A brief overview
Buying an investment property often requires large amounts of money at short notice. This isn’t always an option when using traditional mortgages, so private money lending has become a popular way for investors to get the capital they need quickly.
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What are private money lenders?
A private money lender refers a private person or organization that lends money from their own capital to investors. They are not affiliated with a bank or any other financial institution, and they deal directly with the borrower. Private money lenders make their profit from the interest that they charge on the loan.
They have different lending criteria to banks, and they can usually provide funds much quicker, which makes private lenders an attractive financial solution for real estate investors who need to close a deal fast. Often, private money lenders use the value of the property as a determining factor for whether they will issue a loan or not.
How do private lenders work?
There are two types of private lenders that investors can turn to, either private companies or private individuals.
Private companies: They work similarly to a bank but aren’t affiliated with any, and they provide private money loans to real estate investors to purchase or rehab a property. Companies will profit from the interest that they charge on the loans.
Private individuals: These are people that can also be a financial solution for investors by providing private money lending. Whether it’s a friend, family member or someone in the industry, it works to their advantage to lend money and make a profit from the interest, instead of leaving it in the bank.
The advantages to using a private money lender instead of a traditional financial institution for real estate investment purposes include:
- Direct access between the lender and borrower
- Faster approval process with less stringent lending criteria
- Negotiate better terms and interest rates, depending on the deal
How to use private money lenders
Buying a property
Whether you’re looking for a residential, commercial or multifamily property, private money loans can be the solution for you. It all comes down to what kind of deal you are pitching to the lender, if they’re likely to make a good profit then they’re more likely to lend to you. It’s a good idea to form relationships with a few private lenders so that you can pitch to all of them when your deal is ready, and this improves the likelihood of one of them lending to you. Using a private money lender means that you can snap up a deal much faster than if you were to use a bank or other lender.
You can use a fix and flip loan in this case, to purchase a property, renovate it and then sell it again. These properties are often distressed or being auctioned and therefore funding is needed quickly.
This type of loan is commonly used by investors who need a one-off loan to do repairs on a home that they’re going to fix and flip or rent out. This loan is used to fix up a property and renovate it, before selling it again or renting it out. Typically, these kinds of projects need a large amount of funds at short notice, so a private lender is an easier option than a bank.
If there are gaps in your funding for any real estate investment projects, this is where a bridge loan comes in. This type of loan can help prevent foreclosure and can fund necessary repairs that need to be done before a home can be sold or rented out.
How to find private money lenders
Finding private money lenders for your real estate investment project may be easier than you think. Here are a few tips to help you find a private money lender for your next real estate deal.
Do the research
Understanding how real estate investment loans work is the first step towards finding the right private lender. Once you know the ins and outs of these loans, you’ll be able to negotiate your terms better and assess your risk tolerance more accurately. To entice private money lenders to your deal, you’ll need to present a detailed strategy that outlines why it’s a good move for them. To do this in a coherent way, you’ll need to understand how the loans work from end to end.
Working with private lenders is all about the relationships that you have formed with them, so the building blocks to your financial solution is to foster relationships with various private lenders. You can start by developing your real estate investor network to include other investors, real estate agents, attorneys, and so on. These networks usually open up doors to private lenders that come recommended. These connections can be invaluable for putting you in touch with the right private money lenders for your needs.
Locate high ROI properties
Private money lenders are all about the return on investment, so your next step is to find properties that can offer lenders a high ROI and good cash flow, and then present these to the private lender. One of the best ways to do this is by using free tools like FlipScout, which help you find great investment deals in the area where you’re looking.
Choose a lender
At the end of the day, the lender you choose will need to fulfil your investment needs. Even though you might have formed relationships with a few lenders, now is the time to decide which one is right for you and your particular investing needs. Once you’ve chosen the right lender, you can work on getting them to buy into your deal.
Prepare your pitch
Putting a private money lender’s mind at ease is the key to striking up a deal with them. If you can ensure that you have crunched the numbers, and that they are likely to make a profit, the rest is easy. Make sure to establish a rapport with the lender while you’re delivering your pitch, educate them on the process and be prepared to answer any questions they might have.
Tips for securing a private money loan
- Learn how to negotiate, this is a skill that will serve you well with private money lenders as they won’t necessarily have a hard and fast amount set, so you’ll often be able to negotiate on amounts or rates.
- Don’t forget to cold call, while it might seem old fashioned, this technique still works and can widen your search for lenders.
- Network with estate agents, their networks can be a valuable resource for you to connect with private lenders.
- Use a marketing campaign to reach out to investors with emails, direct mail and any other strategies you see fit, it’s a good way to broaden your lender search even further.
Best private lending companies
There are a variety of private lending companies, which you can find with a quick online search but here are a few of the widely used ones:
What's the difference between a private money lender and a hard money lender?
A private money lender is an individual or any company that isn’t affiliated with a bank or financial institution, that can provide private loans to investors. On the other hand, hard money lenders are usually affiliated with a financial institution but have less stringent lending criteria. This means that hard money loans can have higher interest rates.
Hard money loans are technically private money loans, however they use an asset, in this case property, to decide both the loan amount and the rate. Whereas private money loans use any criteria for lending that they choose.
Working with private money lenders is much more than just landing a good deal, getting funding and moving on. If you find a lender that you can work well with, it’s important to nurture that relationship so that it can continue into the future, and you can work with them on a long-term basis. Finding a private lender that you can form mutual trust with, is a great benefit to your real estate investing journey.