Why Private Money Lending?
Depending on if you have a long term or short term investment plan , private money lending is the most aggressive way to fund the growth of your real estate portfolio. Private money lending works in the same manner as borrowing money from a bank, but the bank is a private individual with little or no stringent lending criteria who simply receives a Note and Deed of Trust or Mortgage (depending on the state you are investing in) in exchange for funding your deal.
Private money lenders can bring speed and easy resolution to your transaction by asking fewer questions and moving money faster. Being able to offer a expedited closing with private funds will encourage sellers to take your offer over your competition, and will encourage them to take a much lower price from you than they would from a conventional buyer.
Low Costs, Flexible Terms:
Private money lenders are often cost effective , with ratesvarying from no points and 8% interest, to 3 points and 15%. Pricing and terms should differ depending on the overall risk associated with the deal. Private lenders can provide a variety of types of funding starting with “flash cash” (when you only need funds for a short term ) to longer term notes as long as 5 years or more. Lenders may choose to receive interest payments monthly, quarterly, annually, or at the time of loan maturity.
Transaction fees on Private Money Loans are smaller than most as private lenders do not have underwriters, processors, etc. as full time employees , and do not require nearly as much paperwork as traditional or government-backed loans.
Why you should protect them, and how:
As a professional investor, you will want tosecure the interests of your private lenders and yourself . We suggest providing them with the following documents to protect their investment capital:
o Promissory Note: This is your lender’s collateral for their investment capital
o Deed of Trust, or Mortgage (varies based on location ): This is the document that is recorded with the county clerk and recorder to publicly secure their money against the real property that you provide to them as collateral
o Hazard Insurance Policy: List the Private Lender as the “Mortgagee” to protect them in case of fire or natural disaster, etc .
o Appraisal (optional): Many private lenders will simply research the value of a property with a search engine online before making an investment decision. As many of your acquisitions will be properties that require significant renovation, an appraisal may be unnecessary to establish value if your purchase price is reasonably well below market. If a lender does require an appraisal, be sure to give the appraiser a copy of your renovation plan of work with total renovation estimate and ask the appraiser for an ARV (after repaired value) figure on the appraisal.