With today’s very difficult credit environment, it is very difficult for most real estate investors to find a good consistent source of investment property loan money for real estate businesses. This is where private loans come in and they offer many advantages over these two traditional sources of money. If you want to be a successful real estate investor, you may need to consider private loans.
Banks are slow: Some offers don’t work with traditional bank financing or hard money loans. If you have to close quickly to get a great deal, banks and hard money lenders will require lengthy reviews and a lot of paperwork. The seller may be desperate and need your money right away, but they can’t close quickly while waiting for the bank to approve their loan. The seller may accept someone else’s offer even if it’s at a lower price just to get their money quickly.
Cash Flow: You won’t survive the cash flow game if you use your own money. Between acquisition costs, marketing, maintenance costs, repairs, and selling expenses, it’s possible that you’ll deplete your personal funds after your first trade. Having an investment property loan lined up increases your ability to make low-cash deals.
Easy money: Many sellers will need cash now to solve their personal problems and will need a quick “total offer”. Without access to fast cash, you can’t bid and you’ll lose another profitable deal to your competitors.
Exit Strategies: With access to private money, you will have numerous exit strategies available to you as you buy and hold or buy and switch quickly. Private lenders may want you to hold so their money will work for the long term, or they may want you to switch to get their money back quickly with a profit that will be quicker and more profitable.
bargaining power: Having a group of private lenders gives you the power to “cash everything” and use that power to get lower prices or better terms. Your competitors won’t have that power if they only use banks. You can also negotiate flexible terms with your investment property loan. Private lenders are more flexible with payment terms, so it is beneficial for both parties.
Low cost: Private loans are usually much cheaper money than hard money lenders. Hard money lenders typically charge 20-25% in total versus private money 10-15%.
Do not split earnings: You do not have to share or split profits with partners or hard money lenders. Paying 10% to 15% interest on borrowed funds is much cheaper than splitting 50% of your earnings.
No loan limits: Fannie and Freddie have limits on the amount of loans you can take out to purchase investment properties. The limits were recently raised from 4 to 10, but that’s still a limit you don’t have with private lenders.
NO personal guarantee: Banks and hard money lenders ALWAYS require you to personally guarantee each and every loan. Private lenders will not require you to personally guarantee and seek the property as your collateral
You need a credit score: Banks and hard money lenders require minimum credit scores. The minimum scores are now between 650 and 700. If you have this type of score, you’re out of luck. Private lenders will never look at your credit score as they based their investment decision on the property and kidney rates.
Therefore, the work to obtain an investment property loan is the fuel that will ignite your real estate investment business.