What is a Private Money Lender?
By definition, a private lender is considered as a non-institutional person or company that loans money. The funds normally are secured by a deed of trust and note. Raising equity capital from private money lenders can take both time and luck in finding the right connections.
How to Find a Private Money Lender
Finding real estate deals can often be easier than sourcing the money to fund it. Private lenders can take on a variety of forms. One way to find a private lender is to work your primary circle. You can think of this circle as encompassing your family, friends, co-workers and neighbors. It’s not uncommon for many real estate investors to turn to this source first for funding assistance. The flip side of borrowing money from this group is that some strings are still attached. If the deal goes sour, then you will more than likely still have the person in your life. The worst thing to do is borrow money from someone that really can’t afford to lose it in an investment. Many times in the real estate business we see family and friends assist with an earnest money deposit or down payment. Of course, it never hurts to put the word out that you are looking for money to complete a real estate deal. By spreading the word throughout your sphere of influence, another investor may come up that is an acquaintance of someone that you know.
Borrowing Money from a Private Lender
Borrowing money comes with risk. It doesn’t matter if it is from a lending institution or a private lender. Private money loans can be difficult to find so this is when a private money lender enters the picture. This role is somewhat similar to what a loan officer would do. But, it is different since it’s outside the ‘real banking world.’ A private money lender can help people find private money loans through their established clientele base that is looking for investments. An application and vetting process still exists for a private money loan in real estate. However, certain things can be a little more unconventional than the strict rules and regulations that typical banking institutions must adhere to.
The reason for utilizing private lenders can vary. We have seen private money utilized for everything from down payments, cash for a short sale, money for repairs and moving costs. Private money lenders will usually specialize in bridge loans, rehab loans, multi-family loans, commercial loans and various other types of loans. The private money loan offers a higher return to the lender than that of a typical loan that is offered by a commercial banking institution. Normally private lending is utilized more for the short-term as opposed to a traditional 15-year or 30-year loan type. The terms to qualify for a private loan can be more flexible and often a private lender will loan on something that a commercial lender may not.
Successful real estate investors realize the importance of working with private lenders. For example, when a low priced property comes onto the market, they can snatch it up by utilizing private loans as opposed to waiting for a commercial lender. Ever see those “we buy houses and can close in 14 days” signs on a telephone pole at a stop sign? They use private lending. Paperwork and red tape seem always to slow the loan approval process up when dealing with the bank. Private money can be obtained in about a week in some cases whereas a bank may take a minimum of 30 days or more before they are ready to lend. Another reason private lenders are in demand is banks will only allow so many loans before they have to cut a borrower off. Private lenders can use their own judgment to verify if the person and investment is sound and worth lending to.