Investing in real estate is inarguably a safe and smart way to build wealth. With the right knowledge and strategy, the real estate investments can be lucrative for anyone.
The money earned from real estate investment can provide a path for a profitable career to the investors. All they need is to be smart with their money. Certainly, it can be reinvested into another property; however, if you are looking for an alternative, there is another option that you think about – private lending.
Investors who are capable of doing so should consider private money lending in real estate.
What Is Private Money Lending?
Private money lending is when an individual or a business entity lend their personal funds to individual investors or private investment companies to use for investment purpose. The said loan is protected by a collateral.
Needless to say, it is a great alternative option for financing a real estate asset outside of banks and other traditional lending institutions.
Having your hard-earned money in a saving account isn’t an intelligent strategy to grow your asset. Ultimately, private money lending will let you secure a loan on a real estate that is worth more than it.
This process can be somehow less risky than actually acquiring a new property. Therefore, it is essential that you know about the ideal real estate financing options available to investors.
A few years ago, banks, insurance companies, government agencies, and pension funds were the only real estate financing sources. However, with strict requirements and an unconducive timeline for the average real estate investor, the need for an alternative rapidly increased.
In the meantime, those having significant funds realized that their money could be a more lucrative option for investors than large institutions. Nowadays, private money lending holds the key to a sustainable career for the average real estate investor.
Those who choose to lend their private money can benefit from the practice in various ways. First and foremost, if done the right way, offering alternative real estate financing options can quickly establish wealth. This, however, isn’t the way to go for everyone.
You need to make sure that you are prepared to mitigate all the potential risks before throwing the extra money in your bank account at the first investor you find.
Private money lending is worthy of your consideration if,
- You are a real estate investor exploring ways to expand your portfolio.
- You are a retired individual looking for passive income investment opportunities.
- You have significant retirement savings in your account.
- You are a lawyer, head of an organization, a doctor, or any other professional with a sophisticated income.
- You are an entrepreneur of a successful tech firm.
- You have won a lottery.
Exploring the Anatomy of a Private Money Loan
The concept of a private money loan is quite simple, with a borrower, a lender, and necessary paperwork being the three key elements for it to transpire. Whatever the intent and purpose, it provides the best opportunity to dive into the real estate business without investing your own money.
Though the purpose of private money lending is the same as that of traditional lending, there are some differences. Typically, the rates of private money loans are higher than that of banks and other financial institutions; however, its availability can be significantly higher than that is passed on by an average bank.
Additionally, the private money loan provides a better combination of transparency and speed than traditional lending institutions during the origination process.
For private money lending, you may encounter different types of borrowers. Each of them is unique but they all share the same ultimate goal.
There are four types of lenders you are likely to confront;
Rehab/Sell
These investors typically buy residential properties in poor condition and renovate them with the intention of reselling them. Private money is an attractive option for borrowers because banks usually do not lend to such properties.
Rehab/Rent
These types of investors typically purchase residential properties and renovate them with the intention of renting them out. They are interested in private money for the same reasons for those described in the rehab/sell category.
Builders/Developers
Borrowers in this sector buy vacant residential or commercial land and permit and develop it. Private money is a lucrative option for these borrowers because of the quicker availability of funds than banks.
Commercial Investors
These investors may use private money to purchase a commercial property when a bank is not ready to lend on an asset that is un-stabilized.
What Is Hard Money Lending?
A hard money loan is a perfect alternative to traditional lending helps the borrowers to use a property or any other assets as collateral on loan.
While traditional lending sources bank on the credit history of the borrower to evaluate his/her creditworthiness, hard money lending relies on the value of the asset being used as collateral.
Hard money lending often has a higher interest rate than traditional loans. However, it is yet an attractive option for the investors having low credit and high equity in a property because of increased fund accessibility and a less stringent and relatively quicker approval process.
Pros Of Hard Money Lending
Hard money lending is an appealing perk for many investors as it provides them with an opportunity to tap into the lucrative potential of real estate even when they do not want to actually add a property to their portfolios. This can be particularly beneficial for those who do not have time adequate resources and time to secure a real estate deal.
Another advantage of hard money lending is that at the end of the day, it is the lender who decides with whom they will work and on what terms.
Cons Of Hard Money Lending
Like any other financial opportunity, hard money lending does not come without cons. The biggest challenge for those interested in hard money lending is that it requires sufficient funds to start.
Hard money lending also poses some degree of risk for the lenders because the investors may not be fulfilling the loan eligibility criteria by some standards.
To mitigate this risk, hard money lenders should set their own standards. They must always be ready to scrutinize investors and the assets in question before choosing an ideal candidate to work with.