The Basics of Private Money Lending

The great thing about being a real estate investor is that there are options for how to scoop up properties, grow your portfolio, and turn the venture into a full-blown successful business. Whether new or seasoned, there are avenues for how investors can get from point A to point B, none more preferred than private money lending – allowing individuals or businesses to receive loans without the stress and restrictions of being tied to a bank.

Private money lending may be an investor’s best chance to invest in real estate with a high leverage and is an especially appealing option for those who specially focus on fix-and-flip properties.

So, how does it work? Let’s get into the ABC basics of it.

What makes private money loans unique

If the thought of walking into a bank and being judged solely on your credit score and past financial health scares you out of diving into real estate investing, then private money lending is for you. Unlike traditional bank loans, private lenders are far more interested in an investor’s experience, collateral, and borrower’s performance rather than their credit score or income.

Come to the table with a solid action plan of where you’ve been and where you want to go as an investor, and you’ll likely be able to strike a deal with an investor who is willing to collaborate on your next big property project.

Bonus points? Unlike banks, the red tape is minimal, and you can get funding within weeks.

Who are private money loans good for?

The reality is that many investors don’t have their own money to put up for an investment property, and frankly, even if they did, why would they? If you’re not comfortable parting with a substantial amount of cash upfront for purchasing real estate, private money lending might be your best option.

Similarly, if you’re an investor specializing infix-and-flip properties, teaming up with a private money lender might be ideal.Though private money lending may come with a slightly higher interest rate, they are structured to be short-term loans, making them ideal for the fast nature of fix-and-flip projects.

The pros of private money loans

Convenience – Applying for and obtaining a traditional loan through a bank is time-consuming and can be a little deflating. It can take months to close on a loan, putting investors at risk of losing out on investment deals. Private money lenders cut to the chase and through the red tape so that investors get quick funding for projects within a matter of weeks.

Flexible terms – Because hard money loans are offered by private lenders, there is greater room for negotiation of the loan terms.Things like tailoring the repayment schedule or reducing the underwriting process can all be discussed up front so that the best deal is struck for both parties.

Collateral – Again, flexibility is key. Private money loans often times use the property itself as collateral for the loan, thought here are cases where lenders may allow for some leeway. Some investors may use personal assets – such as a retirement account or residential property – as collateral.

It’s worth noting that lending terms can vary and be structured differently to accommodate the investor’s needs, thus moving away from a one-size-fits-all approach. Loans for fix-and-flip properties, for example, can be negotiated to reflect a profit-sharing agreement where the lender loans the entire amount to the buyer and once the property is sold, the profits are split in accordance with the agreement.

If you’re ready to explore financing options, contact TVC Funding to learn more about how we can partner with you.