Real estate investors have long used private money lenders to finance their real estate investments. A real estate investor, who we funded loans for in the past, confided in me that he was preparing to do a new property acquisition using a friend’s private funds. His friend was planning on advancing him the funds to purchase the property, and in return, would charge both interest on the funds and a small percentage of the profits. I asked how the lender planned to secure the loan and the investor informed me that the lender would only require a promissory note to be signed to secure the loan. So, what is the problem with this private lender making a loan to this investor?
The Promissory Note
The problem is with the Promissory Note that is intended to secure the debt on the property. A promissory note is only a “promise to pay,” but it is generally not recorded. In order for a private money lender to secure repayment of a promissory note with the real estate, a lender must use a deed of trust, or a mortgage. If the private lender makes the loan to the investor and secures it to the real estate with only the promissory note, this will not be sufficient security. A deed of trust is sometimes referred to as a security document because it secures the promissory note to the real estate by creating a record in the County where the real estate is located. This recorded document creates the lien against the property that is a notice to the world that there is a debt owed to the lender. Without it, the investor could resell the property without paying back the lender.
Pay attention to this if you’re planning on making private money loans to friends, investors, and others. Always use a Deed of Trust or a mortgage to secure repayment of a promissory note with real estate. Further, consider using a seasoned, Private Money Loan Broker to handle your next private money loan transaction to make sure it is done correctly. A seasoned Private Money Loan Broker understands all of the steps and documentation requirements to make sure you’ve secured your debt properly for piece of mind. To learn more, check out a recent post we wrote on this topic, ‘How to Become a Hard Money Lender.’
Real estate investors have long used hard money lenders to finance their real estate investments for reasons of speed and flexibility. But for those who have never taken out a non-bank loan before, there are certain things every real estate investor should know about hard money lenders. Here are just 3 things every real estate investor should know:
Not Every One of Them Is Legit
There are a lot of loan scams in the hard money space so be wary of fake lenders who don’t have the ability to do a deal. Most of them are just collecting upfront fees from borrowers!
Protect yourself by reading this post: How To Avoid Lending Scams
Don’t Assume a Hard Money Loan is Like a Bank Loan
The process of obtaining a hard money loan is completely different from the home mortgage loan process that is typical at your bank or credit union. For example: documentation requirements, valuation determination, speed of funding. These are just three examples of how the process differs greatly between the two types of lenders.
Never Expect No Documentation Just Because it’s a Hard Money Loan
So many people assume that just because it’s a hard money loan that there are absolutely no documents required, e.g. loan application, credit report. Although the documentation requirements of a hard money lender may be LESS than a bank lender for a loan approval, it does not mean they are non existent. Each lender has its own list of documentation requirements, so ask and don’t expect or assume that there’s no documentation required.
These are just 3 important things that every real estate investor should know about hard money lenders. Are you a hard money lender yourself, or are you a borrower who is seeking private money financing? What else would you add to this list?
Both real estate investors and small business owners are two groups that commonly utilize private money lenders. A private money loan is any loan from a non-bank source of financing. Most auto financing falls under the category of private money loans, just like hard money loans used in real estate investing. Because these loans can fund much faster than traditional financing, they allow individuals to capitalize on opportunities or to solve problems. But why should you know a few private money lenders? Below are just a handful of the reasons why you should have a few private money lenders in your digital rolodex:
1. Bad Credit Nightmares: a foreclosure, bankruptcy, or other credit issue can really limit an individual’s ability to borrow money. Most private money lenders don’t care about credit, and will lend to you anyway. If you have bad credit, knowing a few private money lenders is a must. You never know what opportunity could come along for which you’ll need financing.
2. Fast Real Estate Acquisitions: Good real estate deals are typically done very quickly, with all cash, and don’t wait for bank financing. But because private money lenders can make quick lending decisions, hard money loans can work like ‘all cash,’ because of their rapidity of funding.
3. Inventory or equipment purchases for business: Small business owners are often unable to obtain credit lines. Private money lenders will step up to provide credit to small business owners when banks will not. The availability of this type of credit can be life or death to a small business.
4. Buy Outs: Whether it’s a partner, family member, or business entity you are looking to buy out of an investment, a private money loan is a great alternative to complete a buy-out. Often it is cheaper to pay interest on a loan, rather than keep a bad partner in an investment. Private money loans are commonly used for this purpose.
5. Repairs to real estate owned: Many banks won’t lend money for repairs, improvements, or for additions to real property. Private money lenders, on the other hand, will make loans for repairs, improvements, and will also lend on vacant, distressed properties.
These are just a few of the reasons you could find yourself needing a private money lender sometime in the near future. By making relationships with non-bank lenders, you can create opportunities for yourself or provide solutions to problems. For more information on our private money loans, take a look at our loan program page and keep our contact information in your rolodex!
A real estate investor just starting out often asks, how to get a loan for a rental property? The answer is simple: cast the net out wide and consider various options. However simple this answer may be, it is far too vague. So I will attempt to delve a bit deeper into answering this question, and explain in more detail how to get a loan for rental property.
Do you have a need for speed?
If you are purchasing new rental property and have a need to close, whether on an all cash purchase, or on a last minute wholesale deal, a hard money loan is the best option. Even if a buyer is “pre-qualified” with a financial institution, a traditional loan cannot close fast enough to mimic an all cash transaction. Only a hard money loan can close fast enough to mimic all cash, because it can close in a few days. If speed is required by a real estate investor to successfully complete a purchase transaction, a bank loan is not an option. Look for a hard money lender to finance purchases that require speed in closing.
Do you understand all of your alternatives?
If you’re trying to refinance rental property, there are many alternatives for financing. Because rental income can be proven via bank statements or tax returns, it is far easier to refinance rental property with a bank loan rather than to purchase one. Particularly if a rental property is vacant or in need of rehab. If a rental property is vacant or in distress, once again, a hard money loan may be the only option on a purchase. Once a rental property has been purchased, rehabbed, and rented, a bank loan will take out the existing hard money loan.
Are you seeking a loan for more than one property?
If you already own a portfolio and are seeking to refinance your rental property, there are rental property loans specifically for rental property portfolios. This is a loan that you would get after you’ve purchased and stabilized a portfolio of rental properties. This type of loan for rental property requires lease agreements, a rent roll, a dedicated bank account where all rental deposits should be placed, and tax returns for the business entity that holds title to the rental properties. These items are those that will be required to qualify for a bank loan to refinance rental property.
If you still want to know more about how to get a loan for rental property, or if you are seeking rental property loans, leave a comment below with your contact details. Or send us a message via our contact page, and we will respond to your questions promptly.