Alrighy, creating a robust investment portfolio is all about finding the right deals and getting funding from trusted sources.
With big-ticket purchases like real estate deals, we think that considering private money lenders is a very sharp tool to keep in your REI toolkit.
So what is private money lending? (Here’s a list of the best private money lending books today for more context.)
And is it right for you?
So, we’re covering all the high-level deets about this potentially very useful funding source.
Let’s get to it!
What Is a Private Money Lender?
So, you’re exploring your lending options in search of one that will give you money without absurd interest rates and impossible terms. Enter private money lending.
Private money lenders are often private organizations or wealthy individuals.
This form of lending is particularly common when it comes to real estate investments. (Hope that doesn’t seem like mansplaining or Captain Obvious chatter!)
And keep in mind that this type of lending isn’t nearly as regulated as traditional lending…
Even though private money loans don’t have the same regulations as traditional ones, they still need to follow state laws, which does place a limit on the amount of interest that a lender can charge.
Now, this isn’t to say that interest rates are great with these loans. You’ll still likely pay around 15%-20% in interest.
The qualification process is pretty different for a private money loan than, say, a traditional loan from a bank. Private money lenders often focus more on whether a deal has a sound financial basis as opposed to what the borrower’s current credit score is, for example.
See, when you buy a house with a traditional mortgage loan, the terms are typically 15-30 years, which means that you have that amount of time to repay the loan.
Private money loans are similar to bridge loans, which means that the terms are often short. In most cases, terms for these loans range from 6 months to 5 years.
If you want an even deeper dive on private money lending, check out these books …
There are other differences in the types of lenders, so let’s check those out a bit more…
What’s the Difference in a Private Money Lender vs. Hard Money Lender vs. Traditional Bank Lender?
The types of lenders you may need to borrow from when trying to invest in real estate include:
- Private money lenders: A private money lender is usually a friend or family member who’s willing to give you cash to invest in a property. But, companies and other investors can also act as private money lenders.
- Hard money lenders: A hard money lender is like a private money lender, but they’re not the same. Hard money lenders are often companies that are acting as private money lenders with stricter requirements and higher fees/interest rates.
- Traditional lender: A traditional lender is a bank or credit union that offers loans at reasonable interest rate. But, you’ll need to meet some strict guidelines to qualify for a traditional loan.
How to Use a Private Money Lender for RE Investing?
Private money lending is a piece of the REI puzzle. When you’re looking to invest in real estate, you’ll likely find it challenging to locate a bank or credit union that’s willing to give you a short-term loan.
Good thing is, private money lenders often find this type of loan more acceptable… as long as you pay a higher interest rate.
There are several ways you can use private money loans to invest in real estate.
Like what?
Whelp, you can buy a property with the funds and rent it out. Hello, passive income and cash flow. And, you’ll repay the lender with that rental income you earn.
You could also use the money for a “fixer-upper,” which gives you a great opportunity to renovate and make a profit when you resell the property. In this scenario, you’ll repay the lender when the property sells.
When you’re considering investing in real estate, private money loans may just be your best option.
Who Are Private Money Lenders?
Like we said above, private money lenders are often friends or family members who are willing to give you anywhere from a couple hundred dollars to a few thousand.
It might be your dentist, aunt, or even your car dealership owner pal. Don’t fall into that trap of limiting beliefs when it comes to thinking about who can be your private money lender…
You never know till you ask.
Who isn’t a private lender? It’s most likely NOT going to be a bank or licensed lending institution.
How to Find Private Money Lenders?
To find private money lenders, you just need 2 steps and some tenacity!
- Ask your friends or family members if they’re willing to loan you some money for your investment. (They’ll earn some profit from the interest, so it’s a win-win.)
- Build a network of fellow investors, real estate agents, private investors, and title companies — referrals are an awesome way to land a private money lender.
The beauty of private money lending is that it’s a viable option when traditional lending isn’t for these deals.
As long as you keep the higher interest rates in mind, you can likely secure a private money loan even if your personal credit isn’t in great shape.
Wrapping Up How to Find a Private Money Lender
Look, no matter what type of funding you’re looking for, you need to research every deal and vet every potential private money lender.
With the right amount of prep, you can avoid making a costly mistake.
So, start by making a list of fam, friends, your circle of influence, acquaintances, and industry folks you could approach for private money lending.
Perhaps you just might use a private money lender for your next REI deal.
If you’re looking for more info about private money lending, check out these private money lending books!
