Real Estate Investing and the Advantages of Private Money

With traditional mortgage and hard money lending getting tighter and tighter for most real estate investors - private lending is fast becoming the only option to finance your deals. 

What is private lending?  Private money is a type of creative financing that is usually provided by private individuals who have excess money that they are willing to lend at higher rates than they could get at banks or CD's.  Their investment is usually secured by the property you are buying and NOT by the borrower.  Unlike traditional mortgage lending, the terms and conditions will vary from one lender to another and they usually depend on the agreement between a you and the private lender.

Borrowing money from private money lenders is much easier compared to traditional banks and hard money lenders.  Because a borrower only needs the approval of a single person, he doesn’t have to deal with 4 inches of paper work and a 3 to 4 month approval process only to get reject after a long waiting period.  In addition, he doesn’t have to present lengthy documents and other credentials because private lenders are not interested with such things.  Private lenders first want to know the real estate investment makes economic sense first before they worry about other issues.

Because of such a scenario, real estate investors with poor credit scores can still borrow money from private lenders if they are prepared and the deal makes sense.  However, they must be able to show that their real estate investment makes sense and will generate enough rent to cover their interest payments and the property collateral is worth more than the loan amount.  Therefore, if an investor wants to borrow $125,000 from a private lender, he has to make sure that the collateralize property’s market value will hit the $175,000 with an appraisal once repaired and renovated.

One reason why many real estate investors prefer private money over looking for a business partner who will finance a project is that they can earn bigger profits.  Most private lenders ask for interest rates of 8% to 15% range while business partners are likely to demand a larger portion of the profits when you sell a property.

The key to getting private money is to be prepared and have a well thought out business plan and credibility kit.  Without these two items in place it is hard to image a successful business person giving you money if you do not impress the person with your well thought out business plan.  Take your time and be prepared to answer all the questions about the property such as what are the value of comps, what are rents in the area and what are the cost to fix up the property.  Also spend some time to develop your credibility kit to show your experience and knowledge as a real estate investor.