If you’re in the real estate investment industry, there will come a point where you’ll realize that obtaining financing is one of the most challenging and overwhelming aspects of the entire process. Getting approved for funding from traditional bank lenders is far from the easiest thing to do—especially if you’re on a tight project deadline as is often the case for fix-and-flip properties in particular. It becomes even harder to acquire capital when you are a house flipper since the property you want to purchase will typically need to be revamped and banks are notorious for rejecting applications for funds for old, worn-out houses. This is in large part why real estate investors of all experience levels have been migrating towards private money lending in recent years due to the numerous advantages that this financing route has over traditional lenders. Still, it should be noted that private money lending is not a one-size-fits-all affair. You need to be proactive and do your homework to learn the ins-and-outs of private money lenders, what terms and conditions best fit your particular real estate portfolio and the lenders servicing your area.
Private money is a finance package that is sourced from an entity that is not a traditional banking or financial organization. Private money can be comprised of funds from your family, or, alternatively, from individuals or entities that you have no previous affiliations with. In the latter scenario, in which the financing is being sourced from private organizations, the capital is termed ‘hard money’ and differs slightly from private money lending.
Private money lending is premised mainly on establishing and maintaining relationships compared to other financing methods. That’s not to say that private lenders still don’t require a solid project proposal in order to agree to extend you any amount of money upfront. When it comes to private money, the interest rate ranges between 8-12%, which is considerably higher than the rate typically associated with traditional bank financing. This is attributable to the inherently higher risk profile associated with this financing option. But private lending offers other advantages that make it an ideal choice for many real estate investment projects.
If you are just starting out in the real estate investment sector, you may experience some initial confusion regarding what category of financing you should utilize, whether it be a conventional loan, private money, cash, or hard money. The following is a brief overview of the two main instances where you should consider private money lending as a potential financing option.
You Need Financing…NOW
One of the primary advantages of private money lenders is that their approval timeline is exponentially shorter compared to traditional financing options. To illustrate, in order to obtain approval for a conventional loan, you will usually have to wait for up to 45 days, and even then, there is no guaranty that you will be approved at the end of this waiting period.
Banks and financial institutions impose strict regulations when it comes to what projects and individuals it can offer funding to. Houses that are in relatively poor condition—such as those typically targeted by real estate investors looking to fix and flip—usually don’t have a favorable financing approval rate from banks. House flipping is inherently a very time-sensitive affair, and you will need funding as quickly as possible in order to get a favorable return on investment.
If you are entertaining the idea of buying and holding a property, you will still require efficient funding. A property that is priced to sell will not linger on the market for long and a house purchased at a reduced price point will produce optimal cash flow down the road. That’s where private money lending comes in—it can take as little as three minutes to get pre-qualified and then it typically only takes between ten and fifteen days to get funding. That is the big reason why private money is considered the best option for many investors.
Your Credit Score is Sub-Optimal
It could be that you are in no particular rush to obtain funding. Still, credit score is one of the most decisive factors banks take into account when considering a loan application. Alternatively, private money lending organizations prioritize the quality of the deals you propose as opposed to your credit score when deciding whether or not to approve your application. Put simply, if they believe that they can make a solid profit from the deal you have in mind, then they will offer you the cash you requested.
All told, private money lending is a powerful tool for real estate investors to get streamlined financing with the least amount of red tape involved. It can make all the difference between sealing the deal and you walking away with empty hands.