When investing in real estate – especially for the first time – it is critically important to secure financing with the right lender. Whether you are purchasing a new construction home, a multifamily rental property, or need a loan for a fix and flip investment, financing is often needed to complete the deal. New real estate investors purchasing for the first time typically obtain financing via a lender, but which type should you choose?
Let’s start with a definition.Just what is a private lender?
A private lender is an individual or non-institutional entity that provides loans to borrowers, typically without the involvement of traditional financial institutions such as banks or credit unions. Private lenders can be individuals, businesses, or investment groups with access to capital and are willing to lend money to borrowers for various purposes, such as mortgages, personal loans, or business financing.
Private lenders generally operate outside the regulatory framework that governs traditional banks and financial institutions. As a result, they can offer more flexible terms, faster approval processes, and customized loan structures. However, this also means that borrowing from a private lender can come with higher interest rates, fees, and potentially greater risk.
Traditional vs. Hard Money vs. Private Lending
If you’re deciding between a traditional, hard money, or private lender, you should consider how each type of loan will work with your investment strategy.
Traditional or Bank Loans
A traditional or conventional loan is normally offered by a financial institution, such as a bank or credit union, to individuals or businesses based on their creditworthiness, income, and other financial factors and have strict guidelines. As a result, the loan approval process is largely set in stone both in terms of its timing and requirements. For example, your credit scores and history play a significant role in getting your loan approval.
Conventional lenders are likely to sell your loan to a federal government agency with strict loan size standards and other loan parameters.
When working with a conventional lender such as a bank for traditional loans, they often come with specific terms that cannot be negotiated. In addition, loans for residential properties work differently than loans for investment properties. Generally speaking, the requirements for traditional loans are as follows:
- 20% downpayment
- High credit score
- Lengthy credit history
- W-2 income is usually not considered
- Liquid assets that equal six months of loan payments
You should note that while these loans usually offer the lowest interest rates, the underwriting process is more intense and lengthier than with other loan types.
Hard Money Loans
Hard money loans, on the other hand, provide relatively quick and easy access to financing. These lenders use “hard” investor assets (like properties) as collateral for short-term loans instead of focusing on the borrower’s credit or income. The qualification and approval processes are faster, too – often with an approval decision turned around on the same day. However, the price for this benefit is higher rates and fees.
Private Lending Companies
Private lenders combine the best attributes of the traditional and hard money lending worlds. A private money lender is a non-institutional lender and can be wealthy individuals or organizations, such as a hedge fund, with access to cash and seeking a higher return on investment. They are lending their own money and set the loan terms based on the borrower’s perceived risk.Private lenders provide asset-based private loans for business purposesand do it faster than banks can with traditional loans.
Private lenders are also more willing to use W-2 income for qualification purposes, which can be helpful if you are a first-time real estate investor with irregular cash flow or income. Like hard money lenders, private lenders deliver the advantages of convenience and speed, but they also provide better service and greater transparency throughout the process. In addition, private lenders offer more reliable access to capital because they have more of it.
Should you decide that a private lender might be the best fit for your first foray into real estate investing, you should know a few things. Here are three tips that can help you have a productive and positive experience when partnering with a private lender for the financing you need.
Tip #1: Know the Risks & Rules of Engagement
Step 1: Determine whether your proposed real estate investment is likely to be profitable
Real estate investing can be a lucrative and rewarding endeavor, but it requires careful consideration of various factors before diving in. Here are some things to think about before entering into real estate investing:
- Investment goals: Determine your investment objectives, such as capital appreciation, rental income, or a combination of both. Your goals will help guide your investment strategy and property selection.
- Financial resources: Assess your financial situation, including your available capital, credit score, and borrowing capacity. Real estate investments typically require a significant amount of upfront capital and ongoing expenses such as maintenance, taxes, and insurance.
- Risk tolerance: Real estate investments carry varying levels of risk, depending on factors such as property type, location, and market conditions. Be honest about your risk tolerance and ensure it aligns with your chosen investment strategy.
- Market research: Conduct thorough research on the real estate market in the area you are considering. This includes understanding local property values, rental rates, vacancy rates, and economic factors that can influence the market.
- Property type: Consider the type of property you want to invest in, such as residential (single-family homes, multi-family homes), commercial (retail, office), or industrial properties. Each type has its own unique set of challenges and opportunities.
- Location: Location is a critical factor in real estate investing. A good location can significantly impact property values and rental demand. Consider factors like proximity to amenities, transportation, schools, employment centers, and future development plans for the area.
- Property management: Determine whether you will manage the property yourself or hire a property management company. Managing a property can be time-consuming and requires a certain level of expertise, so consider the costs and benefits of each approach.
- Exit strategy: Have a clear exit strategy in place for when you eventually decide to sell your investment property. This may involve timing the sale for optimal market conditions or having a plan to improve the property’s value before selling.
- Tax implications: Understand the tax implications of real estate investing, including deductions, depreciation, and capital gains taxes. Consult with a tax professional to ensure you’re taking advantage of all applicable tax benefits and are aware of potential liabilities.
- Legal and regulatory requirements: Familiarize yourself with local laws and regulations that may affect your investment, such as zoning restrictions, building codes, and landlord-tenant laws. Consult with a real estate attorney if necessary to ensure compliance.
By considering these factors and conducting thorough research, you can make more informed decisions and increase the likelihood of success in your real estate investing endeavors.
It’s important to know what you are getting into when seeking a private money loan for your real estate investment. Be sure you have a thorough understanding of the risks involved when securing financing with private money loans, such as default risk – meaning what happens if you do not make payments in a timely manner. A default will negatively affect both your business and your personal credit history, so it is critical that you are wellequipped to manage the payments and know what will happen if you suddenly cannot.
Step 2: Understand the rules of engagement.
It’s also important that you fully understand the rules of engagement – in other words, the terms of your loan. Your private lending company should proactively provide this information to you, explaining in clear terms how the loan works. Private money lenders know that your success enables their success. At RBI Private Lending, we go to great lengths to secure our customers’ trust, and one of the ways we do that is by clearly communicating the terms of the financing vehicles we offer.
Our private money lending programs are designed to help you grow your business in ways that traditional lenders cannot. At the same time, private real estate loans are a contract between you, the real estate investor, and your private lending partner.Therefore, transparency goes both ways. You, too, must make sure you are up front and fully transparent about your financial situation as well as the condition of the property.
You should also understand that when working with a private lender, loan terms are typically shorter, and interest rates are usually higher. It’s the price you pay for the conveniences of ease, speed, and great service.
Tip #2: Select the Right Private Lender
When choosing who to partner with, there are a number of attributes you should look for in a private lender.
- Competitive rates: Are they as good or better than what other private lenders are offering?
- Flexibility: Does the lender’s loan program offer a range of terms and qualifying criteria?
- Quick access to funds: How fast is the lender’s approval, closing and funding process?
- Positive online reviews: Do people rate the lender highly on website forums?
- Local: Are they intimately familiar with your market so that an appraisal can be avoided to save time?
- Transparent: Does the lender have a reputation for being honest and not backing out of deals?
The old adage, “Go with your gut,” applies here. If you don’t have a good feeling about negotiating for the best financing solution with a particular private lender, then you should look for another one. Trust your instincts.
Tip #3 – Get Prepared for the Loan Application
The best way to secure fast funding for an investment loan is to find out what you need to qualify BEFORE completing the application. Start by having a concrete idea of the loan amount, how much money you need to set aside for a down payment, what interest rate you’re hoping to secure, how much you’ll need for a reserve fund, and what you can afford in terms of closing costs.
Then begin to collect all the required documents. You’ll need to produce a variety of them so the lender can accurately verify your identity, income, assets, liabilities, credit history, etc. Typically, you need to provide several forms of identification, bank, and investment account statements, W-2s, tax returns, etc.
When you have done your homework and have all the necessary information, it’s time to sit down with your private lender to (hopefully) secure a quick and easy pre-approval. Also, when you are well prepared, you appear more professional, which can sometimes make it easier to get approved – even when a minor problem arises.
If you are a first-time real estate investor, know that you have options when it comes to financing. A private lender might be the perfect fit because of its ability to qualify and approve you quickly and provide you with fast access to the funds you need. At RBI Private Lending, we do our very best to support real estate investors with a wide variety of loan options, flexible terms, and personal service to help you close your deals smoothly and efficiently.
For more information about RBI Private Lending and how we can help you begin investing in real estate successfully, visit our contact page or call us at 800-668-1004.