When Investors begin their real estate journey, they find themselves asking the same questions, “Why would someone pay private lending rates and fees?” and “How can profitability be achieved with a high cost of capital?” However, as you delve deeper into financing, it is clear each type of financing serves as a tool. The more financing tools at one’s disposal are crucial. The beginning of every deal starts with financing. Below are some reasons why you might consider using a Private Money Lender, also referred to as a Hard Money Lender, on your next deal.
1. Cash To Closing/Down Payment
One of the biggest advantages of private lending versus other types of financing is the high loan to value. Real estate investing can be a capital intensive business, most banks require between 25-40% equity into a deal compared to private or hard money financing that may cover a hundred percent of your costs on a strong deal. Structuring your financing to limit your cash into a deal will allow you to do multiple deals at one time.
2. Multiple Deals
If you are able to close with zero money down, it opens the idea how many deals can you do? As many as you can find! With less money in each deal, it gives an Investor the ability to have multiple projects going at a time. A lot of borrowers keep a large amount of cash in the bank (hundreds of thousands in some cases) so that they can do more deals with hard money rather than fewer deals with large down payments.
3. Fast Closings
In a competitive property market, a great way to set yourself apart from the other offers is the ability to close quickly. A seasoned Investor can decide if they are moving forward on a property in less than 30 minutes, but getting to the closing table is what the seller is looking for. A typical lender is taking about six weeks to close a deal right now, which leaves a lot of time for the deal to blow up. Hard money can close as quickly as two weeks and it is not uncommon to close in a week. Put yourself in the seller’s shoes. Which offer would you take?
4. Less Expensive than a Partner
Most Investors find that working with Lenders is less expensive than a partner, finding that even after paying the fees and interest charged by a Lender they make more on the deal than splitting profits with a partner.
5. Easy to Qualify
Following the last downturn, bank financing has become more conservative, especially for real estate Investors. Banks want to see very strong borrowers with money in the bank, consistent verifiable income, great credit, low debt to income ratios, and experience. Sometimes real estate Investors have trouble showing income consistency as the deals ebb and flow or maybe their money is tied up in a new project. Private Money Lenders are usually more understanding of self-employed borrowers and not as concerned about income and credit as long as the deal makes sense and the borrower can support it.
Banks and institutional lenders change their loans. It is difficult to do business with Lenders whose requirements change if they don’t like the property, location, or size of the deal. Retail Lenders have a limited amount of money available and could be making commitments to other investors on a first-come, first-serve basis. Private Money Lenders typically stick to their loan program regardless of the deal, they have established their loan to value, pricing, and underwriting in a way that fits for a deal regardless of size, location, or complexity. Analyzing a deal is much easier when you know what your cost of capital and loan to value on every deal.