If you want to invest in real estate, you need to get a sense of all your funding options before getting started. There are many options beyond getting a traditional loan. One of those options is a Private Money Loan. Below is a guide to private funding for real estate.
What is a Private Money Loan?
In real estate, Private Money refers to a specific type of funding that doesn't come from an institutional bank or lender. Rather, the funding is given from the investor to the borrower based on their relationship. In fact, a private money lender could be a family member or a friend. However, that doesn't necessarily always have to be the case. Sometimes, private money lenders can be companies like private equity funds which use money from accredited investors to back various projects.
How Private Money Lenders Work
Loans from private lenders work just like loans from banks or credit unions. Funding is received to:
Buy a property
Make home improvements
Make a purchase
Consolidate debt
Other expenses
Then, you pay the amount you borrowed back in installments with interest.
What are the benefits of a Private Money Loan?
Benefits for the investor
Passive income
Have some of the highest returns
Benefits for the borrower
Flexibility in approval standards and loan terms
Speedy and simplified funding process
No Credit History Check
Are Private Money Lenders Legal?
Yes. It’s perfectly legal for organizations other than banks and credit unions to lend money. However, private money lenders still have to comply with the banking laws and usury laws of the states in which they operate and that means the rates that they’re able to charge are regulated. Plus, depending on the state, a private money lender might only be able to lend a certain amount without having a banking license.
What interest rate do Private Money Lenders charge?
Generally speaking, private money lenders will charge between 6-15%, but this depends on the following factors:
Purpose of the loan
Length of the loan
Relationship between the borrower and the lender
For instance, it is entirely possible for a parent/family member, close friend, or business acquaintance to act as a private money lender. In this scenario, a private loan could be set with favorable terms for the borrower, including low interest rates and minimal penalties for late payments.
What Are The Requirements For Securing A Private Money Loan?
The terms and conditions for securing a private money loan vary a great deal because private money lenders are so diverse and no government regulations cover private money lending.
Close friends and family members may be willing to loan you money simply because:
you have a clear proposal for how to turn a profit
because they know and trust you
Acquaintances and colleagues may want:
a note or deed of trust
a clear investment plan
Professional private money lending companies and individual lenders will want:
proof of identity
a note
a deed of trust
your credit score, although not all lenders will ask for it
a written plan outlining how the money will be spent and the profit you expect to generate
a down payment for the loan is also likely required, and you may need to use the property as collateral to protect the lender if you aren’t able to pay off the loan
Summary
Private money lending can represent an attractive opportunity for both lenders and borrowers. Borrowers seeking alternative financing sources will find the benefits including a faster approval process and increased access to funding. On the other hand, those lending may find they have unique access to potential deals and investments. No matter which side of the transaction you are on, private money lending is a viable option for expanding your financial portfolio and wealth building.