Top 5 Tips for Choosing The Right Private Money Lender
Over the years, private money lenders have played a significant role in providing loans to those who typically would not qualify for conventional financing. These private lenders offer a plethora of private money loans depending on the specific acquisition and funding needs of the borrower. In the real estate industry, private money lenders extend financing to borrowers who may not qualify for a bank loan due to poor credit scores or insufficient income history. Those who wish to acquire a fix and flip renovation property that is in very poor condition may also be turned away by a bank.
Another challenge some borrows face and one that prevents them from receiving a traditional loan is not having enough cash on hand for a down payment. Although, private money lenders do require their borrowers to have some “skin in the game”, their loan-to-value requirements are more flexible than a bank. In addition to the increased flexibility of private money loans, a major benefit with this type of funding is the speed with which the borrower can receive the money for their real estate investment.
Private money loans offer a quicker and easier way to obtain funding for real estate deals. However, choosing the right private money lender can be a daunting task, considering the fact that there are so many lenders in the market and it may be hard to decide which lender to partner with.
To help cut through the masses and pinpoint the best lender for your real estate investment needs, you should consider the following:
1. Responsiveness and Reputation- When it comes to choosing a private money lender, make sure they are responsive to your inquiries, concerns, and can provide answers to questions that pop up throughout the lending process. It goes without saying that you should visit the lender’s website to read past customer reviews and testimonials. A huge bonus is selecting a lender who has extensive building and development experience themselves. This experience will only be of benefit to you as they can offer you advice and provide recommendations on contractors, budgets, timelines, etc. Who knows, they may even know someone at the permitting office to help get those stuck building permits pushed through!
2. Loan Flexibility- Before you choose a private money lender, make sure the terms are disclosed in the documents and that you are comfortable with them. Sometimes the parameters of the loan can be modified depending on your specific funding needs, desired loan term, and exit strategy. In any case, the flexibility you will experience with a private money lender will be greater than that of a bank.
3. Interest Rates- One major factor to consider before choosing a private lending company is the interest rate. A private lender’s rates will be higher than those of a bank because of the flexibility, quicker access to funding, and the greater risk they are taking on.
4. Assess Your Financial Situation- Even if you find the right private lender, you still have to factor in the higher interest rate into your profit calculations. In order to fully maximize the benefits of this type of loan, it is best to have a solid team of subcontractors, a comprehensive building, and development plan and anticipate to be in and out of the investment property within 9–12 months.
5. Focus Your Search Locally- Although you can find hard money lenders across the country, it may be best to choose a lender that is local to your real estate investment property. Not only is it good to be able to meet face-to-face with them when you are reviewing the terms of your loan, but a local lender will have extensive knowledge about your area’s real estate market and can help guide you on the right buy and sell price for your property.