5 Valid Reasons For Obtaining Loans From Private Money Lenders

Posted on: April 16, 2011

Categories: Other Articles

Author: lbuen

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Private Money Lender - by epSos.de via Flickr

Funding Real Estate Deals Using Private Money

Private money lenders are a fantastic source of funding for your real estate business. There are several strong points you can get when you finance your deals with private money compared to traditional loans, lines of credit, bank loans and other types of financing.

Perks of Private Money

Private money played an important role in fueling my real estate business forward. Even when I was just starting, private money has been there to help me close bankable deals. The following are some things I like about this form of financing:

1. No Credit Probe. Your siblings, dad, aunt or anyone in the family could be your private investor. You can also request for private funding from friends, business partners and through referral of people who do not want their spare money to languish in the bank. Investors of 401k plans, IRA’s, Super funds and other nest eggs are a fantastic wellspring of private money. These non-traditional and informal sources of financing will not look at your credit record. You obtain credit on the merit of the real estate deal and not of your credit standing. In comparison, some hard money lenders and most, if not all, banks will require you a minimum credit score.

2. Financial Documents Not Required. Because of their informal nature and since most of them are people you know, private money lenders will not require you to submit pay stubs, bank statements and other paperwork that are usually required by banks and traditional financing. These requirements mean additional work for you and can protract the process of obtaining funding.

3. Less Questions Asked. The first time you obtain funding from a private money investor, of course you have to inform them when they are getting their money back, how much ROI they will be reaping, how safe is their investment, among others. If you source your funds traditionally, you may have to answer a whole lot of other questions.

4. Highly Negotiable. Since they are often people you know, private investors do not have stringent rules and guidelines in lending money. Anything goes in the negotiating table depending on how well you thrash out the deal. You can negotiate customized terms to suit your needs and that of your investor. You can arrange an understanding that you are not required to make monthly payments. You only pay after the real estate deal has been clinched.

In contrast, negotiating with hard money lenders may be less flexible. Even if hard money lenders are classified as non-traditional, they are still organized and are usually licensed to provide financing. They often have certain prearranged rules and criteria when lending money, such as fixed periods, interest rates and upfront points.

5. No Need To Pay for Points and Pre-Termination Penalties. These extra payments are typically required by some hard money lenders. You are penalized for paying off the loan in advance. But with private investors, you can obtain funding without a down payment, rehab funding or credit. You do not have to shell out cash since they finance the whole deal.

There may be more strong points for using private money. The bottom line here is that using private money gives you more flexibility and allows you more control and elbow room to execute your deals. I am not saying that you totally avoid hard money lenders. They can be handy especially if your private investors are not available and you need to execute a deal right away. Hard money lenders are easier to find. To gain ready access to a pool of private investors, inform everyone you know that you are looking for investors and by putting up newspaper and online ads and sending out direct mail. From these, establish a database of these people so that you can simply call them each time you need funding.

To bump up your real estate business, take time to cultivate strong business relationships with private investors. Once you show them what you can do to their money, they will keep coming back for more and may even refer you to other investors.

 5 Valid Reasons For Obtaining Loans From Private Money Lenders
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