Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

3 Scenarios When A Private Money Lender Is The Best Financing Option

Written by JD Esajian

In what circumstances would the assistance of a private money lender be your best option for financing a transaction?

A common obstacle among real estate investors is financing. While some have the working capital they need from day one, others will have to seek ways to obtain it. More often than not, the average investor will not be able to fund a deal with their own money, which means the assistance of alternative financing is required. Also, the majority of lucrative real estate deals are predicated on timing and capital, as serious sellers are essentially looking to close deals yesterday. That said, real estate investors may find themselves in situations where the benefits of a private money lender are their best option.

A private money lender is an individual that loans money to fund real estate purchases and transactions. They operate much differently than an institutional bank, as they offer upfront financing with a specific payback period (anywhere from six months to a year) for real estate investors looking to raise the value of their property over a short period of time. The appeal of a private money lender is their capability in bringing speed and efficiency to every transaction, specifically when it comes to finances. They not only have the means and intent to invest in your business, but they are just as interested in working with you as you are with them.

3 Scenarios When A Private Money Lender Is Best

Private money lending

Because private money lending is based on relationships, as both sides stand to gain something from every deal, it can be advantageous in several ways for beginner real estate investors. Here are three examples of when it’s best to use a private money lender:

1. You Need Cash

The attraction to private money lenders is the ability to obtain cold, hard cash. Having access to private money enables investors make offers they normally wouldn’t be able to make. This upside is significant, as nothing has the power to entice a seller more than a cash offer. This approach is ideal for investors looking to acquire bargain deals or distressed properties.

“Sometimes the best way to win a bidding war and avoid paying a higher price is to increase your down payment,” says Coldwell Banker agent Robert Pennington. “Sellers favor strong buyers. If you can afford to make an all cash offer, do so. That’s almost always a definite way to slam-dunk a sale.”

It’s no secret: the advantage of an all-cash offer lies in its ability to sway the seller into taking your deal. Cash offers have a greater chance of being accepted, as the majority of distressed sellers do not want to deal with the burden of a bank. Along with extended closing times, the uncertainty of a conventional mortgage is another reason why sellers prefer cash offers over other financing options. The power of cash offers can also help to fuel more deals for investors.

2. You Need Financing Immediately

Securing financing in a timely fashion has proven to be the bane of existence for many new investors. Finding a real estate deal is great, but if you don’t have the money to fund the deal it’s a waste of time. In most cases, investors seeking to acquire a lucrative deals in real estate will need working capital immediately in order to close the deal. Investors looking to capitalize on speed and efficiency when making a deal should seek private money lenders. Rather than waiting an extended period of time with a bank, investors can move quickly and more swiftly to secure time sensitive deals, helping to capitalize on opportunities that otherwise wouldn’t have been available.

Although a private money lender will demand a cost of somewhere between six and 12 percent interest on money borrowed (more than a traditional bank or institutional), the benefit of a real estate investor is in the form of volume and efficiency, as you have the opportunity to close on more deals in a shorter period of time. As an investor, this is an invaluable asset.

3. Your Credit Isn’t Up To Par

A private money lender can be beneficial in many ways, but none more than those with below-average credit scores. The appeal of private money lending is the ability to borrow money without being subject to traditional credit guidelines and requirements. Banks and credit unions are generally less willing to work with investors that have less-than-perfect credit or can’t provide proof of a steady income. However, with a private money lender, investors can sit down and discuss their options, including negotiating the amount and terms that make sense for them.

Investors have more options with private money lending, as lenders will make loans that the average bank would typically pass on. However, it will also come at a cost.  The use of a private money lender will entail a higher rate than other loans. In some cases, private money lenders can even delineate points (three to five) to represent further percentage fees based on the loan amount, similar to hard money lenders. That said, it’s important to note that every lender will have their own set of costs, so investors are advised to conduct their due diligence.

The ace up any successful real estate investor’s sleeve is their aptitude for securing capital. The best investors not only have the resources, but the access to obtain working capital when needed. Investors looking to make their mark in the real estate market need to seriously consider the use of a private money lender, as it can take their real estate business to the next level.

That said, it’s important investors take the necessary time to find compatible lenders that not only identity with their needs, but their financial demands as well. Not every private money lender is the same, and every lender will have their own set of rules when it comes to lending money. Done right, the use of a private money lender can help investors obtain more deals and ultimately boost the success rate of their business.