Are you familiar with the experience of having your bank refuse to lend you money or consider your project too risky for them to grant you a mortgage? It’s a common occurrence in real estate investing. Real estate investors must use their brains to “creative finance” Those who don’t understand the concept and believe that only banks can lend money should be aware that there are many other options! Private lenders are the most common alternative to traditional financing through a financial institution. A private lender? Yes, but not the type you might think. This is not the pawnbroker you see on TV. Private lenders are wealthy people who have capital to grow. In return for capital, it provides hard money loans for real estate investors to finance various projects. It charges a higher interest rate than the bank but also funds projects that are more risky. Why would you do business with a private lender if he is more expensive than the bank? Excellent question! These are five benefits of using hard money lenders for real estate investments.
The terms and conditions of a loan are more flexible than traditional mortgage loans. Unlike conventional mortgage loans, which you take on your FLIP project, or purchase an income property, the mortgages of FIX lenders and FLIP lenders don’t have a formula. Anyone can become a private lender, provided they have the right to borrow a lot. After this, both the lender and borrower must negotiate the terms of each agreement. Each project will have its own terms and conditions, which may vary depending on the project. These terms include the interest rate, repayment period, term, and other terms. A project’s risk level plays an important role in the decision-making process. The private lender can lend you more money and may be willing to amortize your loan for a longer time. Or, they may just refuse to do business. A private lender is a great alternative if you are looking for flexible FIX or FLIP loans.
Private lenders will finance more risky projects: All experienced real estate investors have seen the same thing happen: The bank won’t finance your project due to it being too risky, or because your borrowing capacity is exhausted. The internal rules for Hard Money Loans to Real Estate Investors are very strict. This is so agents don’t lend money to projects that pose too much risk. Many investors then turn to commercial hard-money lenders. Private lenders lend most often to FLIPS projects. These are projects for purchase or quick resale. Avoid financing real estate projects for long-term hold with private lenders as the interest rates will be high in the long term. Because the bank does not like FLIPS projects, 90% of real estate projects funded by private lenders are FLIPS projects. Lenders know that they will quickly get their money back. The great thing about hard money lenders is the possibility of finding a loan through a private lender even if your bank refuses to finance your project. The private lender does not always calculate your borrowing capacity the same as a bank, and is willing to take on higher risk.
How to improve your project’s performance: When you decide to invest in markets or projects, such as real estate or stocks, profitability and return are directly tied to how much money is invested. You can make extraordinary returns if you finance your entire project through a private lender, and then use the profit of others. For example, if you invest $ 20,000 to finance a $ 100,000 project (the bank requires 20%), you will get a 52.5% return on your capital. If you take out a loan of $200,000 from a private lender with a 10% down payment of $20,000, your return on invested capital is 125%. While a private lender will charge more interest for a FLIP project than he will, the rate will not be much different.
You can work on multiple projects simultaneously: As your real estate investing career grows, it is common to want to take on more than one project at once. This is when things get complicated between you, your bank and yourself. If your income has not significantly increased, the bank may refuse to lend you simultaneous funds to help you start new projects. Private lenders can be a valuable resource. First, you can get a loan from your bank. Then, you can go to your lender and ask for a second loan at a higher interest rate. You will be able complete both your projects if you offset the risk from your private lender. The advantage of the private lender is its ability to not analyze risk the same as the bank. This can work in your favor if you need multiple FIX or FLIP loans.
Establishing a relationship of trust between you and your lender You may return to a private lender who trusts and funds your projects. If you have dealt with him many times, your projects continue to go well, and your lender realizes the profits he is owed, you will become a close friend to him. He makes money by your risk, and you make money by his money. You will have a great relationship, and if you don’t, it is worth changing your lender. This can result in better long-term borrowing terms. If you’ve been working with the same lender for five years and have paid well, then the bank could offer a lower interest rate because you are a good payer. This benefit is not offered by the bank and your interest rate will remain unchanged, even though you are the highest payer in the country. The FLIP and FIX lenders are more humane and place more emphasis on subjective factors. A relationship of trust can help you get more loans at a lower rate and with better terms.