Investing in real estate can be an arduous task that leaves investors looking for unconventional means to bankroll their projects. Real estate investors often look into private money lenders for the cash that allows them to purchase a new investment property. While the investors get the capital they need, the private money lender receives a return on their investment if and when a project is successful.
Private money lending is when a private individual or small business loans an investor their own personal money to use for investment purposes. The pursuit of rehab loans rather than relying on traditional banks is one example of private money lending.
What Private Money Lending Can Do
Northwest Private Lending, a hard money lender in Oregon, sees private money loans as an opportunity to provide a win-win situation for both a real estate investor and the property owner. This form of lending is secured by real property, relying on collateral rather than the financial position of an applicant or real estate investor. In these scenarios, even default by the borrower can still result in profit for the lender.
As with any traditional lending operation, basic fire insurance is required to protect everyone’s interest in this property being renovated. A standard policy is usually all that it takes, but some lenders will recommend a minimum liability limit for what they call a rehab, or fix and flip loan.
Private lenders provide a preferred method for a loan amount, as it cuts out the red tape of working with banks and credit unions with a much more streamlined approach.
There are several private lenders that will seek to work with real estate investors on construction projects and other potential adjustments. These private money loans do not rely on conventional lenders, so oftentimes the loan amount is coming from someone a borrower has a personal connection with. Private money lending is a solid financial option for:
- People with a surplus of cash in their savings account
- People with sizable retirement savings account like an IRA or 401k
- People looking for passive income (a way of making a profit without too much regular involvement)
That’s referred to as the primary circle of individual private lenders, with friends falling into the category of the second circle. There is also a third party circle, which refers to accredited investors that are not known to the borrower.
For real estate investors, there can be a lot to oversee when it comes to day-to-day operations, from contractors to asset management. It is recommended that investors look into equipment management software that makes inventory manageable. These asset management solutions are operable through a personal dashboard that keeps track of everything from purchase orders to preventive maintenance tasks in real-time. Whether you’re working on new construction or preventive maintenance on investment property, inventory management on a mobile app will streamline the workflow and, therefore, end up saving money for investors
Hard Money Loans
The money provided through these private lending companies is often referred to as a hard money loan. Hard money is a term used to describe the maximum efficiency of a funding stream. Hard money allows a borrower or recipient to prepare for an influx of cash based on a scheduled series of payments, rather than a lump-sum.
The terms of these hard money loans are based on the property being used as collateral, and not on the credit score of the borrower. The higher cost of a hard money loan is offset by the fact that the borrowers intend to pay it off fairly quickly, mainly viewed as an investment opportunity and not a true debt.
The increased expense is a tradeoff for faster access to the money and flexibility in the repayment schedule depending on the lender. Hard money loans can be used for construction on a fixer-upper, and even as a means of staving off foreclosure. This is a quick fix that can avoid any struggles that a loan product through a financial institution can delay for days at a time.