If you’re like most beginning real estate investors, the number one hurdle you face when getting started is acquiring the cash you need to finance your business. Many people have trouble thinking outside the box and finding creative ways to finance their properties. With strict qualification guidelines, tons of restrictions, and large down payments, many investors don’t have the wherewithal to get a loan from a traditional bank. Fortunately, there are other strategies you can use to finance your real estate transactions, the best being private money. Using private money allows investors to act faster on potential deals, allowing them to beat the competition and help many struggling homeowners by taking a property problem off their hands.
What is private money?
Private money is a very common term used in reference to the act of lending money to a real estate investor by a private person. When a private money loan is made, a property is purchased and the lender receives a first or second mortgage or deed of trust (depending on his status) on that property, securing his legal interest. After the purchase, the real estate investor will use the remainder of the loan to renovate and sell that particular property. These loans will always be made with a low loan-to-value ratio, typically 75% or less, increasing investment security. For example, if a property is valued at $100,000, a private lender would never lend more than $75,000 on that property. After the renovations have been completed and the property has been resold, the principal of the loan plus accrued interest determined at the pre-agreed rate will be repaid to the private lender.
The real estate investor
Using private money loans is the best way to finance the growth of any real estate investment business. The advantages of using private money cannot be matched by any other type of creative financing. The number one reason why using private money is so beneficial to real estate investors is because it streamlines the property buying process, allowing more transactions to be completed faster, resulting in higher profits. Being able to offer a quick closing with cash provided by private lenders will motivate sellers to accept your offer over the competition. This will also encourage them to accept a much lower price than a conventional buyer. Also, since real estate investors find and buy properties well below market value, these private loans typically cover 100% of the purchase price, as well as some or all of the renovation costs. Plus, with no down payment and often no monthly loan payment, it’s easy to see why this strategy is the number one method of financing real estate investing businesses. Since the use of private money is a great benefit for real estate investors, they are willing to offer lenders high interest rates.
The private lender
So why should people choose private loans over more traditional investments like the stock market? Well, the answer is simple: more control, higher returns, and little risk. When you choose to be a private lender, you control the terms of your investment, deciding the length of your term, your interest rate, and when you receive payments. Depending on each particular investment, you can choose to lend funds anywhere from a few days to 5 years. Real estate investors using private loans will often times offer returns that are much higher than almost any other investment vehicle, typically earning between 8% and 12% and sometimes as much as 15%. You choose when to receive interest payments, whether monthly, quarterly, annually, or at loan maturity. Risk is minimized with a promissory note that provides your collateral, a deed of trust or mortgage that guarantees your legal interest, and an insurance policy that protects you against accidents. There are many different sources that private lenders can use to take advantage of this type of investment. With the ability to use cash, an IRA, 401k, home equity, credit cards and more, private loans with real estate investors are an incredible investment opportunity. High fixed returns guaranteed by real assets, insured against accident, with the ability to be completely tax-free within your retirement account.
Diversity is a very important component of any investment portfolio. With the benefits of private lending combined with the volatility of other, more traditional investments like today’s stock market, there may not be a better time than now to explore this type of investment. So what are you waiting for?
