Why Private Money Lending?
Depending on if you have a long term or short term investment system, private money lending is the quickest way to fund the growth of your real estate portfolio. Private money lending works the same way 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 backing your deal.
Private money lenders can bring speed and easy resolution to your deal by asking fewer questions and movingfunds faster. Being able to offer a faster closing with private funds will encourage sellers to take your offer over your competition, and will entice them to take a much lower price from you than they would from a conventional buyer.
Low Costs, Flexible Terms:
Private money lenders are very cost efficient , 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 various types of funding including “flash cash” (when you only need funds for a few days ) to longer term notes as long as 5 years or more. Lenders may elect 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. on staff , and do not require nearly as much paperwork as conventional or government-backed loans.
Why you should protect them, and how:
As a professional investor, you will want to protect the interests of your private lenders as well as your own . We suggest providing them with the following documents to secure 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 easily research the value of a property online before making an investment decision. As many of your acquisitions will be properties that must have significant renovation, an appraisal may not be necessary to establish value if your purchase price is easily 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 cost and ask the appraiser for an ARV (after repaired value) figure on the appraisal.