As implied, private money lending is borrowing money from sources other than banks and financial institutions. Even though the interest rates on loans from private lenders are typically higher, they are popular among those who have poor credit, require a quick loan disbursal or demand flexibility of approach that is impossible for banks and credit unions. Private money lending is especially popular for real estate investors who are in the business of spotting market opportunities, buying a property, fixing it, and selling it for profit in a very short period of time. Some frequently asked questions that can help you to understand private money lending better:
What Are the Benefits of Private Money Lending?
Private money lending is especially popular in the real estate sector because conventional banks are extremely reluctant to give out loans to investors on the basis of collateral of a property that has a relatively poor market value. Investors who are able to identify properties that may be damaged, run-down or otherwise of poor quality but have the potential of being fixed with a reasonable investment and sold off for a handsome profit can only turn to private lenders.
Typically, private lenders operating in this sector tend to focus less on issues like credit history and documentation and more on the profit potential of the property and are quick to approve loans to enable investors to take advantage of the opportunity. This is in stark contrast to banks that take easily a month or more to evaluate the merits of the loan application. Hard money loans are especially suited to real estate deals as the monthly repayment is required only for the interest amount with the principal becoming due only at the end of the tenor to coincide with the sale of the property.
What Are the Drawbacks of Private Money Lending?
The first and very obvious drawback of private money loans is that the rate of interest is significantly higher than that of banks and credit unions. While averagely, the interest rate can be in the bandwidth of 8% to 12%, it can even go up to as high as 15% or more depending on the market conditions and nature of the proposal. Unlike banks that finance properties for as long as 30 years, the typical private money loan needs to be repaid in six to 12 months with two/three years being the maximum in special cases. Since the property will be offered as a collateral, you will need to perform a detailed due diligence, which, however, is not a bad thing for your own reassurance of the intrinsic value of the property.
What Do You Need to Provide to Get a Private Loan?
Unlike the institutionalized financial sector, private money lenders are not governed very well by federal and state regulations. As a result, the terms and conditions applicable for securing loans vary widely from one private lender to another. However, you can expect to be asked to provide details of the property being acquired and the details of the proposed utilization of the loan in addition to the usual compulsory proof of identity, a promissory note, and the comprehensive contract spelling out your rights and obligations as well as the interest rate, charges, penalties, etc. under various situations.
While your credit score will definitely be asked for, it is not a vital issue for loan eligibility, however, the rate of interest you will be charged will be influenced by it. You will also need to arrange for a down payment; while you can bargain for the actual amount, most conservative and reputed lenders like https://www.libertylending.com/ are generally happier with a loan-to-value ratio of 0.7:1, which means that you will need to arrange for a down payment equivalent to 30% of the property value. You will also be required to offer the title of the property as collateral so that the lender can sell it off and recover its money in case you default.
What Are the Best Ways of Finding Private Lenders?
Finding a reliable private lender who can provide a loan at extremely short notice and at a reasonable rate of interest without fleecing you with unreasonable fees, charges, costs, and penalties can easily be the biggest challenge after finding a lucrative real estate opportunity. Since the sector is unregulated, you will find innumerable lenders trying to lure you with very attractive offers, many of which, unfortunately, are just scams that can prove to be very costly for you. Perhaps the best way of identifying a lender is to ask around for references and recommendations from people who have experience in real estate deals. Be sure to ask your contacts in the real estate network for tips.
The internet is a great source of information; you can check up the reviews that various lending companies have got across multiple parameters and also find out about the affiliations and accreditations to bodies like The Better Business Bureau that can indicate how genuine they are. If you are new to real estate investing, it can help to deal with the more reputed names even though their rate of interest can be comparatively higher; at least you will not be ripped off with high upfront fees, hidden penalties, and opaque and unfair contracts.
Investing in the real estate sector can seem to be very easy and lucrative; however, you need to be alert to many issues. Firstly, you need to be able to spot market opportunities that are genuinely lucrative, be able to perform a due diligence quickly and have a lender on hand who is willing to give you access to the necessary funds quickly without taking advantage of you. At the end of the day, it will be your ability to leverage your relationship with a lender that will bring home the profits that you desire. It is a good policy to deal only with lenders who are reliable and have a good reputation as there are too many loan sharks lurking around to scam you and leave you bruised, disappointed, and poorer for your efforts.