One of the best ways to fund your real estate deals is by using private lenders.
Private lenders are often easier to work with, have negotiable terms, and can fund much faster than traditional lenders.
Similar to traditional lenders, private lenders should be getting a first lien on the property.
Rate, terms, and equity split can be negotiated to make it a good deal for you and the lender.
What are Private Lenders for Real Estate?
Private capital funding in real estate refers to funding that does not originate from institutions or banks. Instead, the investor provides it to the borrower in exchange for a mutually beneficial agreement.
Benefits of Private Capital Funding for Real Estate
Flexibility
If you’re trying to buy real estate, private lenders can provide long-term loans for investment properties or refinance loans for fix and flip properties. You can also get a personal financing bridge loan for new construction since private money is generally flexible.
The primary advantages of private equity lenders are speed and flexibility. Most people feel that creditor-debtor relationships are more personal with private lenders than traditional banks. Depending on the person and the property, interest rates and LTV ratios can be structured individually.
Transparency
LTV (Loan-to-value) refers to how much the property would be worth after it is rehabbed or how much it would be worth when it is resold. Because of this, it is standard that borrowers indicate the loan-to-value ratio. Then they provide a scope of work or list of repairs they plan to make to the property.
Private capital lenders prefer to familiarize themselves with the buyer’s plan to ensure that both parties are on the same page. And although they may request an inspection, they rarely ask to see the property in person. If the amount projected in the scope of work isn’t precisely accurate, private capital lenders are usually flexible and understanding.
Speed
A private capital loan’s speed is also one of the best reasons why real estate investors like private lenders. Private lenders aren’t required to adhere to the same rules and regulations as traditional banks, so they’re less likely to need long waiting times and endless paperwork when deciding to make a loan.
Knowledge of Real Estate
Many investors turn to private capital lenders because they have a better understanding of the real estate investing business compared to traditional banks. This appreciation is manifested in the criteria they use for loans. The investors pay much more attention to the potential of the property and the investor than they do to the standard measures such as credit scores and income.
They also realize that real estate investors often need more than just money to buy a property. They need the financing to rehab it to rent or sell it, which traditional banks are often unwilling to provide.
Amount Funded
An LTV ratio determines the amount of a private equity loan. The ratio varies from lender to lender but typically ranges between 65-70% of the quick-sale value of the property. If the property defaults, the lender can get the amount of money for the property in one to four months from the quick-sell value. This value is different from the market value: the amount the lender can get for the property within one to four months of a potential default. If the debtor fails to pay, private capital lenders must ensure they can recoup most of their investment by selling the borrower’s property.
Private capital lenders prefer to lend in a first lien position, which means they are the first creditor to be compensated if the borrower defaults. Together with a low loan-to-value ratio and high-interest rates, this provides security for the lender.
Trust
It is common for real estate investors to use the same private capital lender for multiple properties, developing trust and flexibility for their loans. The requirements and structure of a private capital loan depend on a lender’s perception of the risk of the property and the investor.
Risks for the Private Capital Investor
Investing in private funds or a private money loan comes with some risks. There’s no guarantee they’ll get a return, and they could lose money too.
Although its collateral is often the borrower’s property, if the borrower defaults on the loan, it will fall to the lender to take them through the foreclosure process. This can be both time-consuming and costly.
Risks for You as the Borrower
Private money loans come with higher interest than traditional banks. Having the ability to make interest payments and repay the loan within a short timeframe is essential to avoid extra penalties, fees, and a damaged relationship with the lender.
How do you find private lenders?
In addition to learning the benefits and risks of private funding, you need to know. How and where to find it. Everyone will have a different journey to finding private funding.
Here are a few common strategies for finding a private money lender.
Build your network
If you want to get private funding, ask for referrals and recommendations with people you know.
As you become more experienced, your network will expand. It’s a good idea to join local real estate investment clubs, visit your local chamber of commerce, and attend real estate conferences.
Search for private lenders online
Finding private capital online is an easy process. Hard money companies are everywhere. Their interest rates and fees are typically higher, but they are willing to work with new investors which most private lenders are not.
Final thoughts
It’s important to be educated and experienced before seeking funding from private lenders. The right relationship can help make both the lender and borrower a lot of money over time. Meanwhile, if you are new consider using a hard money company on your first few deals.