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Friday, January 13, 2023

What Is Real Estate Gap Funding? Bridge Loan? Will it work?

Real estate gap funding is essentially an interim loan used to temporarily provide financing for an individual until they can secure a more permanent solution. Otherwise known as a bridge loan, gap funding is traditionally used to "bridge the gap" between the moment a borrowed money and when they can secure a long-term loan.

Due, in large part, to their short-term nature, gap loans are traditionally used by borrowers who are simultaneously waiting for long-term financing to clear and need money to cover immediate expenses. However, it's a tool for anyone who needs access to capital while waiting for a subsequent loan to transpire. As a result, more and more real estate investors are starting to take taking lending and the benefits it may provide between deals.

GAP FINANCING FOR REAL ESTATE

Most real estate investors will rely on private or hard money loans for impending deals. However, it's uncommon for most private and hard money lenders to cover the entire cost of the purchase and rehab cost example, they will only lend a percentage of the purchase price or after-repair-value (ARV)—usually somewhere around 70% of the home's value. As a result, most borrowers will need to secure additional capital; that's where gap funding comes into play.

Real estate gap funding can make up for the shortcomings of most hard money lenders. But, more importantly, gap money may cover the difference between the original hard money loan and the remaining cost obligations. That means gap funding for real estate investors may cover the rest of the acquisition costs and the expenses incurred from rehabbing, marketing, and selling the property.

It is worth noting, however, that g. However, typically coincide with more expensive rates than their private and hard money counterparts. Since gap loans are technically a second position (behind the original loan), they'll compensate for the added risk with higher rates. Additionally, gap funding lenders may require borrowers to hand over a percentage of the deal's resulting profits. While gap funding has helped countless real estate investors carry out deals, they may not otherwise have had the chance to, it must be used conservatively.

GAP FUNDING PROS

Gap funding serves a specific purpose and is best suited for investors flipping a high volume of properties. That said, there are other benefits investors will be very happy to hear:

Gap funding is tailor-made for high-volume rehabbers, as it is ideal for those who fully intend to maintain several projects simultaneously. More specifically, gap funding mitigates the risks one may encounter from a delayed sale or any instance that unexpectedly slows down the rehab process. With gap funding, the need to wait for one deal to close before starting another becomes obsolete.

Gap funding for real estate investors may cover the difference between hard money loans and the remaining acquisition costs of the subject property. As a result, gap funding makes it possible for many investors to acquire deals they otherwise wouldn't have been able to.

Gap money can help investors fund more than the acquisition of a property; it can be used for rehab costs and any costs incurred from trying to sell and market the home.

Gap funding has proven very useful for investors who want to remain in a more liquid position.

GAP FUNDING CONS

Despite how helpful gap funding has proven to be for investors, it could be more situational. While it may serve as a great source of interim financing, there are some drawbacks investors need to pay particular consideration to:

The short-term nature of gap funding could be better for investors attempting to flip a single deal. The added costs are typically meant to meet the needs of those who intend to flip a high volume of properties simultaneously. Therefore, the cost of a gap loan may not be worth the price of admission for those who won't use the funds under the right circumstances.

Due to the increased risk facing gap lenders, investors can expect to pay more interest. Typically, the rate will be 10-20% higher than traditional mortgages.

While not standard, some gap lenders will request a percentage of the proceeds from the sale of the house.

HOW TO GET A GAP LOAN

Receiving a gap loan—not unlike almost every other source of funding—will require investors to decide whether they want to pursue traditional or alternative forms of funding. If for nothing else, gap loans are made available from both institutionalized banks and private money lenders. Those who elect to borrow from a traditional bank will need to apply, much like a traditional loan. Those who would instead work with private or hard money lenders will need to attract interested investors. Since gap lending is technically riskier, investors must convince the gap lenders that their investment would be worthwhile. Unlike a hard money loan, the money received from gap lenders is more asset-based than anything else. That means the better the deal, the more likely they will lend the money.

Gap Lending And Real Estate

Gap lending and real estate investing go hand-in-hand. Better yet, gap lending is the perfect financial safety net for those who need to keep current projects going or don't want future projects to be put on hold because of current delays. Gap funding, for example, may help those who have spent all the money from their original hard money loan but still need more to complete the rehab. So instead of delaying the project and risking losing profits, investors may secure gap funding to finish renovations. Sure, the loan will come with added costs, but they are well worth the price of admission if they help see a deal through to completion.

WHEN SHOULD YOU USE GAP FUNDING?

Real estate gap funding has proven invaluable to countless investors. Quick and easy access to cash can't be underestimated, especially in a market as competitive as today. It is worth noting, however, that real estate gap funding isn't necessary for every deal. But, not unlike every other type of funding, there is a time and a place where gap funding makes sense. More specifically, gap funding should be used when:

High-end projects are more likely to realize sizable returns.
Investors want to maintain more liquidity.
There isn't enough cash on hand to close a deal.
Transitioning to a bridge loan can reduce interest payments from the initial loan.
Cash reserves are needed to complete any unfinished construction projects on the subject property.
Interest payments are building up due to the deal taking longer to close.
Investors need to keep enough cash on hand if another deal presents itself.

GAP FINANCING COSTS

Gap funding has proven to be a valuable tool for securing temporary financing. That said, the optionality awarded by gap financing doesn't come without a price; it's usually more expensive than its traditional counterparts. Interest rates on gap loans, in particular, can range from 10% to 20% (depending on creditworthiness). Outside of higher interest rates, borrowers can expect to incur the following costs:

Administration Fees
Appraisal Fees
Escrow Fees
Loan Origination Fees
Notary Fees
Title Policy Fees

SUMMARY

Gap funding has developed a reputation for supplying borrowers with immediate access to capital. It is worth noting. However, that gap funding is more than a source of money; it's a tool used by countless investors to facilitate deals they may have otherwise had to pass on. That said, gap funding isn't without its caveats; there is a right and a wrong time to use it. Therefore, it's in everyone's best interest to learn about gap lending before committing to it.

Equal Housing Opportunity. This is not a Good Faith Estimate and this is not a Guarantee to lend and should not be considered as such. Costs, rates, estimates and terms can only be determined after completion of a full application. Actual payments will vary based on your individual situation and current rates. APR for loans vary from 7.99 - 29.5% and is based on Credit Score, Down Payment, LTV, Income. Mortgage rates could change daily. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of all loan programs are subject to change without notice. Level 4 Funding LLC, 22601 N 19th Ave Suite 112, Phoenix AZ 85027, 623-582-4444 NMLS 1018071 AZMB 0923961 This e-mail is for the exclusive use of the intended recipients, and may contain privileged and confidential information. If you are not an intended recipient, please notify the sender, delete the e-mail from your computer and do not copy or disclose it to anyone else. Your receipt of this message is not intended to waive any applicable privilege. Neither this e-mail nor any attachment's establish a client relationship, constitute an electronic signature or provide consent to contract electronically, unless expressly so stated by Dennis Dahlberg RI/CEO, Level 4 Funding LLC, in the body of this e-mail or an attachment. To the extent this message includes any tax or legal advice this message is not intended or written by the sender to be used, and cannot be used, for legal or tax purposes or advice.

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Home Renovation Expectations You Should Know

Homeownership comes with a host of responsibilities.

Chief among them is maintaining and improving your property.

When it comes time to renovate, there are a few things to make the process as smooth as possible. Level 4 Funding private hard money lender has put together a list of expectations you should have for your home renovation.

1. Know the Different Types of Elements in a Home Renovation

Any home renovation has three main elements: cosmetic, mechanical, and structural. Cosmetic renovations are strictly aesthetic and don't require any significant changes to the property. Mechanical renovations are changes that improve the functionality of your home, such as installing central air conditioning or updating the plumbing. Structural renovations are changes that impact the load-bearing structure of your home, such as adding an addition or knocking out a wall.

2. Include a Home Office in your Plans

Adding a home office to your home renovation can be a great way to create a functional and stylish space. The first step is to choose the right location for your home office. Once you have found the perfect location, it's time to plan the layout. Decide where to put your desk, chairs, and any other furniture.

When selecting furniture for your home office, it's essential to choose stylish and practical pieces. If you're looking for a way to make your home office more comfortable, try this: instead of a traditional desk and chair, set up a standing desk. This way, you'll be able to move around more while you work, and you won't have to worry about sitting in the same position for hours at a time.

Finally, add some personal touches to make your home office feel like your own. Hang some art on the walls, add a rug or throw pillows for extra comfort, and use fun and unique storage solutions to keep your space organized.

3. Choose the Experts to Do the Job

Not all contractors are created equal. When selecting who will work on your home, vet them carefully by checking references and reading online reviews. Once you've found a few candidates you're comfortable with, get bids from each before making a final decision.

4. Set a Working Schedule and Deadlines

Before work begins, sit down with your contractor and agree on a schedule and project. This will help ensure that the work is completed on time and within budget.

5. Estimate the Budget and Other Costs

In addition to the cost of materials and labor, there are other costs associated with renovating your home, such as permits, inspections, dumpster rental, and storage fees. Make sure to factor these additional costs into your budget, so there are no surprises down the road.

6 . Selecting Estimating Apps Used by Contractors

Once you've settled on a budget for your renovation, it's important to select estimating apps used by contractors so that you can track spending and avoid going over budget. Understanding the estimating apps or software your contractors will use is important. This can help you to manage expectations and ensure that your project stays on track.

There might be an app designed to help electricians calculate the labor and materials needed for a job, create and send estimates, and accept online payments. Ask about their estimating software if you're working with an electrician on a home renovation. Try this option, which will help you understand the costs involved and keep your project on budget.

7. Insure Your Home When Your Renovation Is Complete

Be sure to update your homeowners' insurance policy once the renovation is complete so that your newly renovated home is adequately

protected.

So, there you have it! Our top tips to help ensure a smooth home renovation. By being aware of the different types of elements in a renovation, setting up a dedicated workspace, choosing experienced experts, and estimating all costs upfront, you can avoid many of the common pitfalls that often lead to stressful renovations.

The Best Guide To Financing Investments A Real Estate Investor ’s

Private hard money lenders are the most important people to establish a relationship within the real estate industry – at least if you want to run a sustainable business. Whether you are a new real estate investor or a seasoned veteran, chances are you will want to scale your business sooner rather than later. However, volume isn't contingent on skill alone; you must bring something else to the table. There is one more piece to the puzzle that every successful real estate investor must find on their own: funding. That said, any hopes of completing more deals would depend on building relationships with those that have the necessary capital. There are exceptions of course, but private hard money lenders are a critical component to any real estate investor's arsenal.

Private hard money lenders are integral to the growth of every new investor. They essentially provide the confidence and funding required to complete more deals. Of particular importance, however, is the liquidity private hard money lenders can offer investors and their businesses. Additional funds insulate people in our industry from risk and allow them to diversify their portfolios, at least more so than without private or hard money lenders getting involved.

Both sources are certainly worth their own considerations, but investors are advised to be able to differentiate between the two. To help you understand the differences between private money lenders and hard money lenders, my partners over at CT Homes and I have provided the following:

Breaking Down Private & Hard Money

Funding Deals With Private Money

In their simplest form, private money lenders are those people with the means and intent to invest capital. Consequently, anyone with a little extra money and an interest in what you do may be typecast into the role of a private money lender. It is up to you, however, to see to it that the convergence between your business and their interests takes place.

It is important to note that private money lenders are just as interested in working with you, as you are interested in working with them; it is really the quintessential symbiotic relationship. Both sides stand to gain something from every deal that is struck. In return for interest on their investment, private money lenders are entirely capable of bringing speed and efficiency to every transaction. Additionally, your leverage will increase exponentially when you offer to purchase a property with private-cash funds.

It is not uncommon for the funds from a private lender to go towards the purchase price of a property and subsequent renovation costs. The lender, however, will receive both the mortgage and a promissory note at the time of closing. Think of this as their insurance policy. The investor, on the other hand, will proceed with the renovation and put the funds to work. Following the completion of the rehab and its inevitable sale, the lender will be given their principle plus interest payment, and the borrower will collect what's left.

As I mentioned before, private investors can benefit immensely from investing their own capital in the ventures of others. First and foremost, their money will work on their behalf, coming back with interest on top of the principal investment. Their investment is also protected, as they will receive the deed and promissory note as a form of collateral. In fact, private money lenders are awarded more safety than many other investment vehicles can boast.

At the cost of somewhere between six and twelve percent interest on the money borrowed, real estate investors will be given the opportunity to close on more deals in a shorter period. What you pay in interest comes back in the form of volume and efficiency. It is truly the definition of a win, win scenario for both parties involved.

Often, private money lenders tap into their own bank accounts to fund a deal. That said, you won't have to wait an extended period and can move quickly on time sensitive deals. Consequently, traditional bank loans can offer nowhere near the efficiency of a private money loan.

Funding Deals With Hard Money

It's no secret; savvy investors know that they need to complement their private money sources with a hard money lender. That said, I could argue that a hard money lender is the most important person you will work with on a project at any given time. Not unlike private money lenders, hard money provides short-term, high-rate loans, and will also typically cover the cost of purchase and rehab expenses. However, hard money lenders are typically more organized and semi-institutional. Perhaps even more importantly, however, they have been licensed to lend to investors like yourself.

Hard money funding is typically distributed in draws against the work being done. It is, therefore, relatively common for a hard money lender to set up a payment schedule for completed work.

It is also important to note that the term "hard money" does not imply a degree of difficulty in acquiring said funds; in fact, it's quite the contrary. While the terms and criteria that accompany a hard money loan can be extensive, they are typically easier to overcome and more reliable than your standard institutional lender. If for nothing else, receiving hard money approval is easy in the face of a promising asset. You see; most hard money lenders make their decisions based off the asset in question. It isn't until after the home has been deemed promising that they will even see if the borrower qualifies. In other words, the more promising the project, the more likely you are to receive a hard money loan.

While hard money is certainly more expensive to borrow, it is more reliable. That said, it is not subject to traditional credit guidelines (the same ones that protect banks). Instead, fees for borrowing hard money are often delineated in points (three to five to be exact). Points represent an additional upfront percentage fee based on the loan amount. It is important to note that these fees are not universal, and different hard money lenders will bring different terms to the table.

Subsequently, hard money lenders are trying to mitigate risk by increasing interest rates, thus charging investors more for their services. But that increased rate is more than worth it, considering investors will be able to move on deals much faster than they would be able to with a traditional loan.

It is rare that a hard money lender will fund an entire deal. It is more common that they will only fund a percentage of the purchase price or the after-repair value (ARV) – usually, around 70 percent. Also, hard money lenders tend to favor deals that take less time. Having said that, it is common for the duration of a hard money loan to top off at 12 months. If your deal looks to be lengthy, you may need to side with a private money lender, or someone willing to fund your project for an extended period.

In the end, chances are a hard money loan is your best bet to secure a deal with a great profit margin. While five points may sound difficult to overcome, sometimes the profit margins awarded to those who can close on a home quickly are well worth the investment.

Even with all of this in mind, investors are still advised to use caution when working with a hard money lender. I encourage you to have multiple exit strategies lined up in the event something unexpected happens.

Private hard money lenders have become a trusted source of funding for real estate investors on nearly every level, regardless of their experience. Both hard money and private money, for that matter, have become the backbone of any successful real estate entrepreneur. You simply can't beat the speed and efficiency they have to offer. While they may come with a heftier price tag, I can assure you their positives greatly outweigh their negatives.

For More Information On Private & Hard Money Lending:

If you are interested in how to find private money investors that may be interested in teaming up with you on your next project. That way you won't have any problems finding funding for your next deal. Are you ready to start working with private hard money lenders?

Friday, September 16, 2022

Your Guide to How Owner-Occupied Hard Money Loans Work

Owner occupancy hard money in Arizona means a borrower will use a property as their primary home.

Lenders use this distinction because they want to know whether you'll be living in a property, renting it out, or selling for speculation "spec" purposes. Renting out properties typically carries more risks to traditional lenders, which is why they seek this information.

There also are Arizona owner-occupied business loans, where you use the loan to improve or expand your business. Traditional hard money lenders in Arizona offer both types of loans, but many borrowers needing an owner-occupied loan don't qualify for conventional loans.

For these borrowers, an owner-occupied hard money loan can be the answer. Hard money lenders make borrowing simple, based on common sense and the deal's merits. Learn how borrowers can qualify for an owner-occupied loan from Applewood Funding Group, the leading Arizona private money lender.

What is a Hard Money Loan?

Private investors, rather than banks, fund hard money loans. Typically, they offer borrowers short-term funds for time-sensitive projects such as real estate investments or house flipping. But hard money lenders such as AppleWood Funding take loans to a higher level.

Bottom of Form

Applewood Funding is a full service mortgage banking firm specializing in owner-occupied private money loans. The goal is to offer Arizona borrowers a valuable alternative to institutional financing. Applewood Funding offers quick funds for short-term projects and long-term owner-occupied consumer loans ranging from 20 to 30 years.

Arizona Hard money loans also help consolidate debt and improve credit, acquiring second, third, or fourth mortgages and cashing out on properties with equity to finance business deals and improvements.

Need assistance solving legal or estate issues? Consider an owner-occupied hard money loan for:

o Legal or divorce settlements

o Dissolving a family trust

o Settling estate inheritance issues

o Resolving probate issues

o Purchasing or refinancing properties with deferred maintenance or safety issues

o Paying off a bankruptcy

They also are an ideal option for self-employed borrowers who banks reject for not having solid credit or enough proof of income.

Applewood is one of the only Arizona hard money lenders offering borrowers owner-occupied consumer-purpose loans in addition to business-purpose loans.

Owner-Occupied Hard Money Loans

An owner-occupied hard money loan offers borrowers many finance options. While traditional lenders can provide these types of loans, the requirements are often too strict and unforgiving. In addition, many borrowers have unique situations and need unique opportunities to give them the funding they seek.

Business Purpose vs. Consumer Purpose Hard Money Loans

Why are consumer-purpose hard money loans so rare in Arizona? This is a result of the 2008 recession and the Dodd-Frank Wall Street Reform Act, signed in 2010. This act aimed to protect taxpayers and consumers from investment risks taken by banks.

After Dodd-Frank was signed, banks had to work hard to prove that borrowers understood loan risks, and they had to verify a borrower's credit history, income, and job status.

Most Arizona hard money lenders stopped offering owner-occupied consumer loans due to the new regulations, even if they continued to provide business-purpose loans. But Applewood Funding recognized this need was still very much alive.

The difference between consumer-purpose and business-purpose loans lies in how the borrower uses the loan.

Borrowers can use consumer-purpose loans for:

o Purchasing a primary residence

o Refinancing their home

o Remodeling their home

o Acquiring a second, third, or fourth mortgage

o Consolidating debt

o Operating as a bridge loan

o Settling legal, estate, or probate issues

Business-purpose loans for:

o New business start-up costs

o Purchasing or improving a property

o Operating capital

o Purchasing new equipment

o Buying out your partners

Qualifying for an Owner-Occupied Hard Money Loan

With Applewood, qualifying for an owner-occupied hard money loan is simple. First, the team will want to see a short submission story and the property address. Beyond that, deals are examined on a case-by-case basis, so requested documentation can vary but remains uncomplicated.

Our team may look at a borrower's assets and bank statements to make our decision. The process is common-sense driven, and we strive to make those fantastic deals possible for borrowers when banks have determined they are too complicated. Banks often run into seasoning issues, requiring a borrower to have six months to two years of income history. We can qualify you for a loan even if you just got a job yesterday.

Owner-Occupied Second Mortgage Hard Money Loans

Applewood Funding offers owner-occupied second mortgage hard money loans for business or consumer purposes. By using the equity in a borrower's current home. Consumer purposes of paying off high-interest debt or for legal settlements. Business purpose can be used for business growth opportunities.

o Property types include:

o Single-family or multi-family residence

o Commercial, construction, industrial, or land

o Hard Money Loans vs. Conventional Mortgages

While Arizona hard money loans are simple, straightforward, and quick, conventional mortgages from banks have many more requirements. The strict documentation required for a chance at approval includes:

High credit score

o Low debt-to-income ratio

o Proof of income and tax records

o No bankruptcies or foreclosures

There used to be more options for borrowers in the form of non-qualified mortgages, but these dried up due to COVID-19's effects on the marketplace. The ideal choice for unique borrowers is a private money loan.

Owner-Occupied Hard Money Loan Example

Hard money loans in Arizona are ideal for many Arizona borrowers and situations. The speed, flexibility, and common-sense approach can make growing businesses and families much easier and less stressful.

An Arizona hard money loan can be the best choice if a borrower is looking to purchase their first home but can't go the traditional route. And if they need to get a second mortgage to gain access to precious equity, it can be a life-changing way to get their lives back on track by redeeming their credit and cracking down on old debts. In addition, business owners can have more freedom to expand and make processes more clean and efficient.

Plus, borrowers can acquire a loan by negotiating terms directly with the lender rather than adhering to strict credit and income requirements. Applewood also offers non-owner-occupied hard money loans, which are helpful for house flippers and real estate investors.

Applewood Funding can provide:

o Same-day approvals

o Closing in as fast as seven days

o Common-sense underwriting

Our team is dedicated to using an honest, straightforward approach to all deals and building long-term relationships with our brokers and borrowers, ensuring long-term success for all involved and a lifetime of great deals. Contact us today to speak with our team about your unique situation, ask questions, and get started.

We look forward to working with you.

Tuesday, September 6, 2022

Should you use cash to purchase your fix and flip property?

The real estate investing business is full of options. One thing that makes it so great is that you can support almost any way you desire. There is no set template or blueprint you have to follow. At some point, you may have to decide on the best financing option. There are compelling arguments on both sides and no right or wrong answer. What is universal is that you always want to explore all available options. There are times when paying cash for property makes sense, and other times you should take advantage of financing. If you have capital or access to funds, here are some pros and cons of paying cash for your next property.

PROS:

You have increased cash flow. If you are purchasing a rental property with cash, one of the most apparent benefits is the increased cash flow. On a rental property with no mortgage, the only monthly housing payments are for taxes and homeowners insurance. Then, of course, there are utilities and other expenses, but the bulk of the price is in these two areas. So with a cash payment, you will have a surplus of cash left over every month. In addition, there is a handful of options with the property that you can use to grow other areas of your business.

More offers accepted have a greater chance of getting accepted. Many sellers do not want to deal with a financed offer, such as a conventional mortgage loan. A cash offer provides a sense of security between the excessive closing times and approval uncertainty. This security leads to more bids accepted on properties. Closing just one or two extra deals a year can be a real boost to your bottom line.

Instant equity. When you purchase property cash, you take ownership with instant equity. This equity gives you a series of options you would not have had otherwise. You never know what changes your business will go through down the road. Instead of waiting for appreciation, you can make the best decision, whatever the market brings. If you want to sell in a pinch, you can do so at any time. It would help if you considered the option of a second mortgage. Instant equity equals instant options.

Interest savings. Most of your monthly payment goes towards interest when you finance a property. For example, on a 30-year mortgage, the first ten years of payments are mostly allocated to the interest portion. Over the life of a loan, you end up paying hundreds of thousands more than you finance. By paying cash, you save your monthly cost on interest.

Faster closings. One of the actual benefits of paying with cash is the speed at which the transaction can close. It is not unrealistic to complete anywhere from five to seven days after you submit an offer. A fast closing helps to start the process quicker, which shortens the time you can see a return.

CONS:

Opportunity lost. Most real estate investors do not have a limitless amount of capital. To explore the next deal, they need to pull cash out of an existing one. When you pay cash, you are locked into the property until you can turn it over or until the value increases. You never know when a great opportunity will come your way. If most of your funds are unavailable, you will be upset if a better one comes. Before you make a cash offer, you need to be comfortable that your funds are tied up for the short term.

Lack of leverage. There is something to be said about the ability to use other people's money. When you pay cash for a property, you lose that leverage. You no longer have the flexibility to act when you see fit. Leveraging a purchase means using the bank's money to earn a return on your investment. For example, you can make a 15-20% down payment and own the property. When you use cash, you pay 100% of the purchase.

Exposure. Depending on how you amass your capital, you are exposed. Getting money from a private or hard money lender is one thing. When you scrape together your savings, you enter into an all-or-nothing proposition. In most cases, the reward exceeds the risk, but there will be plenty of sleepless nights. Even the slightest change can have an impact on your bottom line. When you are all in, there will be plenty of uncomfortable moments.

Even if you don't currently use cash to fund your deals, you never know when you may need to in the future. A cash offer may make more sense on the right property in the right situation than financing. It would be best if you began exploring your options, including using a hard or private money lender when your business is slow. They can be a great resource in your back pocket when things get going. If you have your capital, you should always consider using it in the best possible scenarios. Having cash or access to it can be a great option in the right situation.

Saturday, September 3, 2022

Private Money Lending Questions and Answers.

There may be no more exciting yet often confusing element to the real estate investing field than private money lending. Yet, while private lending for real estate represents a real opportunity for new real estate investors, many are unsure what the endeavor entails.

Is private money lending different from conventional financing? What's the difference between private money lending and hard money lending? And how do you find those ever-elusive private money lenders just waiting to take a chance on your new property acquisition?

To help dispel some of the confusion and boost your real estate investing IQ, here is a private money lending FAQ to get you up to speed on this most promising form of investment financing.

What Is Private Money Lending?

They are borrowing money from an individual investor. Real estate investors use private lenders to finance deals that will not qualify for a traditional loan or are not able to wait the usual 30 days or so that a conventional mortgage loan needs approval.

How Does Private Money Lending Differ From Hard Money Lending?

Private Money Lending FAQ

Think of it this way: private lending involves borrowing money from people with the means to invest capital in your venture (there's no financial institution backing this investor). An excellent example of a private money lender would be a friend or family member — anybody in your inner circle — or an individual investor who was intrigued by your proposal and wants to be a part of your investment.

Hard money lending is something that lives between private money lending and conventional bank financing. Though hard money lending doesn't require the usual hoops to jump through that traditional financing, hard money lenders are semi-institutional. However, they do have their own set of established criteria. Therefore, both types of lending should be part of an investor's financing toolbox.

Private Money Lender – Individuals who use their own money. Easy to qualify and get funded.

Hard Money Lender – a company or broker that uses their funds/pool or finds an individual private money lender, or provides semi-institutional funds.

What Are The Advantages Of Private Money Lending?

As Nasdaq accurately points out, private loans are ideal for investors who want to buy a property that needs a lot of repairs. For example, conventional financial institutions often refuse to grant mortgage loans for properties that have been vandalized or seriously damaged. On the other hand, private money lenders and hard money lenders see the potential in a property that can be purchased cheaply, fixed for a reasonable price, and then resold for a tidy profit.

Additionally, private money lenders and hard money lenders will have fewer requirements than other lenders. More specifically, private investors focus on the potential profitability of the real estate purchase rather than the borrower's financial history and credit score. Furthermore, private money loans are funded relatively fast, whereas a loan from a conventional lender may not be approved for up to 45 days.

What Are The Disadvantages Of Private Money Lending?

There are a few disadvantages to obtaining private loans. The first is that private lenders often charge a higher interest rate than the average bank loan. Private lending rates hover around 8%-18%. This is particularly true if you have poor credit and property purchases are risky. Lenders also add "points" to the loan, creating an additional expense for borrowers to cover.

Another disadvantage is that, unlike banks, raising private money won't allow you to pay off a loan over 30 years. Instead, you can expect to be required to pay the loan back within six to twelve months, although some more-lenient lenders, especially those you may be related to, may give you a couple of years.

One more thing to remember: you will likely have to use the property as collateral for the money financed from a private money lender. Do your due diligence to ensure a deal's framework (and potential) meets your criteria.

The good news is that these disadvantages do not hinder your real estate investment plans if you have done your research before pitching an investment deal. If you know the property is a good buy and are reasonably sure you can fix it up and sell it at a profit within a reasonable amount, the strict repayment time frame shouldn't cause alarm.

How Do You Find Private Lenders?

It's a big puzzle many new investors have: how to find a private lender that might be able to help them with the financing of their next project and securing low lending rates.

Several investors specialize in offering private loans to real estate buyers. You can find such investors through a variety of platforms:

A simple Google.com search for "private money lenders (your city or state)."
Craigslist.org
Your friend-and-family inner circle
Tapping your existing real estate network (mortgage brokers are ideal for this)
Social media (especially LinkedIn)
Live events (especially those that would attract investors)
Direct mail marketing
Cold calling
Public record search (look for "grantees" on mortgage paperwork)

Remember that private lenders don't need to be professionals in the field; when searching for ways to find a private lender, you want to locate somebody who wants a decent return on their money. For example, a parent, relative, colleague, or acquaintance who has cash on hand — and wants to turn a profit on it — may be willing to loan you the money you need to get started. These people in your "first circle" will have the lowest barrier to entry. You can even work with more than one lender if a single individual does not have enough cash to help you buy a property. The friends and colleagues of your "first circle" are considered part of your "second circle."

What Are The Requirements For Securing A Private Loan?

Because private lenders are so diverse and no government regulations cover private money lending, the terms and conditions for securing a loan vary greatly. Close friends and family members may be willing to loan you money simply because you have a clear proposal for how to turn a profit and because they know and trust you. On the other hand, acquaintances and colleagues may want a note or deed of trust and a clear investment plan to consider a loan.

Professional private money lending companies and individual lenders will want proof of identity, a note, a deed of trust, and a written plan (budget) outlining the profit you expect to generate.

A professional private lender may also ask about your credit score. Poor credit may not hinder you from obtaining a loan but will likely affect the interest rate. A down payment for the loan is also likely required, and you may need to use the property as collateral to protect the lender if you aren't able to pay off the loan.

Private Money Lender –It may require a credit report and a simple application.

Hard Money Lender – a company or broker that uses their funds/pool

or finds an individual private money lender may require a credit report

or semi-institutional funds require a credit report and a 1003 application.

Combining Private Money

Taking private money from multiple investors and pooling it together is legal under the right conditions. Two main structures exist to help you stay squeaky clean and organized: REITs and LLCs.

REITs are liquid and can use pooled money to invest in many different areas of real estate. LLCs allow investors more control over what they want to choose to fund. Both structures have their pros and cons, so be sure to do your research and consult with an attorney if necessary.

How is credit score considered?

Most Private Lenders will ask to see a credit report. However, having bad credit will not stop the deal. The lender is looking for or is the overall credit score and judgments on the credit report. A low credit score will require a higher down payment and interest rate. If the deal looks good and is secured with a reasonable LTV, the private lender will usually fund the deal. It depends on the source of funds; an Individual is more flexible.

A managed poll may have more requirements and a credit limit. For example, they would not fund with a credit score below 630, a maximum LTV of 60%.

Institutional funds require a credit report with a minimum credit score, cash flow analysis (do you have income), an LTV of 80%, and an appraisal.

One essential item that will stop all loans is whether the borrower has judgments or tax liens or is currently in bankruptcy.

Summary

When trying to attract a private money lender, it can be very tempting to focus on "closing the deal" and think about all the excellent opportunities coming your way when you secure financing.

But it's essential to think of it from the lender's point of view.

As a private lender, you want to hear to ensure your investments are secure and you have a good chance of seeing a decent return on your money.

Understanding how raising private money works is just the first step. The real breakthrough comes when you "think" like an investor and present yourself as the answer to a question they hadn't even asked. Do that consistently, and you won't have to look for investors again; they'll come looking for you.

About the Author: Dennis has worked in the real estate industry for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the excellent investment opportunities trust deed investing and hard money loans provided. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have two beautiful daughters and five amazing grandchildren. Dennis has been an Arizona resident for the past 45 years.