Private Money And Lenders In Real Estate
– In the world of real estate investing, private money and lenders are common. However, many real estate professionals are unfamiliar with private lenders and what they bring to the real estate industry. Money makes the world go around and real estate deals cannot get done without it. Countless real estate investors actively work to form relationships with private money investors that will work with them to fund real estate investment opportunities.
What is a Private Money Lender?
By definition, a private money lender is considered as a non-institutional person or company that lends money. The funds normally are secured by a deed of trust and note. Raising equity capital from private money lenders can take both time and luck in finding the right connections.
How to Find a Private Money Lender
Finding real estate deals can often be easier than sourcing the money to fund them. Private money lenders can take a variety of forms. One way to find a private money lender is to work your primary circle. You can think of this circle as encompassing your family, friends, co-workers and neighbors. It’s not uncommon for many real estate investors to turn to this source first for funding assistance. The flip side of borrowing money from this group is there are usually non-financial strings attached. If the deal goes sour, then you may still have this person in your life. The worst thing to do is borrow money from someone that really can’t afford to lose it in an investment. Many times in the real estate business we see family and friends assist with an earnest money deposit or down payment. Of course, it never hurts to put the word out that you are looking for money to complete a real estate deal. By spreading the word throughout your sphere of influence, another investor may come up that is an acquaintance of someone that you know.
Borrowing Money from a Private Lender
Borrowing money comes with risk. It doesn’t matter if it is from a lending institution or a private money lender. Private money loans can be difficult to find. This is when a private money lender enters the picture. This role is somewhat similar to what a loan officer would do, but it is different since it’s outside the ‘real banking world.’ A private money lender can help people find private money loans through their established clientele base that is looking for investments. An application and vetting process still exists for a private money loan in real estate, but certain things can be a little more unconventional than the strict rules and regulations that typical banking institutions must adhere to.
The reason for utilizing private lenders can vary. We have seen private money utilized for everything from down payments, cash for a short sale, money for repairs and moving costs. Private money lenders will usually specialize in bridge loans, rehab loans, multi-family loans, commercial loans and various other types of loans. The private money loan offers a higher return to the lender than that of a typical loan that is offered by a commercial banking institution. Normally private lending is utilized more for the short-term as opposed to a traditional 15-year or 30-year loan type. The terms to qualify for a private loan can be more flexible and often a private lender will loan on something that a hard money lender may not.
Successful real estate investors realize the importance of working with private lenders. So, when a low priced property comes onto the market, they can snatch it up through obtaining this type of financing quickly as opposed to having to jump through all of the qualifying hoops of a banking institution. Paperwork and red tape seem always to slow the loan approval process up when dealing with the bank. Additionally, many times banks will only loan on the purchase price of the property instead of the actual value of the property. Private money can be obtained in as little as a week whereas a bank may take a minimum of 30 days or more before they are ready to lend. Another reason that private lenders are in demand is that banks will only allow so many loans before they have to cut a borrower off. Private lenders can use their own judgment to verify if the person and investment is sound and worth lending to.
Another advantage of private money loans is that they do not show up on a credit report. Thus, an individual’s FICO score will be unaffected when borrowing private money. Making a good return on cash is something that many people are interested in. Low-interest rates on savings accounts and other services make lending private money appealing to those who can afford to do it. All the while gaining a handsome return on their investment.
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