Most real estate borrowers run to traditional lending institutions to fund the property they’re eyeing to buy and sell. Banks, government-backed housing agencies, and insurance companies are typically the go-to companies for real estate funding.
However, stringent requirements and the long waiting period have become the major obstacles for most borrowers. And, for buyers eyeing to snag a great real estate deal, time is critical. Alternative funding arrangements aim to quash these challenges. With less hoops to jump through, real estate investor-borrowers are more than willing to take advantage of unconventional lending options.
If you’re an inexperienced real estate investor slash borrower, getting familiar with other lending options are necessary, especially if you have outstanding loans from traditional financing companies. Read to know more about private funding and hard money lending, as well as the benefits and downsides for both investor-lender and investor-borrower. You read that right. In private funding, the lenders and borrowers can be both considered as investors.
What is private funding for real estate?
It takes a lot of money investing in real estate properties. As an investor, you can turn to either conventional or alternative ways of borrowing, whichever is more convenient for you. Private funding is one of the ways you can secure an investment. Often, private funding is hinged on the relationship between the lender and borrower. Most of the time, though, private funding for real estate may come in the form of private equity funds.
A private funding’s major draw is its flexibility. It can be used to finance various real estate projects; from purchasing a rental property, to flipping a home, or as an additional funding for a new property construction. Private money lenders also typically require less documents and a more lenient screening and approval process.
What is hard money lending?
As a type of private real estate money financing, hard money lending is an alternative financing scheme that allows borrowers to use a property as a loan collateral. This means the property being used as collateral can dictate how much the borrower can lend, instead of alternative lenders relying on the borrower’s credit history and other circumstances.
Which brings you to the question; should you get a hard money loan? Truth is, it may not be for anyone. Hard money lending works best for investor-borrowers who don’t have an impressive credit score but own a high-value property. Putting a property up for collateral allows a borrower to access loans that are typically restricted to those with impressive credit ratings.
Similarly, a real estate owner at risk of having a property foreclosed can also make use of this unconventional real estate financing scheme.
As with other private funding methods, hard money lending allows investors to participate in the real estate industry even without going through the length processes of home buying, or keeping and maintaining a property to be included in their investment portfolio.
A private money lender has to set criteria for qualified borrowers, and like traditional lenders, you can be rejected for a loan, too.
What are the benefits and risks of private real estate funding?
Using private money to lend to a real estate borrower comes with its risks and benefits. Below is a list of a few points:
Benefits for the private lending investor
It’s a great way to earn passive income. You don’t have to go through all the hassle of finding, buying, or managing rental properties and other types of real estate. You just need to raise the cash to lend the borrower, and collect regular payments.
Because of the more lenient approval process, high risk borrowers are allowed access to additional financing. This means higher interest rates are imposed on private money loans as compared to traditional lenders. Investors then can enjoy bigger returns, too.
- Who can become a private funding lender?
Being private funding lender is ideal for the following categories of persons:
- A real estate investor who wants to expand his or her portfolio
- A professional who has a high-income career
- An individual who has considerable cash reserves
- A retiree looking for a passive income
Generally speaking, anyone who’s capable of raising a good amount of cash can start lending their private money to borrowers. If you want to become an investor, have someone you can trust, for instance a family member, as your first borrower.
It’s not without disadvantages, though. For instance, the borrower whom you chose to fund may not be as financially savvy as initially thought. And as a result, you may lose instead of earn money.
Additionally, the time and effort you skipped in finding and maintaining properties should be spent on researching for properties investors, and other important factors about the lending process.
Benefits for the private lending borrower
As mentioned, private lenders generally have more lenient screening and approval processes, allowing borrowers to have better access to real estate financing. And, while alternative private funders have their own criteria for ideal borrowers, they’re still less stringent than others.
- Which type of borrowers can avail of private funding?
Additionally, a real estate borrower who’s planning to or in the middle of the following projects look more attractive to private money lenders:
- House flippers: If you’re a borrower-investor who’s into buying cheap houses and fixing it to resell at a higher price, you’ll find that private lenders are life-savers. Conventional lenders don’t usually consider decrepit properties, and take too much time before they could release the cash.
- Rental property investors: Investors who need additional financing for a property rental rehabilitation, can also access private money. Look for a lender who wants to have a steady stream of passive income.
- Developers: These types of investor-borrowers look for idle lands where they can build residential or commercial properties. As time is money in construction, these types of borrowers may not be willing to waste the time and opportunity lost while waiting for cash release. A private funder is a highly-tempting proposition.
Risks for the borrower
The only foreseeable risk to availing a private funding is you may not be able to pay because of the sky-high interest rates. However, if you need cash quickly and for emergency purposes, such as when facing foreclosure, it won’t matter much.
Should you avail of private funding?
Private funding is an alternative way to access funds for your real estate projects. The more lenient and overall faster processing is tempting but it can literally come with a high cost.
If you have an unimpressive credit record but need to have money for a planned investment, fast; consider asking lenders for private money.
Cassandra Adamson is a business management specialist with experience in budget management and business loans. She is an advocate of fintech and other digital business solutions, such as employing IoT, AI, API, and agile management. Cassaandra shares her expertise through her web content article pieces posted in business-related publications.