Fire Your Banks and Learn How to Use Private Money to Fund Your Real Estate Investments – Part 1
If you are tired of hearing banks telling you that they will not finance your real estate projects, it may be time to consider using private capital to fund your deals. The economic conditions that include the meltdown of many financial institutions have forced Lenders to be extremely cautious as they consider new applications.
Understandably, in order to help mitigate the risks of further losses, Lenders are being very selective and cherry picking from only the very strongest loan applications being presented to them. In addition, most Lenders are modifying their underwriting criteria making it even more challenging to meet their minimum guidelines. There has never been a better time and need to learn about the advantages of using Private Money to assist you in achieving your real estate investment goals. This article series will be limited to using single Private Money Lenders for each investment property. Raising money by pooling investment capital from a number of lenders will be covered in a future article series.
What is Private Capital?
Private Capital is money that’s being provided to you by non- traditional lending sources and includes the following:
• Family members
• Business associates
• Professional associates
• Your friends and neighbors
• People on your contact list
Here are just some of the advantages to utilizing private capital:
• Lower due diligence and closing costs
• Having capital available in advance allows you to respond quickly to deals that may become available. Keep in mind, the best deals do not last on the market very long you.
• Less documentation required
• Shorter time to closing
• No risk of being turned down for a mortgage
• You make the rules with flexible terms and conditions that may be offered to your Lenders.
• The ability to take on problem properties that most banks will not touch
Establishing your credibility
Is seems that we are reminded on a daily basis of the latest scams that are being exposed around us. Unfortunately, the current economic challenges are bringing out the worst in some people and it is understandable why so many are skeptical about investment opportunities being presented to them. Demonstrating your credibility is by HULT PRIVATE CAPITAL far one of the top characteristics Investors seek when they are entrusting their money to you. Investors may be able to tolerate if an investment properly executed to the best of your ability does not end up as planned. However, you may never recover if there is any question with regard to your integrity and actions that have led to your Investors losing their money.
How much interest should you pay your Private Money Lenders?
The amount of interest that you pay your Private Money Lenders is completely up to you and although there are no set guidelines for this rate, private money is typically paid at a rate of 6 to 12%. However, lower or higher rates can apply based on the situation. When considering your interest rate you are offering, keep in mind that many states have usury limits which will put restrictions on the maximum interest a lender can charge a borrower. The following are some things to consider when determining the interest rate you will offer in your program:
• How much experience do you have doing these types of transactions? (when you are a novice you may have to offer a higher interest rate)
• What is the term of the loan? (with a shorter term, you can offer a lower interest rate)
• The risk level of the investment (your Investors will expect a higher rate of return on a riskier investment)
• Interest payment payout schedule (many Private Money Lenders would accept a lower interest rate payment with more frequent interest payments being made)
How do you protect your Private Money Lenders?
There are a number of things that you should consider that will provide your investors with both the financial and emotional security they deserve when they agree to put their money into your hands. Let’s take a look at some of the things you should consider:
• Show proof that the real estate taxes are being paid on the subject property.
• Provide your Lenders with a Promissory Note and Mortgage. Make sure you record the Mortgage so that there is public record that there is a lien on this property.
• Provide your Lenders with a title insurance policy
• Make your Lender the loss payee on your property insurance policy
• Consider putting the deed in escrow with the appropriate deed transfer paperwork filled out; this will provide your lender with a higher degree of protection. If you default, they will not have to foreclose on you.
• Will this be a secured or non-secured loan?
• Is this a recourse or non-recourse loan?