Private lending for real estate occurs when an investor uses their own capital in order to lend money to individual investors while securing the main property with a mortgage.
Private lending is considered to be a viable alternative to large banks and similar financial institutions. In many cases, private lending for real estate is a relatively safe investment since the investment is backed by a mortgage.
What is a Private Lender?
Private lenders are generally funded by investors, banks, or both. Private lenders are in the business of taking funds from private investors and making private business purpose loans with those funds.
Investors expect a decent return from their investments, and the interest rate from money borrowed from banks is significantly higher than the banks are being charged for the funds. These factors raise the private lender’s expenses, which are then passed on to the ultimate borrower.
Types of Private Lenders
1. Friends and Family - As one of the most common forms of private lenders, this is the primary circle for funding needs.
2. Colleagues and Associates - These are secondary connections and are also an excellent source for raising capital and equity for investment projects.
3. Potential Investors - These are people that range outside the circle of friends and acquaintances but also have the most prominent capital pool available.
What are the advantages of using a Private Lender?
Faster & Easier Approval Process
Less Regulated – More Flexible
More Customizable Loan Options
Creditworthiness is not an issue
What are the Terms, Rates, and Qualifications?
The chances are good that you will find the loan amount is equal to the after-repair-value (ARV) or loan-to-value (LTV) when working with private lenders. The LTV is primarily based on your property if it is in good condition while the ARV is if the property is in need of repairs.
Private lenders give loans with interest rates that range between 7% and 13%. Origination fees or points can range from 1% to 10% while closing costs can range between 2% and 5%.
The private money loans you get are interest-only, meaning the borrower will pay interest on a monthly basis throughout the loan and then pay off the balance once the loan is over.
Some of the lenders may charge a prepayment penalty if the loan is paid off before the due date comes around. Even though the interest rates might be higher when you compare them to conventional loans, private money loans tend to have lower monthly payments.
Will Private Lenders Do Loans with No Money Down?
Yes. Some private lenders will give loans with no money down as long as the deal meets their criteria for the requested loan type.
Is Private Money Lending Legal?
Private money lending is legal as long as it complies with federal usury and state laws. In some places, private lenders may not need licensing but there is a limit set on the number of loans they are allowed to offer. Exceeding this number of loans can require the lender to get a banking license.
Bottom line, if you have a simple and straightforward property to finance, banks are a great option. However, a private real estate lender is more likely to finance a loan on a challenging property, in a shorter period of time.
For those who are looking to immediately invest in a property, a private lender will close your loan faster, with less hassle to the borrower. This will allow the borrower to grow their business faster, which makes the extra short-term costs of a private lender worthwhile.