Have you ever had your bank refuse you a loan because it finds your projects too risky? It is a very common thing to experience for real estate professionals, and they have to come up with an idea to do what is called ‘creative finance’. If you don’t know what this means and if you think that you can lend money from banks only, then that’s not correct. There are other ways as well, a private lender being the most popular one.
A private lender is a wealthy person who grants loans to individuals to finance their projects in the form of a personal or mortgage loan. In exchange, he/she gets a return on its capital. However, the interest rates charged by a private lender is higher than banks, and if that is the case, why should you use a private lender then? Let’s find out the top advantages of doing business with a private lender.
Top 5 Advantages of Taking Loan From a Private Real Estate Lender:
Terms & conditions of the loan are much more flexible
A mortgage loan from a private lender doesn’t have a set formula like it is in traditional mortgage loans. Indeed, anyone can become a private lender provided his/her bank balance is in millions. Once you find a private lender, negotiate the best terms of agreement with the lender consisting of the loan term, interest rate, and repayment periods. Although the terms vary from project to project, these three points remain static. The level of risk of a project also plays a big role in the process. A private lender is a lot more flexible compared to banks, hence lending you more money and agreeing to amortize your loan over a longer-term.
Risky projects? No problem for private lenders
Almost all experienced real estate investors have come across the same situation at one time or another: the bank refusing to finance your project because of the risks involved or your exhausted borrowing capacity. Indeed, the internal rules relating to mortgages are well defined and often stringent to prevent agents from granting loans to projects with a high level of risk. Due to this reason, many people opt for private lenders.
A big advantage that private lenders have is that it will grant you a loan no matter if your bank refuses to finance your project. Another notable feature of getting a loan from a private lender is that your borrowing capacity isn’t calculated in the same way as banks do, plus a private lender will not shy away from taking higher risks.
You can improve your project’s performance
As you decide to invest in a real estate project or the stock market, keep in mind that the returns from the project are directly linked to the money invested in it. If you decide to completely fund your project with a private lender and use other people’s money for profit, then you have an extraordinary return since you are making money with $0 coming out of your pockets. The rate of interest is obviously higher when taking a loan from a private lender, but if yours is a flip project, then it won’t make much difference.
You can focus on multiple projects simultaneously
When you get the hang of it and your real estate investment career begins to flourish, you may want to take on several projects at once. This is when the situation gets complicated between you and the bank. If you want to start new projects, your bank will continue to calculate the borrowing capacity in the same way and may refuse to give parallel loans if your income has not grown exponentially. This is when your private lender can become a real asset for you. Take your first loan with the bank, but then make sure to get the second one from a private lender if you wish to carry on with both of your projects. A huge advantage of joining hands with a private lender is the calculation of risk, which isn’t done in the same way as banks would do.
A strong relationship grows between you and the lender
If you find a private lender who agrees to finance your projects, you may see him coming back to you for your future projects. If your business gets onto the fast lane and the lender is also making money, then you will definitely share a great rapport with your lender. You make money with your lender’s money, while he makes it with your risk. Undoubtedly, you will develop a great relationship, which can lead to better borrowing terms in the medium to long term. Your bank won’t offer this advantage and remains frozen, even if you pay on time and never defaulted. Private lenders are much more human and place more importance on subjective factors. A good relationship with a private lender will let you get more loans at better interest rates and with less complicated terms & conditions.
Finally, private lending as a resource for alternative financing for your short-term projects is a little riskier. Unless you are a financial whiz, choosing to mortgage an income property with a private lender is a bad choice since it will cost you huge amounts of interest. There is another choice– go with a mortgage broker. Banks do not want you to read about this other choice you have which can save you thousands on closing costs and interest rates.