflow in the beginning, we gave him 50 percent of the equity in the property.


That was a win-win deal for all of us. And as you can see, participation notes can be multifunctional and have the ability to be simple or somewhat complex. But because you are dealing with a person, and not just a lending institution, you have the ability to negotiate things like the deal above.


In times past we have gotten away from participation deals because the cost of money was as low as it was. But now, interest rates are high. According to what I found on the internet for February 2024, investor mortgage rates are in the mid 9’s and pushing 10 percent. At those rates it is hard to make a rental cashflow.

So we started looking at other options and this is what we found.

We are in the process of doing a cash-out refinance on two of our properties where we are using a participation lender. We are getting some of our equity out to use today and our lender is getting 50% of our net rents — after all expense are paid for including the expense factor — and 50 % of the future growth.


In this scenario, our new participation payment will almost equal our original loan payments. That means we got to cash out some of our equity and our cashflow did not go down like it would have had we used a traditional style of lending. Maintaining your cashflow is huge, and just another reason you may want to consider using a participation lender.

Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to or call Joe at 678-986-6813.


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