Private Lenders: The Most Important Person In Your Business?

Private lenders are the single most important persons in your real estate investment business.

Why?
Well, a couple of years ago, you may have been able to get relatively inexpensive loans from your local bank or saving & loan. But those days are gone as traditional lenders are tightening lending practices and, in some case, have gone out of business. As a real estate investor you need access to cash that is both affordable and readily available when a good deal presents itself. Instead of looking for money from banks, saving & loans or even hard money lenders who charge high rates of interest, huge fees and two month closings why not consider private lenders as a far better alternative.

Who Are Private Lenders?
Private lenders can come from all walks of life. They may not even know the first thing about real estate investing but are simple looking for better returns on their money than they are currently getting with bank CD’s or money markets. Private lenders can be local business people, doctors, attorneys, accountants or even in some cases may be retirees with extra money to invest.

Private lenders are looking for investment returns in the 9% to 15% range. Most bank CD’s or money markets are only paying 3% to 5% and private money gives them almost double their current returns. Additionally, private lenders want to be secured by a lien on local rental real estate properties. Most private lenders want to be able to actually see the property that is securing their investment and, in fact, will most likely drive by and see the property from time to time.

Private lending is the process of borrowing money from private lenders (not banks or financial institutions) at rates higher than those private lenders can normally achieve from banks or savings & loans from CD’s or money markets and secured by local rental real estate.

Do Private Lenders Come in Different Forms Private lenders generally come in two forms. First mortgage lenders will lend up to 90% to 95% of the purchase price and expect you to fund the balance or use another private lender to fund the balance. Or second mortgage lenders who will lend you the 20% to 30% down payment you need after you have arranged a bank loan for the first 70% to 80% of the purchase price.

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Difference Between Subprime And Hard Money Lenders

Often people tend to get confused with terms such as subprime loans
and hard money loans. Both these loans are specialized to serve customers who are unable to obtain credit from traditional money lenders such as banks, credit unions and mortgage companies. Although both these terms can be used interchangeably, there are certain subtle differences between subprime and hard money loans:

Subprime Lenders:

Subprime lenders are specialized in providing loans to customers at higher interest rates compared to other loan programs. Customers with a bad credit history or those who are unable to make any down payment or those who are not having a steady income flow can opt for these loans. Interest rates are determined based on the financial situation of the borrower. Greater the risk, higher will be interest. Interest rates can either be fixed or adjustable. Apart from this, subprime lenders also charge exorbitant fees for providing a loan. Closing costs are also higher when applying for a subprime loan.

Hard money lenders:

These are usually private individuals and small local companies that provide loans to customers who are unable to gather credit from even a subprime lender. One example is the situation where borrowers are facing the risk of foreclosure due to their inability to pay back a subprime loan. In these situations, a hard money lender can be approached as a final alternative to obtain cash and repay the previous mortgage. Loans are provided based on the equity in the property.

However, even hard money lenders charge high interest rates and the repayment period is usually short. Hard money loans are fast and easy to obtain because the lenders do not require any verification of credit records of the customer.

Are you familiar with the term Hard Money? Hard money is money loaned to you by private investors. These private investors can be from anywhere but normally the lenders would want to work within their own state, so if you're from California than you want to find an investor in California.

So what type of loans the hard money lenders will loan money on? The first type of hard money loans lenders are offering is construction loan. In construction, the hard money lender will loan the borrower the money in stages.

Example: You own a piece of land in Los Angeles, california, on that land you want to build a house, you have the plans approved by the city of los angeles and you're all ready to go. Now you need a hard money loan because it will be easier to qualify and get the money you need for the construction. You will call a hard money lender and give your information, the approved plans, your financials, your budget for the construction (you can get it from your contractor), then lets say the lender agrees to loan you the money you need, but the way the hard money lender will loan you the money is by stages, and the stages are:
When your Contractor finishes the foundation, the contructor will get paid after inspection that is done by the lender $10,000 for the foundation work, Than when your electrician finishes the electricity in the house, than the electrician will get paid after inspection is done by the hard money lender another $7000. You understand the concept? All contructors will get paid by the hard money lender by the completion of the construction.

Why the hard money lender do that? Because he want to have control of the money, private investors know the risks they're taking but they're still willing to take these risks only if they have 100 percent control of the money.

Why hard money lender will choose to Loan money to investors and not homeowners? This is a very good question that a lot of people should know the answer for. The hard money lenders would not want to have to take a homeowner out from his home because he did not make the payments, but with investors it 's different, it 's 100 percent business and that 's what the lenders want, business. What type of properties hard money lenders will loan money on? A hard money lender will loan money to many type of properties: single family residents, condos, townhouses, apartment buildings, hotels, motels, office buildings, shopping centers and many others. What hard money lenders don't like, it 's land. It will be very hard to find a hard money lender that will loan you money on a land, and the reason is because there is no income to lands, maybe you can get a hard money loan on a golf course or maybe a land that you about to develop something on, but raw land- forget about it.

Today hard money lenders loan more money to commercial real estate investors rather then to residential investors and the reason is less risk. Today the residential market is not going up, values of homes are actually going down by more than 30 percent, and every day more foreclosures are coming out on the market, so the hard money lenders are smart enough not to participate in taking risks with homeowners.

Commercial real estate still very competitive, investors are still buying properties, remodel properties and build new properties. The commercial real estate market is still alive just like it was in the residential market 3 years ago, and hard money lenders are still in the game, and now they're busy more than ever because the banks don't loan money that easy to borrowers. So commercial properties rather than residential properties, and construction Loans. Good luck

About Author:
Pauline Go is an online leading expert in finance industry. www.madalcapital.com

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