Private money loans are capital generating vehicles in the real estate industry. Capital is very crucial in the running of the economy, and in the real estate industry, many deals require financing, which is not always available. The bureaucracy in conventional loans is the most significant impediment in raising capital fast. This gap in the market is one that the private money loans addresses.
A relationship-based business transaction is a concept that fosters growth to all parties involved. It is a concept that we at Money Lender Loans understand best. We have partnered with several entities in Orange County, CA and continue to participate in the growth of this region through continued real estate projects.
To put it to perspective, private money loans are borrowed finances from investors (both individuals and institutions). The borrowed sums are secured by the property to which you seek funding to renovate or construct. Private money loans are a favorite among real estate players because they are unlike traditional methods, which are mostly transactional. You can engage a private money lender and come up with an agreement that is beneficial to both parties; you still retain equity and can complete the project while the lender benefits from a friendly interest sum with the option of converting the loan to equity if they wish to do so.
A Break Down of Private Money Lending
The goal of private money lending is to provide financing to real estate projects that are not easily approved by the traditional money lending institutions. Furthermore, deals in the real estate industry require fast action with most deals demanding closure within thirty days. Traditional credit institutions may not provide this financing within a short timeline. In such cases, it is possible to have funds with private money loans.
Three circles give context to what private money loans are as well as their sources. The first circle is made up of family, close friends, coworkers, and neighbors. They are always the immediate first call when you are looking for funding. However, they may not provide the amount you are looking for. In some other situations, they are emotional investors, and as such, they may not be willing to accept the risk of losing the money should the deal fail. Any investor knows that loss is a risk you have to consider in your decisions, an aspect they may not be open to accepting.
If circle one does not raise the capital you need, you can expand your search to circle two. Here, you involve the associates of members of your first circle. Money from the first circle is often used to secure deals. Then, second circle investments are used to kick start the project. Members of this group are more inclined to buy into your idea and objectively analyze the merits of the project. Emotions may not be much of a hindrance as it is in the first group. Therefore, you may receive more funding unlike from the first circle.
When both circles fail to raise your required capital, option three is an alternative that is worth exploring. You can opt to go for option three from the start without involving family, friends, neighbors and their associates. The third circle is made up of accredited investors. They have got both the finances and the business acumen to analyze your project from a business perspective. Their investment is merit-based and not on your connection.
Private Money Lending vs Conventional Lending
Private money is an alternative to conventional loans from banking and credit institutions. When dealing with private money, the funding is from individuals or businesses who are not necessarily in the business of offering credit for such projects. Their terms are more flexible with lower interest rates because there exists a personal relationship between the project owner and the creditor.
Private money lenders are however non-institutional lending entities. Such lenders have the financial capability to fund your project in its entirety. You get more capital with fewer obstacles unlike what is experienced by those who source for financing from traditional lending institutions. Private loan terms are more flexible and friendlier than those from conventional lenders because private loan facilitators attach the real estate project as the security for the loans provided. Traditional creditors require among other things, a credit history to offer the loan.
It is good practice to have both private loans and conventional loans as financing options in your investment strategy. When all the funds from all these sources are consolidated, they provide more capital for your project.
How Private Money Loans Operate
There is no consensus currently as to the actual definition of hard money lenders. However, for most, private money lenders are hard money lenders. The most significant players in this loan business are institutions. Their financial capability allows them to issue loans for several real estate projects.
Traditional lenders assess your credit rating, your income, and the risk potential of the project as aspects that determine the amount of credit you are eligible for. The information helps them build a perception of your ability to repay the loan. The bureaucracy in place within the institutions further complicate the process of accessing credit. In most instances, the request for credit is denied.
Hard money lenders take on a different approach. Their concern lies in your collateral and its value rather than your financial position. They lend you money based on the collateral, which is the house or building. Thus they have no use for your credit rating and ability to repay the loan. If you forfeit, they sell off the property and recover the sums owed. The loans are short-term in nature, meaning they are based on a one year to a five year repayment period. The period can be adjusted based on your terms of engagement. However, there is no need to extend the loan’s repayment period further as you will bear the downside of increased interest costs. When you consider their short repayment period, hard money is relatively expensive than traditional loans.
Reasons Why Hard Money is a Preferred Financial Option
You may wonder why private loans are a preferred credit option despite their interest rates being higher than the traditional sources of credit. In real estate, reliability, speed, and flexibility define a good deal. If you can access funds as and when you need them to close a deal, then that is the financial source you go for. These three aspects embody what private loans are.
The speed of Processing the Loan Requests
Unlike traditional credit sources, private loan providers are not weighed down by processes. They do not have to evaluate your creditworthiness to determine the sums they can offer. Once you apply for a loan and you provide the required paperwork for the security, your loan is approved instantly. The process is even faster if you have a relationship with the creditor.
Reliability of the Loans
In private loans, the amount you access is equivalent to the property value. Your finances have no bearing on the amount of credit you can access because creditors operate on a loan to value principle. Therefore, you can obtain the loans conveniently but with only one ask; you have assets that provide the same value of the loan as collateral.
Agreements in private loan arrangements can be adjusted to suit the current circumstances. This means that every loan agreement has terms based on their own merits or as negotiated. Further, these financing options can be adjusted to suit the changes in repayment based on your willingness to talk with the creditors.
Private loans are only viable when one requires short-term financing. They are not practical lines of credit if the finances are meant for long-term use. A short-term period is considered as below one year up to five years whereas long-term period refers to a time beyond five years.
Drawbacks to the Use of Private Money Lending
While the private loans offer convenience, they too have drawbacks that you should consider when deciding what loan to take up.
Interest rates charged on private loans are considerably higher than traditional loans, and with good reason. There is a risk analysis conducted on you before the lending institutions approve your loan request. In so doing all while incorporating other aspects in their long line of bureaucratic policies, their rates are reasonably lower. After all, they have an elaborate picture of who you are.
Private loans, on the other hand, have only one guarantee of receiving their sums in full, your collateral. Couple that with the short-term repayment period and it becomes clear why they charge reasonably higher rates. Think of it as a cost for convenience. Most private loans in the market have an interest rate package of about 7 to 15 percent.
Short Repayment Period
Extending private loans beyond five years is impossible. Some lenders may require you to repay the sums owed to them within the year. Yes, you may have the advantage of negotiating your agreement. However, some lenders may not be entirely open to the idea of a repayment period extension.
Situations that Justify the Use of Private Money
Its short-term nature makes the use of hard money limited to areas that need capital solutions fast. There are a few in the industry that continues to flourish thanks to these financial sources.
There are some houses that are bought to improve and listed immediately. This action is what is referred to as flipping. It may prove challenging to generate the sums required for renovations when flipping homes. However, private money addresses this challenge.
Individuals Who Do Not Qualify For Traditional Loans
Poor credit scores and history, the existence of another loan, and project risks that the banking institutions are not willing to offer credit for are factors that top the list of aspects that affect your access to credit. Yet it is in these situations that you may need financing to secure a deal. Private loans are your solution to this challenge.
Purchasing a New Unit When the Previous House Is Listed
Homeowners best understand the challenge of generating funds especially when they are changing homes. At times, they may not be in a position to raise the full sums to buy a new one especially if they are selling their previous home to generate enough money to buy the new house. You can use private loans if you are in a similar situation. This financing will help you secure the new property as you wait for a buyer for your previous home.
Need For Extra Cash for Rehabilitation
You may have qualified for a traditional loan but with one downside; the funds available are inadequate to rehabilitate the property. You can opt for financing from private loans to ensure that your recent purchase is renovated in time for listing in the market.
Credit Repair Borrowers
Real estate investors understand the need to maintain and use both traditional and private loans to finance their projects. It is with this in mind that some opt to use funding from private loans to clear their debt from banks. They do this to restore their creditworthiness to access traditional loans in the future.
Aspects of a Private Money Lender to Look Out for
Reliability is key in any business relationship, and this is no different when looking for a private money lender. There aspects to their business model that speaks of their reliability as financing partners, issues you should take note of before choosing one.
The Business’ Experience in the Industry
Business experience answers questions of their ability to finance projects, the number of clients they have served in the past, and the experience of said clients. You also access the lender’s capital valuation, the information you can use in your decision of whom to partner with. All this information should be available on a lender’s website. A lender who offers all this information is one worth partnering with.
Interest Rates Offered
Interest rates on private loans are generally higher than in traditional credit sources. The market rates range from 7 to 15 percent. Factor in service rates and other incidentals and you are looking at rates that could go up to 20 percent. It is upon you to choose a lender who offers rates you are comfortable paying.
Real Estate Specialization
Different lenders offer finances for different markets and specialize in the same. They are best fit to provide a package suited to what you are looking for in that market. They better understand what your financial needs are and help you address them adequately.
Aspects Private Money Lenders Need Satisfying Before they Fund a Project
While it may seem like all you need to do is approach a private money lender, make a request and you get the funds, getting private loans is not always that simple. Private lenders need to secure their investment, and collateral is not enough. Here are further considerations they will assess to determine what their risk potential is in the project.
Details of the terms agreed to by you, the buyer and the seller of the property are essential to a lender. The terms detail who the owner of the property is and the conversion terms of the same to you. In this, it is possible to determine what your ownership stakes are and how easy it would be for them to sell the property in case you default on your payment.
Scope and Nature of the Rehab Work
Provide all the details of the rehab work at hand. The features should include the contractor you are hiring, nature of the work and the extent of the work. Do not forget to include the actual costing of the work. All this information is the basis of your ask, and it determines the sums you receive.
Appraisals of the Project
Some lenders will require you to have an evaluation done on the property. They too involve their experts for their assessment of the same project. The two reports offer the right picture of the project.
Most private money lenders structure the loan terms to be in effect as a one, two or a three-year engagement. They also have penalties in place should you fail to repay the loan within the agreed terms. Most loans are approved within days of application if the lender is satisfied with the information and documentation you have provided. In most cases, the funding is done anywhere from the tenth to the fifteenth day. Be sure to familiarize yourself with the loan terms before you sign on the dotted line. Be sure to raise any reservations you have on the terms.
Finding a Private Loan Provider Near Me
A partnership is key in businesses. Such relationships ensure the success of projects in the real estate sector. The Orange County community has seen the fruits of this kind of partnership, and you too can enjoy the value of having a reliable financial partner for your projects by getting in touch with Money Lenders Loans. Give us a call at 949-409-4372, and we will be glad to help see your dreams come true.