While banks, financial institutions, and mortgage companies can offer tedious processes for giving away loans, private money lenders are presenting themselves to be a viable alternative, especially to real estate investors who need to make quick and flexible deals.
What are private money loans?
A private money loan is capital issued by a private individual or company to a borrower, typically form the real estate industry. Lenders offer flexible terms and are not as strict as banks in terms of the requirements and eligibility of the borrower. The direct negotiation between the lender and borrower also hastens the process of securing a deal.
Private loans typically have higher interest rates than banks, but this usually depends on the type of project and is flexible to negotiation. The higher interest rate makes up for the convenient process of giving out and securing loans.
What are private money loans used for?
Technically, it can be used for anything; but more often than not, it’s a strategy for real estate investors who might be involved in projects such as house flips, renovations, construction, buy-and-sell methods, and more.
Private money loans are beneficial for investors who might have been denied a loan by a bank due to a less-than-excellent credit score or due to the risks of the project. Because the loan process is quicker, this is also beneficial for investors who want to expand their real estate portfolio.
Who can be a private money lender?
Essentially, anyone who has the money to release funds and are looking for passive income. These can be anyone from private organisations, retirees, trust fund beneficiaries, other real estate investors, and even close relatives and colleagues.
What do private money lenders look for from borrowers?
Of course, just because private money lenders don’t require high credit scores from their borrowers, it doesn’t mean that they should not look into the borrowers’ capacity to pay back loans. Background checks are definitely still necessary, as well as the borrower’s history and experience in the field. Part of the decision making for lenders in partnering with a real estate investor is not just their capacity to pay, but also the value and outcome of the project. The higher the chance that the property will sell profitably, the more likely a lender will want to set up the loan.
Is it legal?
For as long as the source of the money and the projects are legal, of course. Depending on the locality, some states may have regulatory laws in place and require the lender to have a license, but these are mainly for security measures.
Furthermore, all paperwork is and must be kept legal and binding—via a promissory note or a deed of trust. It is also helpful to have legal representation from both parties to make sure that all negotiations are aboveboard.
Both real estate investors and private money lenders can benefit greatly from this type of investment agreement. In the cutthroat world of real estate, making deals in a quick, flexible, and trustworthy manner is essential for getting ahead in the game.