Last time we visited within the confines of this blog, we discussed the idea of private money lending from the other side of the table, namely from the point of view of investors with cash on the sidelines, ready to lend. Well, there are two sides to every story. Where there is a lender there must also be a borrower, so let’s take a look at why real estate investors might choose to eschew the idea of traditional financing and go the private money route.
There may be more reasons than you realized.
1.No credit check – Perhaps the best part of a private money loan is that there is no credit check and no subsequent hit on your credit report. For an investor who likes to turn lots of deals, having to prove creditworthiness each and every time gets to be a bit of a hassle. Why suffer through that inconvenience if you don’t have to?
2.Unlimited funds – We’re pretty sure that even Donald Trump hits the limit of what a single bank will loan him from time to time. For all practical purposes, the amount of money you can secure via the private route is essentially unlimited. As long as you don’t develop a bad reputation as being an exceptional risk for default, borrow to your heart’s content. Most private money loans use the property in the deal as collateral rather than worrying about a silly old income to debt ratio.
3.Control, control, control – If you’ve been in this business for any length of time, probably one of the things that really irks you is being forced to cut through miles of red tape and satisfy every restriction federal government regulators and your local loan officer can dream up. If it starts to seem like they don’t want to loan you money, you might be right. With a private loan, you’re in control and you set the rules. What a breath of fresh air.
4.Cheapest partner you’ll ever find – Property investors are often tempted to bring a full partner on board in order to access more money for deals. With private loans, skip the potential headache of a personality or ideological clash, and never worry about having to split the profits with someone else. You’ll know what your exact costs will be up front in relation to funding the deal. No surprises! We like that.
The preceding benefits of borrowing private money to finance your real estate wheeling and dealing are pretty obvious, but there’s one more REALLY big advantage that’s still sitting out there. Speed. How many times has a primo deal slipped through your fingers while waiting for a bank to give approval on the loan? Property investor veterans, you’ve probably experienced it a time or two.
In complete counterpoint to your traditional financing experiences, private money loans are a smooth, quick process the vast majority of the time. Like we mentioned back up in point #3, banks aren’t happy unless you’re drowning in red tape and restrictions. They’ll say the property you want to borrow on is “transitional” and carries too much risk. They’ll say they’ll get back to you that afternoon but then your loan contact disappears early for the weekend, and there’s no way to get in touch. The bank holds all the cards.
Here’s another point to consider. While you might pay a few more percentage points in interest rate, the sheer volume of deals you are able to process is likely to increase the bottom line of your business considerably. Now we’re not silly enough to suggest you blindly enter into a private money loan on nothing but the basis of this blog’s recommendation. Actually, we’re not really recommending it at all, but rather merely pointing out that the option exists, and you might find you really like it.
Where’s the best place to find private money? Putting some feelers out on the grapevine might be your best bet. Ask around at the office or other local real estate agents. A Google search for the term “private money loan” will reveal a wealth of resources in your state. Once again, don’t dive in with eyes wide shut. Get some legitimate references. Start with a single small deal and see how you like it. The mainstream media tends to paint the “hard money” industry as little better than knee-capping loan sharks. Please, save that junk for the movies. Private money loans fill a necessary niche where the traditional loan industry falls woefully short.
The Jason Hartman Team