If you are currently considering financing real estate investments, but are otherwise unsure of how to go about doing so, it’s in your best interest to familiarize yourself with all of the options at your disposal. To do anything less is a practice in ignorance. If for nothing else, those investors with more options to choose from can greatly tilt the scales in their favor.
It’s no longer enough to simply understand the traditional means of financing. You must proceed to dig a little deeper, as financing real estate investments can mean many different things to many different people. At the very least, there’s more than one way to look at financing a real estate deal. Namely, hard money and private money are two fantastic ways to acquire your next property. As a real estate investor, I implore you to get to know these two important options.
Traditional financing, on the other hand, has become synonymous with the majority of today’s real estate purchases. You can’t make it longer than a day or two without seeing some sort of mortgage advertisement on the street or inquiry in your mailbox. In fact, you could argue that traditional mortgages are as popular as they are because people are more inclined to trust the names they know; the same names they see on the previously mentioned ads and direct mail pieces.
It’s worth noting, however, that traditional mortgages are far from the only option made available to prospective buyers. Banks aren’t the only place you can go to finance a property, but rather one of many places.
If you want to finance a real estate deal, but are otherwise less inclined to use traditional means, there are plenty of alternatives to consider, not the least of which include the following:
As its name would lead you to believe, private money is a moniker given to capital received from a non-institutional (not a bank) individual or company. More often than not, private money originates from within your primary circle of contacts: family, friends, neighbors, coworkers, etc. However, that’s not to say it’s relegated to your current contacts. It’s entirely possible to secure private money from someone you have never met before. If for nothing else, there are plenty of lenders out there looking to make a return on their savings. When all is said and done, private money has less to do with who you are getting it from, and more to do with their occupational status. As I already touched on before, private money lenders are not those associated with a company, but rather an individual with some extra money laying around and looking to invest it.
Having said that, private money is a great way to fund an investment. Few financing options, for that matter, can facilitate a deal in the same way private money can. For starters, private money doesn’t come with nearly as many hoops to jump through as your typical mortgage. Whereas a traditional lending institution will require months of pre-approval and strict guidelines to abide by, private money is a form of asset-based lending, meaning the loan is usually secured by a note and deed of trust. As a result, there is far less paperwork to worry about and virtually no approval process. In other words, it’s not the borrower’s history the lender takes into consideration, but rather the viability of the property in question. That means it’s a lot easier to get private money loan to finance a deal — so long as the home is promising.
Seeing as how there are fewer hoops to jump through, it stands to reason that securing a private money loan to finance a home takes a lot less time than it would to go through a bank. And therein lies the greatest benefit of using private money: speed of implementation. In choosing to work with a private money lender, you can act on properties much faster. No longer will you be expected to wait for a loan to clear. Instead, with private money, you can have a loan lined up and ready to use in a moment’s notice.
It’s worth noting, however, that the benefits of financing real estate investments with a private loan are not without their own caveats. Namely, private money loans are ubiquitous with high interest rates. It’s not uncommon for the rate on a private money loan to be two to three times that of a traditional lender. But I can assure you, even at that rate, private money loans are well worth it. If for nothing else, private money will allow you to act on a deal much faster than a traditional loan, giving you a significant advantage over the competition. Simply making the first offer will tilt the scales in your favor, but that’s not all.
Private money loans have the added benefit of offering sellers cash. And, if you aren’t already aware, cash is king in the investing industry. Sellers will almost always favor offers made in cash over the standard bank loan. At the very least, cash removes the middleman. Perhaps even more importantly, however, cash effectively removes the risk of a deal falling through at the eleventh hour due to funding issues.
Hard money lenders are organized, semi-institutional lenders that are typically licensed to lend money to investors and rehabbers. Not unlike their private money counterparts, hard money lenders offer short-term, high-rate loans with fees that give investors the ability to purchase rehab projects quickly and efficiently, and financing properties is no exception.
Hard money lenders, like private money lenders, are a form of asset-based loans. That means they decide whether or not to lend based on the property in question. If it’s promising, you stand a better chance of receiving a loan. If not, you may need to look elsewhere. In other words, most hard money lenders focus on the deal in question more so than the individual looking to acquire the loan.
Fees for borrowing hard money are typically somewhere in the neighborhood of three to five points, with an interest rate around 11 to 15 percent. It’s worth noting that most hard money lenders will have different terms, but these numbers are pretty par for the course. Most of the time, however, you can expect them to lend on a percentage of the purchase price — usually, around 70 percent of the value of the property.
If you are looking to finance a house, don’t let their steep prices scare you away. Five points and 15 percent may sound like a lot, but it’s often worth it to get the property of your dreams. In fact, working with a hard money lender is often your best chance at landing a deal. If for nothing else, the speed in which they are able to provide you with the proper funding is much faster than a traditional bank — something sellers appreciate greatly. What’s more, high interest rates are less relevant over the course of a flip, as they tend to be somewhere in the neighborhood of three to four months. So, while rates are high, they don’t typically extend more than several months.
Which Path Will Your Choose?
Private and hard money lenders are commonplace in today’s real estate investor landscape, and for good reason: traditional financing can’t compete with the advantages they offer. While these alternatives do come at a price, they offer investors the ability to pay in cash and close fast — two of the most important things sellers take into consideration. It’s worth noting, however, that they are not considered tradition for a reason: the average person doesn’t even realize they are an option. It’s up to you, as an investor, to know about the options made available to you. Only then will you be able to realize success at a higher level.