Borrow or Broker private loans?
The mortgage market has changed dramatically in the last year. We have seen the end of easy money financing and it will be some time before we see sub-prime loans, no-doc loans or wall street financing. Even traditional mortgage lending including FHA will require much higher credit standards, FICO scores and much larger down payments.
Many real estate investors cannot acquire long term financing. They are using private lenders to fund acquisitions and profit from the lowest real estate prices in 25 years.
Private lending is simply when a individual lends money to another individual using real estate as collateral. The money can be used to purchase rental real estate investments.
Private lenders come from all walks of life and may not know the first thing about the real estate business. But what they do have is cash or assets that they can invest in your real estate deals. These individuals are generally middle class people, who have some extra funds to lend. They can be retired business people, corporate executives, professionals such as doctors, lawyers, or business owners or even blue collar workers.
Private lenders are looking for returns substantially above the 2% to 3% they get at the bank with CD?s or money markets. Most private lenders are looking for investment returns in the 8% to 12% range and secured by local real estate that they can drive by themselves to evaluate.
Private lenders generally only lend in First mortgage position and will lend 80% to 90% of the purchase price and repairs or 65-70% of the after repaired value (ARV). The real estate investor should have at least 10-20 % of their own money in the deal.
So the concept of “private lending” can be defined as the process of borrowing real estate investment funds from private individuals at rates higher than these lenders can normally achieve using conventional investing institutions like banks and conventional investment vehicles like stocks, bonds, CDs, or money markets and secured by local rental real estate.
The fastest way to earn money with private loans
The fastest way to earn money with private lending is to match borrower with private lender. Currently every sub prime lender has went out of business. This has created a void of capital that has not been seen in 20 years. Once you let the local real estate community including real estate investors know you have private funds to lend your phone will not stop ringing. Private lenders can close quickly because they are basing the decision to lend on the location, the appeal of the property and the equity in the deal.
EXAMPLE: Single Family home is valued at $200,000 and the borrower needs $100,000 loan. $100,000 divided by $200,000 equals 50% loan-to value.
This should be a simple and safe loan to fund assuming all other factors like income, past credit history, and exit strategy checkout.
The normal commission on a deal like this would be 1-5% of the loan amount. You can earn $1,000 to $5,000 for arranging this loan in less then a week. Arrange just a couple private loans each month and earn up to $10,000.
Borrowing Private Funds for Real Estate Investing
If you are a real estate investor you need cash to buy houses, how are you going to fund your real estate deals in this new environment? Few individuals have enough of their own cash to purchase real estate investments, and those who do, generally know better than to use their own cash in their real estate investing business.
It is not uncommon for new real estate investors to start out with lots of cash and little experience, only to lose all their cash in the learning process and have to learn how to do things the right way the second time around. Even if you have a flush bank account or a home equity line of credit you?ll eventually run out of money and need a consistent and dependable source of new money to buy real estate investments.
So how do you get this cash?
You can go to a bank and try to qualify for a loan and then wait to be approved. If approved, you will need to put up 20% to 30% down payment for each and every deal and pay all the bank?s closing cost fees. How long will your cash last doing that!
Or, you can go to a hard money lender, but they will lend you 65% loan-to-value (LTV) of the after repaired value and you would fund the balance with your personal funds.
So what is the answer? The answer is using private lenders to fund your real estate deals. Private lending is a consistent source of funds to purchase real estate deals that you can go back to again and again and again. In fact, the more you use, the more will become available as you develop relationships with more private lenders.
Sources of Financing for Real Estate Investing
There are many sources of financing available to use as a real estate investors. It is important to know the different financing options for structuring your real estate investment business. As you will see in this report, private lending has several advantages to the other sources.
Conventional Mortgages ? Mortgage Loans are the traditional type of financing for real estate investments and are generally provided by banks, mortgage companies and saving & loans. Mortgage loans are usually 15 to 30 years in duration with interest rates in the 6% to 7% range depending on your credit score and history. Mortgage loans require you to go through a qualifying process and involve lots of paperwork and can take weeks, if not months, to finalize.
Mortgage loans have several primary weaknesses, including a 20% to 30% down payment, a credit score of 700 or more and tight limits on the number of loans one person can make. Banks and other financing organizations are also seriously clamping down on credit scores and typically require scores over 700, whereas, just a year ago, they would led on a score of 600 or less from a real estate investor.
Mortgage lenders will only let you acquire a certain number of properties before they will cut you off from any further funding. Fannie Mae and Freddie Mac, who really control the US mortgage market, recently imposed new investor lending guidelines and now only allow a maximum of 10 loans per investor.
Mortgage lenders will not make loans to LLC?s or corporations. This defeats many of the advantages of LLC?s or corporations of asset protection and limiting liability.
Hard Money Loans ? Hard money loans can also be called rehab loans. Hard money loans tend to have very short time frames of 4 to 12 months and hard money lenders expect you to pay them off after 12 months with a new mortgage loan. These types of loans tend to have higher interest costs that will sometimes be over 18% with upfront points. On the positive side, hard money loans generally require less qualifying on the part of the investor because of the very low LTV ratios, usually less the 65% loan-to-value.
Creative Financing ? Creative financing is a blanket term for techniques such as lease options, subject to, and owner financing that will allow you to acquire control of a property without putting money down. These techniques are great when you can use them, but are not applicable when the seller needs to sell for cash.
Lines of Credit – Revolving credit sources include Home equity line of credit business lines of credit and credit cards. While these can be flexible sources of financing, the interest rates can high and require monthly payments. They also limit you to the size of your available credit line.
Private Lenders – Private lenders are individuals with money to lend for investment purposes. They may or may not be wealthy, but they do have cash or assets available over and above what they need to live on. These individuals are willing to lend for a higher return than they can get with bank CD?s or money markets. There are no limits on the number of private lenders you can have or the number of real estate deals you can do using private money.
The Advantages of Private Lending Over Hard Money Loans or Bank Loans
There are numerous benefits and advantages to private lending versus hard money loans or mortgage loans to fund your real estate investing business. Knowing the advantages can mean the difference between making a real estate deal work or losing a good deal to your competitors.
1. Speed and Cash Flow
The ability to close a real estate deal in less than two weeks is a huge advantage over having to wait weeks, or even months, for a typical bank loan approval. The importance of speed cannot be overstated in a competitive market and quick cash gives you a big edge over other investors.
Imagine if you are the seller and someone comes to you to buy your house and has a two or three month escrow period before closing plus several financing contingencies versus another investors who will close in two weeks with no contingences. Not hard to tell which offer the seller will accept. And the real power of this offer is the seller may accept a lower price to close quickly with no contingencies.
So not only do you get the deal from the other investor, but you get it at a lower price. The power of private lending is the ability to close quickly and drive better deals terms to your advantage.
2. Simple Paperwork
Have you ever gone to a closing on a traditional mortgage loan and had to sign 2 inches of paper work. Now image going to closing and only signing two or three documents (yes that is not misprint).
Private lending deals are incredible simple and the total paperwork is normally less than 10 pages and includes two or three simple documents. The documents included in a private lending transaction are a mortgage (Deed of Trust), an installment note and possible a disclosure statement. The only other required paper work is to name your lender on your property and title insurance as you would in any normal loan.
3. Flexible Terms and Conditions
One of the incredible advantages of a private lending transaction is you control the terms and conditions of the loan. For example, you can offer a very short term loan of only 6 months if you know you are going to flip the property for a quick profit. Or you can offer a 5yr ballon term if you plan on holding the property for a long term rental.
You can also control the conditions of the loan such as not allowing a prepayment penalty for early prepayment. Most normal mortgages and hard money loans require a 1% to 2% prepayment penalty to pay a loan off early. With private lending transaction you control the conditions and can simply add a clause that allows an early prepayment without a penalty. That can mean a huge savings down the road.
4. Reduced Fees and Costs
Private lending money is less costly than mortgage loans or hard money loans. For example, most hard money loans can ultimately have total interest cost of 20% or greater by the time you factor in all the fees, points, interest and other costs. Even mortgage loans can be very costly with fees and upfront points factored in and the high interest rates most investors must pay versus home owners. Loans from private lender sources usually have no points and very few costs. The total cost of most private loans is somewhere in the 8% to 12% range with little upfront or back-end fees.
Private lending provides tremendous flexibility for both you the borrower, but also for the private lender. The private lender can invest small amounts of $10,000 or less in deals or large amounts to fund larger apartments or commercial property purchases. You can also work with lenders to structure a term that fits the lenders needs.
The advantages for private lending are significant and can make a huge difference between a deal working and not working.The bottom line is private lending is undeniably an important component of any real estate investing business. Using private lenders to broker or fund your deals is the ultimate solution for any investor: you won?t be using your own cash nor risking your credit score.
How Do You Find Private Lenders
Advertise for them. It?s as simple as that! Finding private money is not nearly as difficult as people think. We utilize a number of low key person to person marketing techniques as discussed below. However, I strongly urge you not to use any large public sources of advertising, such as Craig?s List, or you may get a call from the SEC and you do not want that.
Here?s how it works ?first, you do some simple marketing to find individuals interested in earning 8% to 10% interest on investments secured by local real estate. You will find these prospects everywhere. They belong to your local real estate investor clubs, church?s, civic clubs, parent organizations, friends, family or even neighbors.
You will be surprised how easy you?ll locate them and soon, they will be searching you out. Just let everyone know that you pay high rates of interest for loans that are secured by local real estate.
As prospects express interest, you explain that the investments are secured by local real estate and do not exceed 65% of the after repair value of each home. Each investment is based on a specific property, and they can decline any property which they are not comfortable with. All you require is that they approve quickly and can fund within 7 to 10 days.
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