What is a Private Lender?
A private lender is an individual or company that loans money from investors to fund a real estate transaction using their own capital or capital from investors. Private lenders don’t sell loans to the secondary market and offer a way of gaining loans without having to go through lenders such as banks or the government. Private lenders typically gain loans at higher rates, which can ultimately lead to higher loan rates for home buyers.
Why Use a Private Lender?
For buyers with poor credit, qualifying for a bank or government loan can be difficult. What is a private lender, and how do they make taking out loans quickly? Because private lenders work with the borrowers directly, they are valuable assets to investors because of their different approval requirements and faster pace for financing. When making an offer on a property, it’s expected that the borrower places a down, or initial payment, along with the proposal. Coming up with thousands of dollars needed for purchase can be a huge hurdle. Therefore, working with private lenders can help focus on getting the deal at a faster rate.
However, private lenders have shorter periods of payback because they’re looking for a quick return on their investments. Thus, for those who’re searching for a permanent home or even their first home, private lenders may not be the best options. Those interested in flipping homes, turning broken down homes into places of a potential investment, private lenders provide a perfect opportunity for those interested in real estate investing.
Private Funding For Real Estate
When learning about private funding, one critical aspect of their business is how to raise capital. Capital refers to the balance between assets and liabilities while managing your expenses to build wealth. Private lenders specialize in helping investors build equity over time through quick access to loans and their capital, thus giving borrowers an excellent way to assist in real estate projects.
Investing in real estate can produce higher cash flow, lead to an increase in property value, create equity buildup, and can result in lower tax rates. It’s a sustainable asset in comparison to other forms of investing, such as stocks and exchange-traded funds. Overall, investing in real estate is a type of business, which is done with a deep understanding of finance, can significantly benefit the borrowers’ overtime.
Because of the nature of private lenders, they can vary in terms of expertise and private funding capabilities, so choosing wisely matters.
Types Of Private Lenders
1. Friends and Family
As one of the most common forms of private lenders, this is the primary circle for funding needs. For those who are interested in investing in real estate, borrowing money from friends and family is natural, because they’re the people most inclined to say yes. However, having a private lender with close ties can result in some poor decisions if the private lender doesn’t understand the difference between a good deal and a bad deal, which can lead to deals going sour. In these cases, only go to friends and families that can afford to lose the investment.
2. Colleagues and Associates
For private lenders that you aren’t so acquainted with, having a network that you can go through to attain a loan can also benefit. These are secondary connections and are also an excellent source for raising capital and equity for investment projects. These groups are more likely to say no, can potentially take longer to raise the money, and will need more assurance. Nevertheless, the more friends and family you have in your first circle, the more you’ll have in your secondary and so forth. So, if you need more connections, take part in luncheons, conduct presentations, and spend time with these kinds of lenders to convince them to say yes.
3. Potential Investors
Lastly, potential investors that range outside the circle of friends and acquaintances. These people are most removed from your social network, but also have the most prominent capital pool available, making them a risky, but can significantly improve your prospects in investing. So, what is a private lender, and how do you contact them? Finding networks to connect through can help form these connections, continue contact with them for years to come, and find a stable relationship that will last years to come.
What Types Of Loans Do Private Lenders Provide?
When learning about what is a private lender, you also get to learn about the types of loans they can potentially have. Because they’re not affiliated with any banks or other financial institutions, they can offer ways to learn the ins and outs of the real estate financing business. When working with a private lender, they’ll have their incentives, understand the risks, and will look for the most secure loan investment out on the market. These are typically the kinds of loans your lenders will offer, as they can have networks of information available to you at their fingertips.
Peer to Peer (P2P) Loans
Investors give these kinds of loans to businesses, matching lenders and borrowers and charge a fee for the service. P2P loans have low-interest rates, and approval is quick and easy.
Lines of Credit
Similar to applying for a credit card, credit lines are flexible, allowing you to take up to your credit limit and pay the balance at any time.
With immediate access to capital for a return percentage, the approval rate is superbly quick, but the fees are typically higher than interest rates on most loans.
These kinds of loans are given to established businesses that can demonstrate the ability to make payments on the loan, all based on their revenue, thus making their interest rates and fees higher than most banks offer.
Similar to merchant advances, private lenders provide funding in exchange for a percentage of future profits. These are the most common loans that private lenders use and allow those who are interested in investment projects.
Small business loans are usually guaranteed by the government through the Small Business Administration, with high amounts of money, low-interest rates, and long terms, making them useful for businesses.
How to Get a loan from a Private Lender With Bad Credit
For those with bad credit, private lenders can provide a gateway between you and future capital, and how to do that is the tricky part. There are numerous ways of enticing private lenders, so here are some tips you can use to begin your real estate investment and attain progress in your ventures.
Negotiating Tactics – Speaking the language of your investors is what makes you appear professional and reliable. With negotiation, there are two types of selling tactics you should know.
Hard Sell – Investors will develop a convincing pitch, selling the idea of funding as an attractive deal to private lenders, usually reigning in the third circle. Approaching them with all the necessary details, prove their numbers are correct and seal the deal.
Soft sell – Typically reserved for friends and family members, both located in the primary and secondary circles, it’s about catching the interest of the lender through conversation and other forms of indirect approaches. It’s about making the sell attractive without intimidation.
Online Lenders – Online lenders, depending on the company or person you choose, can be risky, but a rewarding possibility. REI groups and Google searches can give you an infinite amount of resources to find private lenders and provide you with network connections to industry professionals within the business.
Launching Campaigns – Marketing campaigns can help the negotiation process, giving potential lenders a direct connection to you and your business, whether it’s through placing a sign outside your real estate, establishing a mailing campaign, or using LinkedIn as a marketing strategy for connections.
Cold Calls – Lastly, the old fashioned way of connecting with potential lenders deals with making phone calls. While this outlet seems old-fashioned, cold calls can allow you to lay everything out on the table for negotiation and gives your private lenders a first impression of what your business is like, and will enable you to work out the details of a project at a later date.
A relationship with a private lender is a two-way street; while in many cases you’ll need to provide reliable information to show the potential you have, choosing a lender that will suit your needs is what truly matters — inquiring about the loan, asking questions about interest rates and fees, and how they determine the investment. Some private lenders will choose to apply for loans based on the property’s current value, and some will want their loans based on estimated after-repair value, which assesses the future deals of an ongoing project and calculates that into the loan. State and federal laws regulate private lenders, and so the number of credits they have at their disposal is limited. Their interest amounts, depending on the types of loans available, also have some variety, and will depend on the factors present in the agreement. Nevertheless, a successful pitch, a negotiable rate, and confidence will get you the loans you need to begin your ventures in real estate investing.