Private Money Loans: The Secret Weapon for Real Estate Investors
Navigating Your Real Estate Investment Funding Options
When you decide to invest in real estate, the burning question is, how will you get the money to purchase real estate investments?
When purchasing real estate investments, what options are out there for you to get funding? Sources of funding to purchase investment properties include: cash on hand, money from a partner, funding from a Retirement Account, a 1031 exchange, etc. These are just a few funding options for the purchase of real estate investment properties.
Most real estate investors purchase real estate investment properties using loans. The most common type of loan that real estate investors use to purchase investment properties are called private money loans, or hard money loans. A private money loan, or hard money loan, is a loan from a non-bank source. The words, private money and hard money, are words that are used interchangeably in this article to mean the same thing. There’s a debate whether hard money and private money actually have different meanings which I explain in an older article.
Most people, unless they are real estate investors, have never heard of private money loans for real estate investing. Even though these loans aren’t widely known, private money loans tend to be the top choice for real estate investors to purchase real estate investment properties.
Uncovering Your Primary Needs in Real Estate Financing
Every borrower is looking for the lowest cost funding option to purchase real estate. If you ask people what their biggest need is when it comes to funding for real estate, most will tell you it’s the lowest interest rate they can get. But most of the time, the lowest cost loan option is a bank or credit union.
The challenge with bank loans is they take a long time to close, usually between 3 weeks to 6 weeks. In a competitive real estate market where good real estate deals sell quickly, the biggest need of a real estate investor is actually the speed of funding, and not the lowest interest rate. What good is a super low interest rate from a bank if it can’t close in time for you to buy a property?
The Advantage of Private Money Loans to Meet Investor Needs
Because a real estate investor’s biggest need is usually speed of funding, most will choose private money loans to fund their real estate investment purchases. A cash offer has a higher chance of being accepted by a seller because it promises a faster closing than an offer with bank financing attached. Buyers who rely on bank financing tend to close a lot slower on a purchase, which is why sellers prefer cash offers. Only private money loans can close as fast as cash. This is the primary reason that real estate investors use private money loans to fund purchases of investment properties.
Expanding Your Real Estate Empire Swiftly with Private Money Loans
Another reason real estate investors use private money, hard money loans is because they are able to scale their real estate portfolios faster. What is a portfolio? It’s a bunch of real estate you own, like houses, apartments, warehouses, etc., that you are holding and renting out long term for rental income. If a real estate investor only uses available cash on hand and bank loans, it could take a long time to build a real estate portfolio. Here’s more detail on why hard money loans can help a real estate investor scale a real estate portfolio faster.
Some vacant properties won’t even qualify for bank financing, even if a real estate investor has excellent credit and income. Private money and hard money lenders will lend on vacant properties. This allows real estate investors to buy them, rent them out, and then resell them or hold onto them long term. This is how private money loans can help real estate investors to buy using the BRRRR method of real estate investing.
Private Money Loans vs. Conventional Loans: Understanding the Difference
What are the primary differences between a private money loan and a conventional, bank loan?
- A private money loan has a faster closing timeline that mimics a cash close. Private Money Loans can fund in a week or less, whereas conventional loans can take 3-6 weeks to fund.
- Private money loans have less requirements and less paperwork needed to qualify. Often there’s no minimum credit score. Bank loans require a ton of documentation and have a minimum credit score to qualify a borrower.
- Private lenders accept various property types to be used as collateral for a loan, whereas banks tend to be rigid on what property types they will lend on.
- At the time this article is written, interest rates for private money loans tend to be priced in the range of 10% to 12%, whereas interest rates for bank loans tend to be below 8% for borrowers with good credit scores.
- The loan terms of private money loans are shorter than bank loans. Usually hard money loans come with loan terms of 12-24 months. Bank loan terms, with the exception of car loans, tend to start at a minimum of 5 years to as long as 30 years
The Ease of Qualifying for a Private Money Loan for Real Estate Investment
Qualifying for a private money, hard money loan is a lot easier than qualifying for a bank loan. Why is getting a private money loan easier than getting a bank loan? Here are a few reasons:
- There are no minimum credit score requirement with most hard money lenders, so you don’t need good credit to qualify in most cases.
- There is no income requirement whereby you need to make a certain amount of monthly income to qualify.
- You don’t need to have experience in real estate investing to qualify for a hard money loan on a real estate investment purchase.
- The property you want a loan against doesn’t need to be in good shape or already rented to qualify, in fact many hard money lenders lend on properties that need repairs.
The Hunt for Private Money and Hard Money Lenders
In order to get started in real estate investing, you need to find some good hard money lenders. Find your lenders before you start looking for properties to buy. Get to know the general requirements of each lender and learn how to compare among lenders to know what lender is right for you. How fast will you need funding? Can the lender fund in that timeframe you need? It’s so important to get pre approved with at least one hard money lender before you start looking for a real estate investment property to buy.
Taking the Leap: Securing Pre approval and Starting Your Property Search
In a real estate market with a lot of competition among real estate investors, a bank loan or other conventional financing just won’t be fast enough. Private money loans tend to be the fastest loans out there when it comes to purchasing real estate investments. These types of loans have also helped real estate investors build their multimillion-dollar real estate portfolios faster than they would have done without them. If you’re serious about making real estate investments in the future, get to know your private lenders out there like us.
Private Money Loans FAQs:
What is a private money loan?
A private money loan, also known as a hard money loan, is a type of loan provided by non-bank entities. These loans are popular among real estate investors for their flexibility and quick closing times. The term, “Private Money Loan,” is often used interchangeably with the term, “Hard Money Loan,” to mean the same thing.
Why should I consider a private money loan for my real estate investment purchases?
Private money loans offer speed and reliability where traditional bank loans fall short. Private money, non-bank loans can close quickly, making them ideal for competitive real estate markets where good deals sell fast.
What are the differences between private money loans and conventional loans?
Private money loans typically have faster closing times and fewer requirements than conventional loans. However, they also tend to have higher interest rates and shorter pay back periods as compared with conventional loans.
How can private money loans help me grow my real estate portfolio?
Private money loans allow you to purchase properties that may not qualify for bank financing. This flexibility can help you add properties to your portfolio quickly and with less hassle.
What do I need to qualify for a private money loan?
Qualifying for a private money loan is often easier than qualifying for a bank loan. There are typically no minimum credit score or income requirements, and the property you want a loan against doesn’t need to be in good shape or rented to qualify.
How can I find private money lenders?
You can find private money lenders through internet searches, local real estate agents, and real estate investor groups. It’s important to establish a relationship with a lender and understand their requirements before you start looking for properties to buy.
How can I get pre-approved for a private money loan?
To get pre-approved, reach out to us at the phone number on our contact page, or submit a contact form on that page. Then one of us will reach out to you via phone, or via email, to get you pre-approved.