Are you a real estate investor looking for a way to finance your transactions in an efficient and sustainable manner? You may have heard of the concept of private money loans, but how exactly do they differ from conventional funding options and how do you go about deciding if they are the right fit for your deal?
Here at F.E. Forbes, our team of financial experts have been advising and funding successful California real estate investors for over a century. We’ve drawn on that wealth of experience to provide you with this handy guide to help demystify the private money lending framework so you can make an informed decision when it comes to accessing the capital you need to fuel your investment activity.
What is a Private Money Loan?
Private money loans are generally shorter-term financing options in which the underlying real estate asset functions to securitize the loan. The capital is sourced from a private investor or pool of investors instead of a financial institution or credit union as is the case with traditional mortgages. Private money loans generally carry an initial term of 12 months or less but are flexible and can be extended anywhere from two to five years to cover more extensive projects. Payments are usually made towards the interest in monthly installments with a final balloon payment at the conclusion of the loan period.
The overall loan amount a private money lender can provide to an investor is mainly tied to the value of the associated property. The real estate asset acting as security may already be owned by the investor that they are only using as collateral, or it could be the actual investment property they plan to acquire. More emphasis is placed on the property’s valuation instead of the investor’s credit history, meaning individuals with lower credit scores that are unable to obtain conventional mortgages may be able to alternatively fund their investments with private money loans.
What Types of Properties Can be Funded?
Investors can obtain private money loans to finance virtually any asset class of real estate—whether its single- or multi-family residential, commercial, land or industrial. Note that there are a ton of private money lenders out there, and some prefer to specialize in a niche market sector such as commercial and not offer the option of providing land loans due to their lack of expertise. One of the first questions investors should ask a potential lender is how much experience they have in funding the specific property type they are planning to purchase. The last thing you want is to commit to a deal only to find out the lender you were planning on using doesn’t offer financing for that specific type of investment.
Private money loans, although flexible and efficient, are not ideal for every single deal. If you are planning on purchasing a primary residence and have solid credit and sufficient income, then a conventional longer-term mortgage may be the better option as long as you have the time to wait on the much longer approval process associated with that type of funding. Private money is the go-to financing option when you need quick access to capital in a relatively short period of time—which is the typical scenario in the real estate investment industry. Private money loans are ideal for fix-and-flip transactions, land acquisitions, ground-up construction deals, foreclosures, or short sales.
What are the Advantages of Using Private Money?
Real estate investors turn to private money loans for a variety of benefits. One of the most appealing aspects is the expedited disbursal of funds. In most scenarios, private money loans can be funded in a matter of days compared to the months it takes for the conventional loan process to play out. Quick access to cash is a major competitive edge in the real estate investment industry, especially in today’s hot market where there is often multiple bids on a single property. The ability to offer sellers a quick closing with private money funds will instantly make your offer more enticing and could help you land more deals.
The Time is Now
F.E. Forbes Company specializes in delivering individually tailored funding solutions that enable investors to maximize returns and eliminate the hassle typically associated with the financial aspect of the real estate industry. Get reliable access to the capital you need to accomplish all your investment objectives in a streamlined, efficient process. Contact us today to learn more about how we can help take your investment business to the next level!