Getting the financing piece right is critically important when embarking on any real estate investment. This is especially true when working with a private lender versus a traditional lender. Selecting the right (or wrong) private lender can be the difference between successful real estate investments or delays that jeopardize their successful completion. You must not only evaluate the private lender’s loan offerings, but also its expertise, transparency, and flexibility because those things will also greatly influence the success of your venture.
In this blog, we will review the considerations that real estate investors should take into account when selecting a private money lender, including the alignment of investment objectives, assessing its experience and expertise, its commitment to clear and transparent communication, its suite of loan options, its ability to close quickly, and its approach to relationship management. At RBI Private Lending, we pride ourselves on consistently delivering these things to our investor partners and work hard to ensure their success.
Understanding Your Investment Goals
When making a real estate investment, numerous factors must be weighed when defining your ultimate investment objectives and financing options, such as:
- Property location
- Property valuation
- Investment purpose and time horizon
- Anticipated cash flows and profit expectations
- Ability to manage a loan over time
Aligning your objectives with the right type of private lender is crucial because, quite frankly, you and your lender must share those objectives.
For example, some property investors turn to the fix and flip real estate investment strategy because they can earn
their returns all at once in a short period of time after selling the investment property as opposed to collecting monthly rent checks. For this scenario, a fix-and-flip loan is a viable financing option. On the other hand, a bridge loan is often used if there is a need for cash flow during a transitional period as it can quickly put more cash in an investor’s pocket to finance a new
property or pay off an existing debt obligation. Or, if you’re entertaining a commercial real estate investment, a commercial loan would be most suitable.
Getting on the same page is crucial. Hard money lenders must not only clearly understand your vision – they must embrace it. So be sure you are honest about your intentions and that the private lender can accommodate them with an appropriate loan for your investment property. Both you and your hard money lender need to evaluate the underlying asset. Is it a good investment? Is the purchase price fair? Is the success of your project dependent on price appreciation? The answers to these and other questions about the physical property and your investment properties’ profit potential will help get your private mortgage funded.
Evaluating Lender Experience and Expertise
Another area to evaluate is the lender’s experience and area of specialization. The fact is, not all hard money lenders are alike. Some have lengthy track records; others do not. Those with a strong track record will have the industry knowledge that goes with it. Ask for examples where the lender facilitated successful investments. For example, since 2015, RBI Private Lending has managed over $500 million in transactions for over 4,000 loans.
Do your research on each private lender you’re considering:
- Brush up on its history – Visit the lender’s website to learn all you can about how long they have been in
business, important milestones, and accomplishments.
- Review case studies – If you cannot find them online, ask the lender for concrete examples of recent
- Speak to past borrowers – This won’t always be possible, but ideally, the lender should have a list of
references that you can contact.
- Investigate area(s) of specialization
– What the lender specializes in should be evident on their website and in their discussions with you.
Ultimately, you want the lender to demonstrate to you that they not only understand your unique project needs, but
they have the knowledge, depth of experience, and specialization in the real estate investment loan type that is best suited for you and your venture, be it a fix and flip, new construction, commercial, rental, land, or bridge loan.
Transparency and Communication
In a real estate transaction, transparency and effective communication are extremely important. If the lender is unclear about the parameters of the loan, what’s required to qualify, and how they work, it can lead to complications when closing on your hard money loan. Hard money lenders and their customers buying investment properties have a common goal, participating in profitable real estate investments.
So, before agreeing to a deal, make sure you understand the lender’s loan terms and are confident it can deliver everything it says it can. You don’t want to sign a contract, only to find out that you need a co-sponsor or that you must come up with a cash reserve that may not exist.
Here’s a list of questions you should ask when you meet with a potential private lender:
- What types of loans do you offer?
- What loan terms are available?
- What size loans do you offer?
- Is a down payment required and if so, how much?
- What are your terms regarding loan to value (LTV), interest rate, and amortization rate?
- What are your net worth and liquidity requirements?
- Do you base the loan on the after-repair value (ARV) or the current value?
- Do I need to have a minimum account balance or reserves?
- What percentage of the loan is origination fees?
- Do you require an independent appraisal?
- Approximately how much will third-party reports cost? (Appraisal, structural, etc.)
- How long does it usually take to close a loan?
- How do you handle the disbursement of funds?
- Are there any prepayment penalties?
But don’t stop there. Be sure you continue to ask questions and clarify anything that you don’t clearly understand or find confusing throughout the lending process. Consistent communication is key to a great experience.
Flexibility in Loan Options
As stated earlier, there are a number of real estate loan options available which can be tailored to fit specific investment strategies. At RBI Private Lending, we offer several hard money loan programs to meet the needs of a variety of real estate investors:
- Bridge loans are short-term loans, typically taken out for a period of two weeks to three years pending the arrangement of larger or longer-term financing.
- Fix-and-flip loans are short-term loans used by real estate investors to purchase and improve a property to then sell for a profit or refinance. These improvements range from minor renovations to a complete reconstruction of an existing home. The initial draw will be calculated based on the As-is Value of the property and the renovation budget will be advanced in construction draws.
- New construction loans are short-term loans used to finance the building or renovation of a home or real estate project. The initial draw will be calculated based on the As-is Value of the Property and the renovation budget will be advanced in construction draws.
- Rental loans are a financing option for investors looking for a long-term solution, at an attractive rate. Underwriting is heavily weighted on the DSCR (Debt-Service Coverage Ratio) and not the individual’s DTI (Debt to
- Land loans are short-term loans collateralized by land. Investors looking for construction loans who do not have plans and permits approved will find attractive a loan based on the As-is Value of the land.
- Commercial bridge loans are short-term loans, typically taken out for a period of two weeks to three years pending the arrangement of larger or longer-term financing.
No matter what type of loan is secured, flexibility is key. Real estate loans usually have to be structured on tight schedules when there are hard deadlines that often come up quickly! For example, RBI Private Lending can adjust timelines to meet project completion dates. In fact, RBI Private Lending has funded fix and flip projects in as little as 48 hours! The point is, make sure the private lender can make adjustments as circumstances evolve.
Speed of Funding
One of the reasons hard money loans have proven to be a reliable funding alternative for today’s real estate investor is that property investments often require quick financing. In today’s challenging residential real estate market, there is little inventory and insufficient new construction to meet the ongoing demand. To succeed, you must have the ability to do deals fast with funding in hand.
In addition, funding delays can negatively impact real estate investors’ project timelines and purchase opportunities. So be sure you thoroughly understand the lender’s funding timeline and ability to pivot and meet urgent project needs.
The Borrower-Lender Relationship
For any real estate transaction to be successful, there must be a strong working relationship between the investor and the private lender. In addition, some lenders specialize in funding real estate developers, some focus on residential real estate investors, while others target commercial properties. As you can imagine, there are substantial differences between commercial property and residential real estate. Real estate investing is more than just owning real estate – you and your direct lender each have goals.
It is simply in both parties’ best interest as each has a vested interest in the venture’s success. And mutual success is often achieved through close collaboration and open communication.
Here are four ways to maintain a positive borrower-lender relationship throughout the investment loan lifecycle.
1. Begin with small steps: If you want to invest in real estate, contact several local private lenders and assess who you feel most comfortable with. Seek a private lender who understands your short-term and long-term objectives and can assist you in achieving them. Collaborating with a lender early in your investment journey can cultivate a partnership that could yield even more benefits for you and your lender in the future. Hard money loans from the right partner will be key to the success of experienced investors, as well as new investors.
2. Establish trust: Building trust within your professional relationship involves openly sharing setbacks as much as successes. Quality borrowers with quality development or construction projects will have options when selecting their hard money lender. However, private money lenders want to be more than just a means to finance projects – we want to be your partner. When unexpected hurdles arise in a project, be honest with your lender about those challenges and collaborate to devise a mutually viable plan. This will demonstrate your objectivity and practicality in managing your real estate project. It also underscores your reliability in sharing crucial information that can influence the progress of your project or timely loan repayment.
3. Operate with realistic expectations: The more candid you are about your financial situation, aspirations, and long-term strategies, the higher the likelihood of finding a lender who understands your vision and is willing to collaborate by making a hard money loan to make it a reality. This also helps manage the expectations of both parties.
4. Provide referrals: Chances are you’re acquainted with other investors who need funding for upcoming real estate endeavors. If your investor-lender relationship is healthy, acknowledge your lender’s expertise and support by making introductions. A referral is the best way to say thank you for a job well done.
Choosing the right partner for your private loans is a critical step in achieving successful real estate investments. No matter if you are investing in rental properties, development projects, or multiple properties, make your hard money lender choice carefully. Be sure to carefully consider each factor discussed in this blog and make an informed decision about whom to choose as your partner. The loan amount and loan rates are just one aspect of your decision. Ideally, a private lender that aligns with your investment goals is your best bet. Remember, a well-chosen private lender can contribute significantly to maximizing your investment returns and overall success.
Please consider RBI Private Lending for your next fix and flip project or other real estate investments. Our organization is comprised of seasoned professionals that will provide a financing package tailored to your needs. With years of experience in the industry, we are confident that we will accomplish your goals and provide you with the service you deserve. Let’s partner together for success! Click here for more information.