How To Find Private Money Lenders
Most real estate investors know that purchasing an investment property is different from buying a primary residence. Among the differences is that many homeowners resort to traditional mortgages, while real estate developers search for alternative financing techniques. As a real estate developer, it’s essential to consider how to finance transactions that use tools like private money lenders.
In the real estate sector, a private lender would be a highly valued asset to the investor toolbox. Yet what exactly do they do for you as an investor, and how exactly do they work for you? What’s more, how do you approach private lenders about a deal? Read below to learn how to work with and find private lenders to help ensure you secure funding for your next deal with simplicity.
What’s a private money lender?
A private investor uses his or her money to fund assets, such as real estate, and benefits from interest earned on loan. Private lenders are not affiliated with a bank or other financial institution but deal directly with the borrower. There are private lending companies that investors can search for.
Private lenders are a valuable asset for investors because they often have different eligibility requirements and a faster pace than traditional financing processes. While qualifications and interest rates will vary depending on the circumstances, working with private lenders will be comparable to other loans.
Two types of private investor loans that can be used
Private money lenders can offer a variety of incentives to real estate investors. The best part is they can assist with almost every aspect of a real estate investment sector. The right funding can vary on a deal-by-deal basis, but it is still necessary to consider each of the options available (and how to use them). Here are two ways in which investors can make use of private money:
- Refinancing of a property
- Develop New Property
Refinancing A Property
Let’s say you’re buying a conventional mortgage rental property, but you want to negotiate a better interest rate or a shorter repayment period. Private money loans are an incentive to refinance and thus eventually raising the costs associated with the funding of the deal. Private money is particularly eye-catching because, in some cases, investors can even encourage potential lenders with profit-sharing (rather than loan repayments). For example, when refinancing passive property income, investors might use their monthly cash flow to make the deal more eye-catching. As a result, private money lenders can represent a much more flexible refinancing arrangement than conventional financing.
Buying A New Property
Private money loans may be used to help real estate developers buy new properties, including residential, commercial, and multi-family real estate. The trick to obtaining these loans is to run the numbers and set the correct pitch. Experienced investors can find it beneficial to highlight past acquisitions, while investors will concentrate on future profitability for the first time. Many investors would agree that it is helpful to develop a partnership with as many potential private lenders as possible, as they are prepared to do when the offer comes along. After all, one of the most significant advantages of using private capital to finance a new project is a fast timetable. Private equity will allow investors to buy new deals at much faster rates than other lenders.
How To Find Private Lenders For Real Estate
- Understand the ins and outs of private real estate loans.
- Create a network of potential private lenders.
- Prepare a robust portfolio to be introduced.
- Know the appropriate lender for the project.
- Amaze the lenders with your pitch.
When you get interested in real estate for the first time, you could be looking at your colleagues and wondering how to locate private investors for real estate deals. More often than not, investors use private real estate lenders to help finance properties. There are many private lenders out there, but the most challenging thing might be finding someone willing to finance your offer. However, with the right way of thinking and planning, you’re likely to find private real estate lenders who want to support you.
Build A Network
Unlike securing a bank loan— or a hard money lender— to work with private lenders, it’s all about establishing relationships. It begins with the establishment of a good investor network.
It’s a good idea to start building your network on two bases. First, get to know experts in your industry, such as real estate agents, fellow investors, title companies, lawyers, and private investors. Many private lenders will come by referrals to your real estate network.
Second, it’s good to build your list of contacts from individuals outside the real estate industry. This includes friends, family, associates, and anyone who is not an investor at the moment but might be searching for opportunities. Many ambitious investors may just be waiting for the right opportunity to get around before they get started. Thirdly, some of your friends and colleagues may have genuine connections outside of your existing network.
Always acknowledge future partnerships and keep these networking points in mind. Note, it will take time to develop good relationships with fellow professionals, but it will open up many doors in your career. Developing a stable investment network is essential to work with private lenders.
Select Your Private Lender
Finding private lenders may be difficult at first, but it’s essential to bear in mind that the partnership is a two-way street. Since you’re going to spend time marketing to potential investors and trying to persuade them, you’re going to want to be sure that the lender you select can ultimately meet your requirements, and not just the other way around.
First, make sure you ask them about their proposed loan term and interest rate, and what the loan would be focused on. This will help you figure out how long you’re going to have to repay the loan, and how fast interest will accumulate. You’ll also want to know if they wish to make their loans based on the house’s current value or after-repair value. Be sure to inquire about the potential fees that they charge, whether they are upfront or in the form of penalties. Ultimately, find out the timetable for the lender to transfer their funds to you.
Based on this information, you will be able to determine which private loan will present the lowest risk to you.
Make The Pitch
Finalizing an agreement with a private lender is a lot more than just clarifying the numbers and going over the property. You need to ease your potential partner and make sure you’re both on the same page.
To draw up this rapport, go to your initial pitch meeting concentrated on educating them about the process. Keep building that relationship a piece at a time. Resist the impulse to go for a fast sale, or a quick deal, it won’t work— and it can leave you in a worse state than when you began.
Instead, concentrate on answering questions, particularly those relating to income splits and timelines. That’s what most private investors are worried about. The more you can comfort them by talking about it from their point of view, the more likely you are to receive private financing.
Private Money Lenders FAQ
Working with private lenders is not a complicated procedure, but it can be confusing for investors who are inexperienced with alternative financing strategies. When you start wondering how to find private lenders, make sure you don’t have any continuing uncertainty about the procedure. Read through the following commonly asked questions to ensure that when you find a private lender to deal with, you know what to expect:
How Do Private Lenders Work?
Private lenders operate by investing their money in real estate transactions in return for interest earned on the loan. They will meet with creditors to set down the loan terms, which will be repaid on a term basis. Private lenders are often investors on their own and turn to private lending as a way to expand their portfolios.
Do Private Money Lenders Check Credit Scores?
Like their hard money counterparts, private money lenders are not renowned for testing borrowers’ credit ratings. It is not to suggest that all private money lenders do not verify credit scores before lending, but rather that the decision to lend is focused solely on the asset at hand. Also known as asset-based lending, private money lenders would usually base the majority of their choice to lend on the quality of the property in question. The more likely the property is to sell for profit, the more likely the private money lender will lend the money to the borrower. Of course, the commodity at hand is just part of the decision-making process. Many private money lenders would like to know who they are lending to, which may lead to various problems, like a check on the credit score. That said, not all private money lenders would look at the credit score of the borrower. And those who are more vigilant will typically find the credit score when borrowing.
How Much Do Private Lenders Charge?
Private lenders charge varying rates of interest ranging from four to 12 percent. The amount they charge will depend on a variety of factors, including the investment background, the type of the offer at hand, the duration of the proposed contract, and more. The good news, though, is that interest rates can always be negotiable. Note that, when you prepare your pitch, you are trying to gain funding and the best possible loan terms.
Summary
Your goal, when working with private money lenders should not be to only land a deal and move on. Instead, it would be best to look for someone you can submit to on a long-term basis. When you concentrate on building a solid partnership, you will secure support for both your current and future investments.
When building a network, always remain professional, a strong portfolio, and a good pitch can go a long way to getting a deal. By establishing useful links and maintaining positive relationships with each lender you work with, you can help ensure that you still have options when it comes to funding a contract.
Is there a shortage of funds to stop you from investing in real estate? Don’t let that happen!
One of the obstacles that many potential developers face is seeking funding for their real estate transactions. Our latest online real estate class, taught by expert investor Than Merrill, is designed to help you learn about the various funding choices open to investors and today’s most profitable real estate investment strategies.
