Private Money Loan

Private money loans, also known as private money, are loans given to companies or individuals. Private organizations or simply wealthy individuals provide these loans. This is as opposed to traditional financial institutions such as banks or credit unions. 

These private organizations and wealthy individuals are referred to as private money lenders. 

Short-term and long-term real estate loans are usually used to finance properties. Therefore, private money is a good idea to provide a quick way to get money when financing properties since time matters in the real estate world.

Due to these loans having a higher risk than others, it typically has a higher interest rate. Private lenders usually charge between 15%-20% of interest on the loan; however, it depends primarily on the purpose and length of the loan. 

To have a good private money experience, the exit strategy is important. Real estate investment is also important because the borrowers are hoping to make money back to pay off the loan and make enough profit.

Factors for private money loan lenders

Private money lenders focus on a few factors before allowing an individual to borrow money due to the risks of losing money.

Here are some of the most important factors they think about before offering an individual a loan:

1. The borrower's credit

A borrower's credit score is essential because it shows how responsible they are with their debts. In addition, this shows how consistently they pay off their debts and how quickly they do it. 

2. The pricing strategy

The lender has to make sure the cost of the loan for the borrower is competitive when comparing it to other lenders. 

3. Exit strategy

The plan for the borrower to pay back the loan and how they plan to do it.

Before providing the loan, lenders should perform due diligence and an investigation to confirm the borrower's information through documentation. 

Who are the best individuals to be private money lenders?

• Individuals who have a big retirement savings account
• Retirees who want to make passive income investments 
• Real estate investors wanting to expand their portfolio
• A professional of any kind who has a great value of surplus cash

When should this loan be used?

Knowing when this type of loan is used is crucial. This lets you know if you will be qualified for the loan just for what you will use the loan for. 

These loans are mainly used when individuals do not have enough equity to afford a real estate investment opportunity.

This leads to borrowers seeking out lenders to help support them in their goal to make a profit off of real estate investment opportunities. 

These loans are also good because it is an alternative to traditional loans. Traditional loans may take longer to process, which borrowers want to avoid considering the competitive real estate market.

Speed is important for good real estate opportunities, which is what borrowers want. 

Here is a list of potential individuals who may want to use this type of loan:

• If you are looking to fix and flip a house
• Cash-out refinancing helps you convert home equity into cash
• If you need a construction loan. This is related to properties needing renovations after it is purchased.

This loan has many purposes for real estate, but you should be sure it will make a profit after using it. 

Pros and cons of private money

Before applying for a private loan, it is important to know the good and the bad. This can help you decide if it is the right loan for you. In addition, this limits the possibility of unknown risks for the borrower.

Here is a list of some pros:

1. Speed

These types of loans are fast. This is because the real estate department is highly competitive, so the speed limits the chance of losing any investment opportunities. 

2. There is no prepayment penalty

There are no penalties if a borrower decides to repay the loan early or too fast. 

3. These loans are asset-based

These loans are dependent on the value of the property being bought.

Here is a list of some cons: 

1. The loan is meant for investment properties only

This means these loans are not made for an owner-occupied property, which is when the individual who owns the property also uses it as their primary residence. 

2. Large down payment

A large down payment may be required; however, this only depends on your experience and the profitability of the investment you want to purchase. 

3. Extension fees

Borrowers will have to face extension fees when granted a loan extension. 

Risks with Private Money Loans 

Risks are present for both the lender and the borrower. Therefore, when applying for a loan and lending money, both parties should keep these risks in mind so there are no surprises if anything happens. 

When applying for these types of loans, the borrower has to ensure the lender is legit. If they have not thoroughly checked out the lender, there is a big risk of problems. 

All borrowers should ensure the money they are getting is good, so the loan does not fall apart. For example, if the borrower is in the middle of investing in a real estate property and the loan falls apart, that is not the best for them. 

Lenders must perform due diligence because of the risks they might face when lending money. It simply ensures the borrower can be trusted to pay the loan back. 

There is also the risk of the borrower defaulting on the loan after wanting a risky investment, so the lender should also be prepared for the possibility of the loan not being paid back even if they were to take legal action.  

Where can private money loans be found?

Finding private money lenders is easy when given the right network; however, it might be harder if you are not experienced in investing.

Research shows that the best lenders are Lima One Capital and  Kiavi. Here is the link for other reliable lenders. 

Lima One Capital is seen as a good lender because they are best for borrowers looking for short-term residential fix and flip loans. In addition, they provide funds for first-time investors, which is important for some because others do not provide it to first-time investors. 

Kiavi is also a good lender for its own reasons as well. They have fast funding, which is good for loans. They also have low rates, which are beneficial for borrowers. They provide funds for first-time investors.

If borrowers can show investors a profitable return on the property, they are willing to invest in and a deal that would work, there will be plenty of lenders willing to help them make real estate investments.

This is why it is beneficial to research before investing in a property. You have to be a reliable candidate as many risks are involved.

Individual Private Investors

Individual private investors are looking for profitable returns from their investments, so they are taking a chance when borrowers ask for their help.

If borrowers decide to get a loan from an individual investor instead of a national private money lender like the ones above, some steps are needed:

1. Build your network

Knowing people is very important. Seek and develop relationships with people who are real estate agents, financial planners, title agents,  commercial agents, etc. These individuals will most likely know potential investors who will work with you.

2. Prepare everything in advance

Have the documents necessary to work with the lender. Knowing what you need will make things easier and quicker

3. Make a pitch

Although this varies, having a pitch or a simple presentation of your plan with the loan can help you obtain the money you need.

When choosing individual private investors, it is important to research them first. Then, after you find a reliable one, these steps are crucial because it shows you are a reliable borrower that the lenders can trust enough to lend money to.

Researched and authored by Nikaila Alim | LinkedIn

Reviewed & Edited by Ankit Sinha | LinkedIn

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