Finance can be one of the more intimidating aspects that might push people away from getting into real estate investment. But there are alternative options besides proving one’s credit rating in a bank that requires countless documentations and takes months before releasing a loan. Private money lending can be a viable option for real estate buyers who want to lessen the burden of funding more and focus more on improving the property.
Private money lenders are companies and individuals not attached to major financial institutions. They provide loans to other companies and individuals in the real estate industry who are looking to buy or rent property or expand their real estate portfolio. If you are worried that you might not be eligible for loans from larger financing institutions, then you can look into borrowing from private money lenders.
After all, real estate is fast-paced and competitive. It’s important to be able to stay ahead of the game and secure deals in a quick but honest and realistic manner. Because you will be dealing with a much smaller company, borrowing from private money lenders will cut the time from you, require less paperwork, and be willing to negotiate terms of payment.
Here is a quick breakdown of answers for the questions you might be having before talking to a private money lender.
Is it more expensive?
Yes and no. The interest rates may be higher than those offered by banks, but the benefits of saving on time and requirements with the freedom to adjust negotiation terms far outweigh the added interest charge.
The reason for the higher interest rate is because private lenders acquire the funds themselves (from other investors or from their own profits and savings) and have greater risks when lending to borrowers, especially when the borrower has a low credit score or no history of credit.
Are there hidden costs?
Private money lending contracts are a lot simpler to understand than those that come from banks that have a lot of hidden costs and added fees. Typically, only monthly interest is repaid throughout the duration of the payment scheme with a balance paid at the end of the agreement. Penalties may arise if you prepay the entire loan or miss the monthly dues—this all depends on your agreement with the lender.
Isn’t it risky?
It’s only risky if you and the lender do not have the same objectives for the investment. As a borrower, you will want to make sure that the loan will not fall apart, so it’s important to do background checks to make sure where the money will be coming from and if your lender will follow through on the release of the funds. Terms must be clearly stipulated as well in the deed that you sign.
As a borrower, you also need to follow through in your own payment process and make sure you fulfil your end of the deal.
For as long as you use the money in your real estate project in the right way and you establish a good partnership with private money lenders, exploring this type of investment is a viable alternative to having to go through difficult banking loan processes.