One of the first steps to investing in real estate is determining how much money you can put toward investing.
There are many ways that people finance the purchase of real estate. Some include borrowing from friends or family, having a small down payment, credit cards, conventional mortgages, and hard money lenders. However, there's another option to consider when building your real estate investing team.
Should you have a private money lender? How is that different than a hard money lender? Keep reading to learn more about one of our best real estate investing tips!
What Is a Private Money Lender?
First, let's talk about traditional methods of financing an investment property. While some real estate investors can pay cash for a new fix-and-flip opportunity or buy-and-hold investment, many property investors need financing to build a portfolio. Conventional financing means qualifying for a home mortgage through a bank or home loan lender.
However, if you're buying multiple real estate investments, can't wait for the time it takes to approve a loan, or you can't quite qualify for an investment property mortgage, having a reliable private money lender can help you move quickly when a hot property comes your way. Sometimes mortgage companies won't approve a loan for a property that needs significant repairs. If your real estate investing strategy includes house flipping (in addition to or instead of rental properties), you may have already experienced the challenges of traditional home loans.
Private money lending takes place when borrowing funds from an individual investor. In most cases, these individuals are not backed by a bank or financial institution, making it easier and faster to get the funds you need for a new real estate investment. However, while anyone who has funds to lend an investor can be a private lender—including friends or family—it's wise to vet anyone you borrow money from before closing the deal.
How Does It Differ From a Hard Money Lender?
We've talked about the benefits of having a hard money lender on your team, so why does an investor also need a private money lender?
While both types of financing help successful real estate investors when traditional mortgages aren't an option, a hard money lender has backing from a financial entity and often requires a more formal application and approval process compared to borrowing money from an individual funder.
Hard money lenders provide loans ranging from $25k-$2M+ using an asset as collateral (the property). These types of funds are often very short-term (6-24 months), so they may not be suitable for most investors looking to hold on to properties for longer periods of time.
What Else Should a Real Estate Investor Know About Private Lending?
We mentioned taking time to vet an individual before accepting funds for investment properties, but what else should investors consider when partnering with a private lender? Building a go-to partnership with a reliable private funder can be beneficial when building a significant real estate portfolio, but these funds can come with some disadvantages.
Often, private lenders charge high-interest fees than typically found with conventional mortgages or other types of financing. Like hard money loans, these funds can also require repayment within 6-12 months. Depending on your relationships with the lender, they might also require collateral in exchange for investment funds.
However, despite the drawbacks of this type of real estate financing, some of the most successful property investors build a long-term partnership with a go-to private lender. It's a good way for a real estate investor to ensure they have funding options when it's time to move quickly on properties in various markets.
How Can I Find a Private Money Lender?
If you don't already know someone who can lend you the money to buy your next property, how can you find a private lender? Rather than ask your rich uncle to hand over some cash, tap into your network and see who has the connections you need to find the right lending partner. Chances are, even you don't know someone who lends money privately, someone you know knows a lender!
Talk with connections in your mastermind group or local networks, ask friends or family if they know of any private investors, and talk with your other lending partners to find some resources. You can also try a Google search or score LinkedIn for "private money lenders," then research the names you find.
When committing to a private loan, make sure the terms of the deal meet your expectations.
Find Your Next Investment Property With Privy!
Whether you're ready to try a private money lender or prefer traditional investment home loans, you need an investment property to fund! Building a successful portfolio is easier with Privy's platform to deliver potential properties to your inbox. Our software works with your criteria to scour the MLS and find investments that meet your preferences in markets throughout the country.
Property investors can focus on finding funding, making deals, and turning a profit when Privy does the hard work of delivering potential investments to you! Reach out soon to learn more about the Privy Advantage.
Get more tips to build your real estate investing team! Download a free copy of “Assemble Your Real Estate Investing Team: A Worksheet.”
