Private Money Mortgage Lenders For Your Real Estate Investments
As a real estate investor, you spend a lot of time researching target markets, generating leads, and finding the best deals that have the highest ROI. Of course, you also have to fund those deals, and private money mortgage lenders are sometimes the best source to turn to when you want to buy an investment property.
Whether you are fixing and flipping properties or your plan is to fix and hold them, you can’t achieve your goal without the right funding. And in today’s lending environment to get the right funding, you must understand who private lenders are, how to find them, and what they want in return for lending you the cash to complete your investments. When you understand these factors, you’ll be able to weigh the pros and cons and decide if you should go to a private money lender to fund your next property.
Who Loans Money?
First of all, private money lenders are not banks. They may be individuals, or they may be companies, but in either case, they are willing to lend money to investors for real estate purchases that are not as easily funded through banks. For example, attempting to fund an investment with a traditional mortgage is much more difficult than qualifying for a mortgage to buy your primary residence – even if you have great credit and assets. Traditional lenders won’t loan for distressed, fixer properties, so mastering private money is critical.
As a result, there is tremendous demand out there for money for real estate investments. Private money lenders fulfill that demand by lending money through real estate-secured loans. When you borrow from a private money lender – (just like a traditional lender) you agree on a set interest rate and time that you will pay your loan back. But with private money lenders, the rates are generally higher and loan periods shorter. The loan is secured by the property and if you don’t make your payments on time, just as with a traditional loan, the property can be foreclosed, the lender takes possession and action to recoup losses.
In most cases, a private money lender will focus more on the value of your property and its potential for returns, rather than qualifying you based on your income and/or net worth. There are basically two types of private money lenders.
Using Asset-Based Lending Companies (including Hard Money Lenders)
With the growth of real estate investing comes the need for more and better funding. Lending Tree revolutionized the way people can get loans for homes. More recently, Connected Investors Exchange partnered with Lending Tree to launch CiX.com . It works much like the Lending Tree model – asset-based lenders compete to fund the investment property. Also in Hard Money 101 , we outlined the ins and outs of using hard money lenders – they are a useful tool for investing when the numbers and relationships work. But for this article, we’re focused on the second type of private money lender – the individual.
Private Money Lenders (Individuals)
Unlike hard money lenders, who focus almost solely on the collateral worth of your property and will typically charge a much higher interest rate, private money lending is very much a relationship-based business with fewer hard and fast rules.
It pays for investors to network and build relationships with potential private money lenders – when you are tapped into a personal network, you can close more deals because you have more access to capital. Hoping for the local bank or the “too big to fail” bank” to loan you investment capital is a losing proposition in a post-bubble market.
When you work with private money lenders and show them that you can be trusted to repay their loans and also bring them good returns for their money, you can expect that they’ll want to do deal after deal. For them, it’s safe and easy returns and for you, it’s assurance that when a deal is in front of you, you can get the funding to close it. Many investors use the same private money lenders over and over – because they’ve developed that kind of win-win relationship. The investor gets the deal funded and makes money and the lender earns interest – from a loan secured by hard assets…the property.
Of course, to use private money lenders to finance your investments, you’ll need to know how to find them. Unlike banks and hard money lenders, private money lenders don’t advertise, but they may be closer to you than you think.
How to Find Private Money Mortgage Lenders
Private money mortgage lenders are those individuals who have the funds available to finance a real estate investment – and more importantly – who would be willing to secure a loan on your property with the title or deed to your investment property in exchange for returns.
Many investors find private money lenders among their family, friends, and/or colleagues. More and more individuals are disappointed with traditional investments – and are looking for alternatives. When considering who to approach, you may want to take two important things into consideration:
Is this person knowledgeable about real estate? When working with individuals who already know and understand real estate, you put yourself ahead of the game. It’s certainly fine to work with novices in real estate – just expect to have to do more educating and even hand holding throughout the process of funding and repaying the loan.
Does this person have personal knowledge of me, my business and my track record? Again, those who already know you will be much easier to approach but don’t limit yourself to that network. It’s pretty easy to “show your work” to a potential new private lender. Pull together some photos, some numbers and a summary of a few select projects.
What Private Money Mortgage Lenders Want
Maybe we should start with what they don’t want; private money lenders don’t want hassles, they don’t want to foreclose, they don’t want to own the property and they don’t want difficulties in earning their returns. Most private money lenders have no interest in being a real estate investor – they want to be a private money lender who earns nice returns for the risk involved in funding your property.
That’s the big picture of what they want – here’s the “rubber-hits-the-road” things your private lender will want to have from you to consider funding your property.
The Contract: Most lenders want to see the contract you’ve executed to purchase the property
Photographs: If you’re purchasing a fixer-upper, be ready to provide photos
A Summary: Put together a simple summary for your lender. Include the purchase price, the renovation costs, and the ARV (after repaired value) supported by comparables.
Some lenders, especially if you are new to working with them, would appreciate a list of your “team”. Who’s your closing attorney? Your insurance agent? Your contractors?
Put yourself in the position of your lender and ask yourself, “if I were loaning someone $100,000, what would I need from them to make the decision to do so?” That can tell you everything you need to have ready. And just ask them! Experienced private money lenders already know what they need; novice lenders may want even more.
Relationships Are Important
Private money loans are more relationship-based than hard money loans – but make no mistake…many investors have strong relationships with their hard money lenders and do repeat business because the both relationship and the numbers work.
No matter who it is, your lender wants you to succeed in your investment. For them, your property and project may be the fastest, safest and most efficient way for them to make a profit by loaning you the funds. To ensure that they’re making the right choice in loaning you money, they’ll want to know about you, your current investment, and your track record with real estate investments and/or other lenders and investors. Never be shy about sharing your successes!
Money follows opportunity – and the more your potential lenders know about you and your investing niche, the more likely they’ll be to finance your investment. That’s why it pays to network and build relationships with private lenders. If you’ve chosen a good investment and you have a solid plan for it, it’s a mutually beneficial deal that both parties will likely want to repeat in the future.
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Pros and Cons
All of that sounds like a great deal, as long as you can find a lender who meshes well with you and your investment(s) and who will charge you a fair rate on your loan. However, as with any other funding opportunity, there are pros and cons to be weighed when considering using private money lenders.
Pro – Ease of Qualification
First of all, when you work with a private money lender, you really only have to provide information that demonstrates that you’ve found a good investment that will pay off and create a win-win for everyone. Unlike attempting to fund your investment using a bank or other traditional mortgage lender, there are far fewer hoops to jump through.
Con – Higher Interest Rates
While private money lenders typically don’t charge interest rates quite as high as hard money lenders, the rates are still higher than you’d get from a bank…but it’s kind of a moot point. Most investors can’t get approved for a loan with the bank. The math on your interest rates is kind of simple. If the property and the numbers support it, accessing the funding is worth it. You’ve probably heard the adage, “Part of something is better than all of nothing.” Private lending allow you to get involved when you otherwise might not.
Pro – Geared Toward Investors
Private money lenders understand that you’re purchasing, refinancing, and/or rehabbing a property based on its after-repair value, not its current value. More often than not, they lend you all of the money you need to achieve your goals with your investment than you would get with a traditional loan.
Pro – Get Money Fast
This is huge. We know that purchasing investment real estate is very competitive. Time is of the essence and he who has the cash, wins! The so-called “approval” process is much shorter with private money lenders than it is with banks and mortgage lenders and even some hard money lenders. If you’ve landed a deal and have a property under contract, it’s possible to get it funded within days instead of weeks or months. When you go with a private money lender, “time is of the essence” is less a burden and more of an easy call to action.
Private money lenders offer a lot of opportunities and advantages to real estate investors. While you may have to pay a higher interest rate, you can get funding quickly, rehab and resell your property, and see a return on your investment much faster than you could with most other financing options. You have the opportunity to build relationships, create win-wins and then do it all over again.
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