Category: News

Who Needs Private Money Loans? Different Borrowers, Different Reasons

Introduction: Debunking Private Money Loan Myths

There are a lot of people that mistakenly believe that private money, non bank loans are for people who can’t qualify for bank loans. They wonder why people would pay the higher interest rates that typically come with hard money loans unless they have bad credit, a past bankruptcy, a past foreclosure, or another credit problem. But there are countless reasons that people need hard money loans, and trust me, it’s not because they don’t qualify for a bank loan.

In fact, some hard money borrowers are A+ borrowers, which means they have no problem qualifying for a traditional bank loan at the lowest interest rate available. Then why do people get hard money loans?

Understanding Private Money Loans: Key Definitions

In this article, the term, ‘hard money loans,’ will be used interchangeably with the term ‘private money loans.’ But check out this article defining hard and private money loans for more explanation about these terms. Here are some of the most common uses for hard money loans; I’ll bet that some of these will surprise you.

Why Choose Hard Money Loans: the Advantages for Real Estate Investors

One of the most common uses for hard money loans is to purchase real estate similar to an “all cash” purchase. Hard money loans, often utilized for making an all-cash offer with hard money, tend to take the appearance of an all-cash offer. This is because these loans close very fast and don’t have many of the same requirements as bank loans for approval. Bank loans can take weeks or months to close, while private money loans have the advantage of closing in under a week.

And if you can purchase a property quickly, with cash or cash equivalents, you may get a better deal on the property. This is why hard money loans are crucial to the success of real estate investors. Real estate investors are able to make money in real estate and scale faster their portfolios faster because of hard money loans. View our article to  learn more about how real estate growth through hard money.

The Use of Hard Money Loans in Purchasing Distressed Properties
Business person and distressed property representing diverse private loan borrowers

Vacant properties, or even partially vacant properties, seldom qualify for traditional bank loans, even if the borrower does qualify. Properties that need tenant improvements, repairs, and those that are not generating income often do not meet the lending standards of banks. Even if a property is fixed up and rented, some banks still won’t lend on it until the property has been showing consistent rental income for a specific period of time.

This leads us to another common use of hard money loans which is to fund the purchase of distressed assets. If a property becomes distressed, it can either be sold at a discount, or the loan (note) can be sold at a discount. People who buy distressed property assets often use non bank, private money loans to purchase them.

Partner Buyout Loans: An Often Overlooked Use of Hard Money Loans

And then what about “partner buyout” loans using real estate as collateral? A partner buyout loan is where you buy out a partner’s interest in a property using a loan. Partner buyouts are another common reason people get hard money loans. Banks and other traditional lenders aren’t the type of lenders that will typically make partner buyout loans for a variety of reasons. This is a way for real estate investors to replace equity (a partner) in a property, with debt (a lender), on a property.

Divorce Settlements and Hard Money Loans: a Unique Solution

Icons representing scenarios for private loan needs

In divorce settlements, often the partner that wins the property in the divorce is required to get the other partner’s name off the title to the property. If there is an existing loan on that property, the partner that wins the property in the divorce is required to refinance the loan in order to get the partner’s name off the title to the property. And it’s not just as easy as calling the lender and getting the ex partner’s name removed from the loan. Usually it means the loan will need to be paid back in full to remove the ex partner’s name from the title.

Removing a partner from a property in a divorce using a traditional type of loan is not fast or easy. If the process takes too long, some divorce attorneys will try and force a quick sale of the property. In this situation, a type of hard money loan often called a “bridge loan,” can be used to pay off the existing loan on the property and remove the other partner from the title without being forced to sell it.

Paying Off Reverse Mortgages with Hard Money Loans

A hard money loan is a good solution to pay off a reverse mortgage when parents pass away or move out of a home. Often children will inherit a property in the event of a parents death. If the children want to keep the property rather than sell it, they will have to pay off the reverse mortgage fairly quickly in order to take title to the property. This is another common situation where a private money loan is used; to pay off a reverse mortgage on a property.

Entrepreneurs and Business Owners: an Unexpected Beneficiary of Hard Money Loans

Business owners or entrepreneurs who are seeking funds to operate, or start a new business, will often seek out private money loans against real estate assets they own. Funds can be difficult to source for business owners who need them on short notice, for example, to fulfill obligations of new contracts. Hard money loans can be taken out against the real estate assets of a business owner for short term business needs of under 12 months. In other words, a business owner can use real estate as collateral for a business purpose, hard money loan.

Gap Loans and Mezzanine Financing: Meeting Real Estate Investor Needs

And then there are real estate investors who need what’s called a “gap loan“, or “mezzanine financing.” This is a loan in a second lien, or even a third lien position on the property. This means that a real estate investor has a first mortgage loan on the property in a first position (first lien). And then on the same property, the real estate investor also gets a second mortgage loan, or second position (second lien). Gaps loans and mezzanine financing are almost always from private money sources because they are perceived as being too risky for most traditional bank lenders who only lend in a first position on a property.

Bridge Loans: Solving the New Home Purchase Dilemma

There are home buyers who want to buy a new home but they have to sell their current home first. This is because many homeowners need the down payment funds from the sale of the current home to put towards the purchase of the new home. But how do you time it just perfectly to be able to purchase a new home at exactly the same time you sell the current one? Nothing short of magic!

Home buyers in this position risk being temporarily homeless if the current home sells before they find a new home to buy. Home buyers also fear the idea of having to deeply discount their current home to sell it quickly in order to be able to purchase the new home they already identified.

The type of private money, non bank loan that is most frequently used by homeowners in this situation is referred to as a temporary bridge loan. This is a loan that acts like a bridge to connect the home buyer to a new home, while the current home is listed for sale. Using a bridge loan, home buyers are able to purchase and move into a new home, without having to discount the price on the former home for a quick sale.

Transactional Loans: a Quick Solution for Real Estate Investors

Can you imagine getting a loan and paying it back, all on the same day? Transactional loans, also called transactional financing, allow real estate investors to purchase real estate that they’ve already pre sold to someone else. In other words, they have a buyer for a property before they even purchase it. This is called a “transactional” real estate purchase, also referred to as a “double close.”

Transactional real estate deals must be able to close with all cash, or as quickly as all cash. These types of loans are almost always non bank, hard money loans because they must close so quickly, and often with very short notice. Transactional loans most commonly fund, and get paid back, all in the same 24 hour period.

Conclusion: the Versatility of Private Money Loans

There are so many other reasons why people take out hard money loans, these are just a few examples. If you’re wondering if a private money loan is the right fit for your situation, leave a question below, or reach out to us using our contact information on this site. And if you want to learn more about private money loans, please subscribe, or follow us on our online channels.

Property won’t sell? What to do if you have a hard money loan

If you are a fix and flip investor, you may be holding a property that just won’t sell. Whether it’s because prices are going down, or whether interest rates are too high. Whatever the reason, you’re stuck holding a flip. So, what do you do? 

a renovated house for sale

If you have a hard money loan on the property, you really have a dilemma because it usually means interest is racking up fast on the loan, which is eating into your profit on the deal. And the clock is ticking on the loan due date as well because typically these are short term loans. And once the loan term is up, the lender wants the loaned funds returned. 

 

The good news is that there are solutions at your fingertips that may help you navigate this difficult situation. Here we go:

 

Communicate With your Hard Money Lender

 Never make the fatal mistake of keeping your problem to yourself. I can’t emphasize this point enough. Communicate with your hard money lender at the earliest stage possible when you know you’re in trouble. And don’t be afraid to over communicate, every week at the minimum. Don’t wait, because it may be too late for your lender to help if you wait too long. Many hard money lenders are well versed in real estate, and many are also very well connected, so they may be able to provide advice or resources. And even if your lender can’t help your situation, at least the lender won’t be surprised if you miss a payment, or need an extension.

 

Pivot

Doing a pivot means changing your plan or course of action. In this case it means renting the property and holding it, rather than flipping it. If you have a hard money loan on the property, renting it will help you generate immediate income to offset the loan payment. But you have to communicate this pivot with your hard money lender so the lender knows your plan. You can try and negotiate with your lender and suggest a loan modification by either extending the loan for a longer term, and/or negotiating a lower interest rate. This can provide some breathing room, and allow you more time to sell the property. If you can’t negotiate a loan modification with the current lender, you will need to pay the lender back by refinancing the current loan. This point leads us to our next solution, under number 3 below.

Refinance the Property with a Long Term Rental Property Loan

If you’ve made significant improvements to the property and have it rented, you may be able to refinance the property with a long term, rental property loan to pay off the hard money loan. A long term, rental property loan, sometimes called a “DSCR” loan, has a lower interest rate as compared to a hard money loan. These loans also have longer terms such as a 5 year term, 7 year, or a 30 year. Refinancing the hard money loan with a lower rate can help to lower your monthly payments. If you refinance with a lower interest rate, it will take off some of the financial strain that comes with holding the property. But remember, you won’t be able to qualify for a loan like this until you take the property off the market.

Refinance the Property with another Hard Money Loan

If you can’t qualify for a long term rental property loan, you could try to refinance out your hard money loan using another hard money lender. This would give you more time, say another 6 to 12 months, to either sell the property or rent it. This type of hard money loan is often called a bridge loan because it helps to “bridge you” from one phase to the next. And then ask yourself if you know an associate, family member, or friend that would be willing to become your new hard money lender and pay off your current loan? If you can negotiate a lower interest rate with this individual, this arrangement could be a win-win for both you and the new lender.  

Find an Equity Partner

You could try to find an equity partner that wants to have co-ownership with you in the property. This person could bring in cash equity to pay off the hard money loan and thus become a partner in the property with you. This means you’ll need to create a joint venture agreement with the equity partner, or form a business entity to hold title to the property whereby you are partners in that business. If you decide to pursue this solution, I recommend finding a real estate attorney and a CPA  to help you structure the partnership in the property.

Sell the Property at a Loss

If you’re unable to make any of the other above solutions work for you, then you may need to consider selling the property at a loss. You can use this loss to offset your tax liability. Talk to an accountant or CPA about how this would work for your personal situation. While selling the property at a loss may not be the ideal solution, it can help to minimize the financial impact that holding the property could have on your life over the long term.

Trying to sell a fix and flip property in a declining real estate market, or in a market with rising interest rates, is a tight spot to be in. By taking no action at all, and just waiting for the property to sell, you are just sitting on a ticking time bomb. However, with careful consideration of the solutions that are outlined in this article, it is possible to minimize the financial impact on you. 

 

If you have a hard money loan on the property, communicate with your hard money lender early and often. Always seek advice from professionals when considering these solutions, for example, involve your real estate attorney or your accountant/CPA in your decision making and planning. If you are considering refinancing your hard money loan on a property, we have both bridge loan options, and long term, rental property loan options available, so reach out to us! You may be glad you did.

 

Don’t Risk It! Make Sure You Have the Right Insurance for Your Investment Property

Table of Contents

  1. Liability Insurance
  2. Builder’s Risk Insurance
  3. Theft Insurance & Vandalism Insurance
  4. Vacant and Unoccupied Dwellings
  5. Rental Insurance Coverage
  6. Loss of Use Coverage
  7. Fire Insurance
  8. Wildfire Insurance
  9. Earthquake Insurance
  10. Flood Insurance
  11. Windstorm Insurance and Tornado Insurance
  12. Summary and Conclusion

Did you know that real estate investors tend to be the most underinsured group of property owners? This truth is hard to believe considering most real estate investors are putting their life savings into their investment properties. In fact, insurance is one of the things that real estate investors tend to cheap out on the most! Stick around for a bit because I’m going to outline some of the biggest insurance risks to help you understand what type of investment property insurance you probably need.

Insuring your investment properties is one of the best ways to mitigate risk in real estate investing. But that starts with making sure sure you have the right insurance for your investment properties. You need property insurance to not only protect yourself, but if you have a loan on your property, it also protects your lender. It doesn’t matter if you have a hard money loan or traditional mortgage, as you will responsible for loss

There are different types of insurance to consider when you own an investment property, and for many people, it’s overwhelming. In order to protect an investment property from loss, you’ll need to have coverage for things like fire, theft, and vandalism.

You’ll also want to be sure that you’re protected in the event of an accident on your property or from natural disasters such as earthquakes, floods, tornados, and wildfires. And then what about the loss of use of the property while it is being rebuilt or repaired?

We are not a licensed insurance agency, so please consult with a licensed insurance agent when purchasing insurance policies. But as a private money lender, we often find that the property insurance is the least known area by real estate investors who are usually the borrowers of our loans.

Because a lender is essentially a borrower’s debt partner on a property, it is important that the borrower have the right type of coverage because a potential loss will impact the lender as well. Here we explain some of the most commons types of insurance coverage that our borrowers need to protect their investment properties.

Make Sure You Have Enough Dwelling Replacement Coverage!

One of the most important aspect of any insurance policy is the amount of coverage needed to rebuild the property in the event of a total loss. For most residential policies, the dwelling replacement coverage is the dollar amount that will be available to rebuild the property.

Because the cost of construction is never fixed but is always fluctuating, property owners must revisit this dollar amount frequently to make sure they have adequate coverage or coverage limits are not exceeded. Particularly if building supplies and labor costs are increasing year after year, your coverage may need to be increased slightly every year. Some insurance policies have guaranteed replacement coverage which takes into account inflation of construction costs.

Liability coverage Insurance

Why would you need liability coverage? What if someone gets hurt on your property and sues you? The liability coverage amount listed on your insurance policy is the dollar amount the insurance company will pay if someone is injured on your property. Always make sure your insurance policies have a high dollar amount of liability coverage for renters and other people that enter the property premises. An accident could happen on your property that could cause injury or death to another person and this is why every real estate investor should take liability insurance very seriously! Liability costs will vary depending on the amount of coverage you need. Personal liability policies are also available that cover all of your properties.

Builder’s Risk Insurance

Builder’s risk is a type of insurance coverage that you can obtain on an investment property that is under renovation or construction. If you are building an investment property from the ground-up, or if you are renovating an investment property, builder’s risk insurance may be a type of insurance that you should look into. Builder’s Risk Insurance can be purchased by a property owner, or can be held in the name of the general contractor who is doing the construction work on the property.

Theft Insurance & Vandalism Insurance

Thieves often target vacant properties under construction, so it’s important to have theft insurance coverage if you have a vacant property under construction. Theft insurance is a type coverage that falls under a builder’s risk policy. But if you don’t have a builder’s risk policy, make sure your insurance coverage will protect you from loss if your building materials, tools, equipment, or appliances are stolen.

Vandalism insurance covers the premises and personal property from intentional damage caused by a third party. Builder’s risk policies usually cover vandalism but if you don’t have a builder’s risk policy, just make sure the policy you have covers vandalism. A broken window, tagging/graffiti, exterior property damage from eggs being thrown at the exterior of the property, are just a few examples of vandalism damage.

Vacant or Unoccupied or Property Insurance

If your property is vacant for longer than 30 days you should look into a vacant or an unoccupied insurance policy. What’s the difference between the two types of policies? If your home has personal belongings in it but it is not occupied for longer than 30 days it is considered “unoccupied.” When there are no personal belongings in it and it is empty for longer than 30 days it is considered “vacant.”

When a property is vacant or unoccupied for extended periods, it is considered higher risk, so the premiums for this type of insurance are a higher cost. Particularly in areas with high crime, it’s important to have vacant and unoccupied insurance for any properties that will be vacant for extended periods to protect it against vandalism or theft. Because vacant property insurance is more expensive than rental property insurance, property owners sometimes declare a vacant property as being tenant occupied to save money on insurance costs. Don’t do it!

Never say a property is occupied by a tenant when it is actually vacant in order to save money an insurance policy premium. This is because an insurer may not pay an insurance claim if the true occupancy status of the property is not declared. The good news is that you can have different types of insurance for the different stages of your property’s life. For example, you may need vacant dwelling coverage for your investment property while the property is under renovation for the first six months. Once the property is rented, you can change the insurance to a landlord/tenant policy (rental property insurance).

Landlord and Rental Property Insurance on an investment property

Rental property insurance or landlord insurance on an investment property is important for 3 important reasons.

First, it protects your investment in the event of damages caused by tenants, such as a fire or water damage.

Second, it protects your income if a tenant skips out on rent payments.

And, finally, rental insurance can help protect you from liability and cover medical costs in the event that someone is injured while on your property.

For these 3 reasons, it’s important to have rental insurance on any property you own that is rented to tenants. And your insurance won’t cover your tenants’ personal affects such as furniture, bikes, etc., so make sure your tenants are aware of this and if they are concerned they should purchase their own rental insurance or landlord policy coverage.

Loss of Use Coverage

Loss of Use Coverage is critical for tenant occupied rental properties. This type of insurance coverage will pay if your tenants are unable to occupy the property due to a loss. Sometimes loss of use coverage will put your rental property tenant in temporary housing or a hotel if the property is uninhabitable. This could possibly cover rental income as well. Loss of use coverage usually comes standard with most insurance policies, but be sure that it is a stated coverage on your specific policy.

Fortunately, there are ways that real estate investors can protect themselves from suffering too much financial hardship due to loss of use. One option is obtaining loss of use insurance, which helps to cover expenses related to lost income during such periods. This type of coverage is typically included with landlord insurance policies and can help minimize potential losses due to having a vacant rental property.

Fire Insurance

Fire insurance is a standard coverage found on most insurance policies. Fire insurance covers the cost to rebuild or restore a property that has been damaged or destroyed by a fire. It also covers the replacement of personal property that has been damaged or lost due to a fire. And fire insurance coverage will also cover costs associated with the loss of the use of a property while it’s being repaired or rebuilt.

For example, if your tenants are displaced from a property after a fire, your insurance coverage ought to reimburse you for loss of rents and cover the cost of relocating your tenants temporarily. Because investment properties with tenants are treated differently than owner occupied properties, make sure your fire insurance coverage will cover all of the potential losses associated with a fire.

Wildfire Insurance

In recent years, we’ve seen an increase in wildfires and, as a result, the demand for wildfire insurance has also gone up. If your investment property is located in an area where it has exposure to wildfires, wildfire insurance is specifically designed to insure property owners from damage to their properties caused by wildfires.

If you already own one, or you are considering purchasing an investment property in the western United States, be sure to ask your insurance agent about wildfire insurance. It could be the difference between losing your investment and keeping it safe and protected.

Earthquake Insurance for your Investment Property

If you’re an investor with a property located on or near an active earthquake fault line, it’s important to make sure you have adequate insurance coverage. One thing that most people don’t know is that earthquake insurance is not covered under most hazard or homeowners insurance policies. This is because it is a speciality insurance coverage that will cover the cost of rebuilding your property if it is destroyed by an earthquake or suffers structural damage. It will also cover other structures on your property, such as driveways, garages, warehouses, and small storage buildings.

For example, the Wasatch Fault in Utah represents one of the biggest earthquake risks in the interior of the western U.S. In 2020, a magnitude 5.7 earthquake in a suburb of Salt Lake City, caused over $60 million dollars in property damage. For property owners without specific earthquake coverage, this meant the potential for a total loss! Because many people have their life savings tied up into their investment real estate, a total loss from an earthquake would be utterly devastating. That’s why it’s important to make sure you have adequate coverage in place before an earthquake strikes. As a private money lender, it is important to us that our borrowers have earthquake insurance coverage on any property we lend on that is located on, or near, an active fault.

If you own a property in an area that is prone to earthquakes, earthquake insurance will cover the cost of repairing or rebuilding that property if it is damaged by an earthquake. It will also cover the cost of temporary living expenses if you need to relocate while your property is being repaired. Make sure your policy has a low replacement deductible and enough dwelling replacement coverage to rebuild the property in the event of a total loss from an earthquake.

Flood Insurance for your investment property

Because flood plain maps are always changing, a property currently located in low flood risk area may be at increased risk of flooding in the future. This means the risk profile for a certain location may change over time with regard to flooding and flood zone classification. Flood insurance will cover the cost of repairing or rebuilding your property if it is damaged by a flood.

If you’ve owned a property for a long time that is located in an area with potential for increased risk of flooding, it is important to assess this risk every few years. This type of risk is something that a property owner needs to assess frequently with the help of a licensed insurance agent.

And, even if you do have flood insurance, it’s important to make sure you have enough coverage to rebuild your property should it be damaged by a flood.

Windstorm Insurance, Tornado, and Hurricane Insurance for your investment home

Windstorm insurance is insurance that protects investors from damage to their investment properties caused by gales, winds, hail, and other gusty hazards. When big winds harm roofs and windows, rain and debris can also damage the personal belongings inside a property. Ensure that your windstorm insurance policy covers physical damage to the property and possessions inside the home. Also, make sure you have the right amount of coverage in place to protect yourself from potential losses!

In some states, insurance for tornados, cyclones, and hurricanes require you to purchase a special policy which is typically more expensive. This type of coverage is something you really need to discuss with a licensed insurance agent that specializes in issuing coverage for properties in areas that are prone to destructive storms.

Conclusion

Real estate investors tend to be underinsured as compared to typical homeowners. Many real estate investors either skimp out on insurance, or just don’t get the right type of coverage. If you are a real estate investor, get the maximum amount of insurance coverage that you can qualify for your investment properties. You local insurance agent will  know what insurance products you will need and explain any policy limits.   Depending on the location of your properties, you may require different types of insurance for each location.

As a private money lender, we see real estate investors making the same mistakes when it comes to insuring their investment properties. Don’t let that be you! Find a qualified insurance agent that understands how to insure your properties right. Finding the right insurance agent to issue the right type of insurance coverage could mean the difference between making a good investment or having a total loss of your life savings.

Hard Money Loans Vs Private Money Loans Explained

Hi this is Corey Dutton, I’m a private money lender and today I’m going to talk to you about, “private money explained.” Some of the questions that I’m going to answer for you today are:

  • What is a private money loan or what is a private money lender?
  • How is a private money lender different from a hard money lender?
  • What are the typical interest rates that are associated with a private money loan?
  • And what are a few ways that private money loans are used?

So what is a private money loan?

A private money loan is any non bank loan. So any loan that comes to you from a non depository institution.

Now, many people have a misconception that private money loans and hard money loans are two different things.

What’s the difference between a private money lender and a hard money lender?

Absolutely nothing!! I see it all the time, I see these videos online where these people are like, “why use a private money lender over a hard money lender?”

Again folks, a private money loan is any loan that comes from a non bank source, ok. So a hard money loan is just another type of non bank loan.

But why is it called hard money instead of private money? What’s the difference between private money and hard money? Like I said before, absolutely nothing!

They’re both non bank loans from a non depository institution. But why does hard money have that name, “hard?” It’s because a hard money loan is any loan against a hard asset.

WhatAre Typical Hard Money Interest Rates

what is the typical interest rate that is associated with a private money loan or non bank loan? The interest rates that are typically associated with private money loans are going to be a lot higher than your typical bank loan.

Usually the rates are going to range from as low as say 8% to as high as 18%. Yes I’ve seen them that high before.

And then finally, what are a few ways that people use private money loans? Well, most typically in my business, private money loans are loans against real estate.

But private money loans could be loans against any type of asset, any type of hard asset such as a car, such as gold.

Ok, those are just a few examples of hard assets that can be liquidated fairly quickly for cash. So

Conclusion

Hopefully I explained to you a little more about what is private money and how is it different from hard money.

The answer, the simple answer to that question is: absolutely nothing! There’s no difference!

And what you will commonly hear, you’ll hear this from other people, they’ll say something to you like, “Well you should start with private money lenders first and then if you can’t get a loan from one of them go to a hard money lender.” Well that’s wrong!!

The reason that’s wrong is because a private money lender is NOT your family and friends, and then a hard money lender is like me, an organized company with a website. No, no, no, no, no! It’s all the same, we’re all private money lenders.

So hopefully you learned something from this and that thing is: There’s no difference between private money and hard money.

If you have any questions about anything that I’ve said here, please leave them in the comments section below and I’m happy to answer you. If you found this video useful, or you liked it, please like it or share it. Thanks for watching!

MENU