Top 5 Advantages of Using A Private Lender To Invest in Real Estate
Have you ever had your bank deny you a loan or consider one of your projects too risky to give you a mortgage? If you’ve been doing real estate business for a while now, you know it’s commonplace and real estate investors have to use their brains to do what’s called “creative financing.” For those who do not understand what it means and think that only banks are allowed to lend money, well know that there are other ways! The alternative most often used by real estate investors, traditional financing via a financial institution, is without question private lenders. A private lender? Yes, but surely not the kind you think. We are not talking about a pawnbroker like on TV, not at all! A private lender is actually a wealthy person with capital that he wants to grow. It provides Hard Money Loans for Real Estate Investors to finance various projects, be it a personal loan or a mortgage, in exchange for a return on its capital. Obviously, it requires a much higher interest rate than the bank, but it also finances projects that are normally much riskier. If the private lender costs more than the bank, then why do business with him? Excellent question! To demonstrate the usefulness of a private lender in the real estate sphere, here are 5 advantages of using hard money lenders to invest in real estate. Loan terms and conditions are much more flexible: Unlike the traditional mortgage loan, you incur on your FLIP project or purchase of an income property, the mortgage of FIX and FLIP lenders do not have a formula cast in the concrete. Indeed, anyone (with a lot of money, of course) can become a private lender. Once this is done, the terms of each agreement between the lender and the borrower are to be negotiated between them. The interest rate, repayment periods, term of the loan and other terms are to be discussed and negotiated and vary from project to project. The risk level of a project plays a big part in the process. Nevertheless, the private lender is MUCH more flexible than your bank can lend you more money, may agree to amortize your loan over a longer period or may simply refuse to do business with you for personal reasons. If you want to get more flexible FIX and FLIP loans, going through a private lender can be a good alternative. Private lenders agree to finance riskier projects: Experienced real estate investors have all experienced one day or another the same thing: the bank refuses to finance your project because it is too risky or your borrowing capacity is at its limit. Indeed, the internal rules of Hard Money Loans for Real Estate Investors are often strict and well defined, so that agents avoid giving loans to projects with too high a level of risk. That’s why many investors turn to commercial hard money lenders at that time. The main projects that lend themselves to private lenders are “FLIPS” type projects, ie purchase and fast resale projects. It is best to avoid financing a real estate project for long-term holding with a private lender, as interest will be exorbitant in the long run. 90% of real estate projects that are funded through a private lender are FLIPS projects because the bank often does not like these projects and lenders know they will get their money back quickly. A big advantage for hard money lenders is that if your financial institution refuses your project, chances are you still find a loan with a private lender. It does not necessarily calculate your borrowing capacity in the same way as a bank and agrees to take higher risks. You can improve the performance of your project: When deciding to invest in the markets or a project, whether on the stock exchange or in real estate, the profitability and the return of a project are directly linked to the money that is injected into it.. If you decide to completely finance your project with a private lender and use the money of others to make a profit, you have an extraordinary return since you make money with $ 0 out of your pockets. If, for example, you have to invest $ 20,000 in a $ 100,000 project (20% required by the bank), to make $ 15,000, you make a return on invested capital of 52.5%. However, if a private lender gives you a loan of $ 200,000 with only 10% down payment of $ 20,000, you get a return on invested capital of 125%. A private lender will obviously charge you more interest, but in a FLIP project, that will not change much. You can do multiple projects at once: When you get on the beast and your real estate investor career begins to become more and more flourishing, you may want to do more than one project at a time. That’s when things can get more complicated between you and your bank. In fact, to start new projects, the bank will continue to calculate your borrowing capacity in the same way and may well refuse your simultaneous borrowing if your income has not increased significantly. This is when the private lender can become an extremely valuable resource person. You can take out a first loan with your bank, then go to your lender to take out a second loan, but at a much higher interest rate. This will offset the risk of your private lender and you will be able to complete both of your projects. A big advantage of the private lender is that it does not analyze the risk in the same way as the bank, which can be to your advantage when you want to get several FIX and FLIP loans. A relationship of trust is established between you and your lender: As you can imagine, if you find a private lender who trusts you and agrees to fund your projects, you may come back for your subsequent projects. So, if you deal with him on many occasions, your projects are still going well and your lender realizes the profit that is due to him, he will also become well attached to you. You make money from his money, and he makes money because of your risks. There is no doubt that you will develop an excellent relationship (if not, change your lender), which can lead to better medium- and long-term borrowing conditions. For example, if you have been doing projects with the same lender for 5 years and you have always paid well, the latter could give you a drop on your interest rate since you are a good payer. The bank does not offer this benefit and remains ice-cold, even if you are the best payer in the world. The FIX and FLIP lenders are much more humane and give more importance to subjective factors. Developing a relationship of trust with a private lender could thus allow you to obtain more loans, with better conditions, and at a favorable rate.