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If you haven’t started in real estate yet and are trying to evaluate the different avenues of funding before you start investing this is the article for you. We're breaking down what private money lending is, why people might choose private lending, and how to secure lenders. So without further ado let’s jump right in.
What is Private Money Lending?
Private money lending is a process in which a borrower receives a loan from a private entity or individual. They can be good as a quick solution to find funding because they don’t usually fall under the same qualification processes or scrutiny that traditional bank loans incur.
Since they aren't like your traditional home loan, that also means that there can be extra risk involved with being a private money lender or borrowing private money. The way both the lender and the borrower can mitigate risks associated with private money lending are:
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Exit Strategy - This is how the borrower will settle the loan and the timeline associated with the loan repayment.
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Credit - The lender can look into the borrower's credit score to see how historical debts have been paid off. Did the borrower pay them back in a consistent and timely manner? If the answer is yes they will have a higher credit score.
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Pricing - The lender should strive to keep the cost of the loan competitive with other lenders. If it is not competitive the borrower will probably go searching elsewhere for a better-priced loan. Sometimes private lenders will follow the same interest rates as the banks.
Be sure to check your local state laws to make sure you are following proper procedures when it comes to private loans.
Why would you use Private Money Lending?
There are a variety of different reasons why someone may choose to use private lending versus a traditional loan. Let’s walk through some pros and cons of private money lending.
Pros
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Private money lending is usually a faster-moving process than traditional loans. This is due to it usually having fewer restrictions and red tape to go through.
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New investors
This is a great option for those who are just getting started in real estate investing. If you start finding private lenders now you can keep a good relationship with them. Once you’ve amassed a solid group of private lenders they could potentially fund most of your deals.
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When deciding how much to lend and if they should lend, most of the weight of the decision lies in the asset versus the borrower's ability to pay back the loan. However, repayment will still play somewhat of a factor in it.
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Interest-only payments
Interest-only payments are situational. This depends on what you worked out with your private lender if it is an individual or an institution. However, some institutional private lenders will allow for interest-only payments during the repayment period.
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Flexibility
Private money lending can refer to anything like finding individuals to contribute to your investments, or a group of individuals to invest through an organized institution.
This means they are not as constrained as traditional lending services especially if it is an individual. They may be more flexible with lending terms or be able to change things from situation to situation.
Cons
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A larger down payment like many of the other deciding factors in private lending is situational. This all depends on your experience and the profitability of the investment. It also depends on if you have a private loan from a group of private lenders as an institution or an individual lender. Some lenders may require a larger down payment if there is more risk involved with lending you money.
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Risk
Sometimes the risk with private funds is higher than with the reliability of traditional lending services.
How do you find private lenders?
First, you’ll need to decide what type of private money loan you would like to venture into. Do you want something more institutional like a group of lenders with a company? Or would you prefer to find a handful of individuals to invest in your different projects?
Once you decide what approach you want to take, then you can formulate a plan for finding those private lenders.
If you are looking for lending companies one surefire way to find them is to do an online search for private lenders. Create a list and start reaching out to them. Find out what their terms are when they lend to people and how their process works.
You should be trying to find lenders with interests that dovetail with yours that way you know that you’ll be on a similar page when it comes to deals. Think of private lending as a business partnership in some aspects.
If you are looking for individual lenders, one of the most impactful ways to find them is network.
You never know who in your network has been looking to invest their money somewhere and you could be one of the people they chose to invest through. Make sure you are attending networking events for real estate events, but also when you are networking in other aspects of your life don’t be shy to tell people you invest in real estate.
Tell everyone. And I mean everyone. Friends from church, your kids' sports events, any sort of activity. It never hurts to tell them that you are a real estate investor and even if they might not be in the position to provide a private loan, they might know someone in their network who can invest. That is why networking is such a powerful tool.
Evaluating Potential Lenders
It is very important to make sure you evaluate if your lender is going to be right for you. It isn’t enough just knowing they can be a lender. This goes along with what I mentioned earlier, think of them as a business partner. Do their values align with yours? Are they going to follow through with the promises you make? What does their portfolio look like?
Make sure that they are responsive. If when you start working with them they don’t pick up your calls or at the very least return them that is not a good sign. You want someone who will be engaged with the process especially if you plan on investing long-term.
Conclusion
Funding your real estate deals is equally as important as getting out there and finding those deals because without funding it isn’t quite a complete deal yet. Whether you are securing funding through traditional lending avenues or searching for the perfect private funding I hope this article helped you evaluate the best avenue for you to go to fund your deals. Be sure to leave us a comment if you'd like us to touch on securing traditional loans from financial institutions.
Also, watch the video below to see what some of the industry experts are saying about securing funding for your deals.