Private hard money lenders are the most important people to establish a relationship with in the real estate industry – at least if you want to run a sustainable business.
Whether you are a new real estate investor or a seasoned veteran, chances are you will want to scale your business sooner rather than later. However, volume isn’t contingent on skill alone; you must bring something else to the table. There is one more piece to the puzzle that every successful real estate investor
must find on their own: funding. That said, any hopes of completing more deals would depend on building relationships with those that have the necessary capital. There are exceptions of course, but private hard money lenders
are a critical component to any real estate investor’s arsenal.
Private hard money lenders
are integral to the growth of every new investor. They essentially provide the confidence and funding required to complete more deals. Of particular importance, however, is the liquidity private hard money lenders can offer investors and their businesses. Additional funds insulate people in our industry from risk and allow them to diversify their portfolios, at least more so than without private or hard money lenders getting involved.
Both sources are undoubtedly worth their consideration, but investors are advised to be able to differentiate between the two. To help you understand the differences between private money lenders and hard money lenders
, the following:
Breaking Down Private & Hard Money
Funding Deals With Private Money
In their simplest form, private money lenders
are those people with the means and intent to invest capital. Consequently, anyone with a bit of extra money and an interest in what they do may be typecast into the role of a private money lender. However, it is up to you to see that the convergence between your business and their interests takes place.
It is important to note that private money lenders are just as interested in working with you, as you are interested in working with them; it is really the quintessential symbiotic relationship. Both sides stand to gain something from every deal that is struck. In return for interest on their investment, private money lenders are entirely capable of bringing speed and efficiency to every transaction. Additionally, your leverage will increase exponentially when you offer to purchase a property with private-cash funds.
It is not uncommon for the funds from a private lender
to go towards the purchase price of a property and subsequent renovation costs. The lender, however, will receive both the mortgage and a promissory note at the time of closing. Think of this as their insurance policy. The investor, on the other hand, will proceed with the renovation and put the funds to work. Following the completion of the rehab and its inevitable sale, the lender will be given their principle plus interest payment, and the borrower will collect what’s left.
As I mentioned before, private investors can benefit immensely from investing their own capital in the ventures of others. First and foremost, their money will work on their behalf, coming back with interest on top of the principle investment. Their investment is also protected, as they will receive the aforementioned deed and promissory note as a form of collateral. In fact, private money lenders
are awarded more safety than many other investment vehicles can boast.
At the cost of somewhere between six and twelve percent interest on the money borrowed, real estate investors will be given the opportunity to close on more deals in a shorter period of time. What you pay in interest comes back in the form of volume and efficiency. It is truly the definition of a win, win scenario for both parties involved.
More often than not, private money lenders tap into their own bank accounts
to fund a deal. You won’t have to wait an extended period and can move quickly on time-sensitive values. Consequently, traditional bank loans can offer nowhere near the efficiency of a private money loan.
Funding Deals With Hard Money
Hard money funding
is typically distributed in draws against the work being done. It is, therefore, relatively common for a hard money lender to set up a payment schedule for completed work.
It is also important to note that the term “hard money” does not imply a degree of difficulty in acquiring said funds; in fact, it’s quite the contrary. While the terms and criteria accompanying a hard money loan can be extensive, they are typically easier to overcome and more reliable than your standard institutional lender. If for nothing else, receiving hard money approval is accessible in the face of a good asset. Most hard money lenders make their decisions based on the investment in question. It isn’t until after the home has been deemed promising that they will see if the borrower qualifies. In other words, the more promising the project, the more likely you are to receive a hard money loan.
While hard money is certainly more expensive to borrow, it is more reliable. That said, it is not subject to traditional credit guidelines (the same ones that protect banks). Instead, fees for borrowing hard money are often delineated in points (three to five, to be exact). Points represent an additional upfront percentage fee based on the loan amount. It is important to note that these fees are not universal, and different hard money lenders will bring other terms to the table.
Subsequently, hard money lenders are trying to mitigate risk by increasing interest rates, thus charging investors more for their services. But that increased rate is more than worth it, considering investors will be able to move on deals much faster than they would be able to with a traditional loan.
A hard money lender will rarely fund a real deal. It is more common that they will only invest a percentage of the purchase price or the after-repair value (ARV) – usually around 70 percent. Also, hard money lenders tend to favor deals that take less time. It is common for the duration of a hard money loan to top off at 12 months. If your agreement looks lengthy, you may need to side with a private money lender or someone willing to fund your project for an extended period.
In the end, chances are a hard money loan is your best bet to secure a deal with a significant profit margin. While five points may sound challenging to overcome, sometimes the profit margins awarded to those who can close on a home quickly are well worth the investment.
Even with all of this in mind, investors are still advised to use caution when working with a hard money lender. I encourage you to have multiple exit strategies lined up in the event something unexpected happens.
Private hard money lenders
have become a trusted source of funding for real estate investors on nearly every level, regardless of their experience. Both hard money and private money, for that matter, have become the backbone of any successful real estate entrepreneur. You simply can’t beat the speed and efficiency they have to offer. While they may come with a heftier price tag, I can assure you their positives greatly outweigh their negatives.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.