When Should You Use Private Money Lending?
If you are involved with investing in real estate, at some point you’ll realize that seeking funding is one of the hardest parts of the process. Getting approval from the bank is not the easiest things to do. It’s even harder when you are a house flipper since the house you want to buy will likely need to be repaired (banks hates old, worn-out houses). This is why investors have steered towards private money lending over the last few years, due to its benefits. However, private money lending is not a one-size-fits-all approach. You need to educate yourself on what is private money lending,
What is private money?
Private money is funding that is provided from a party that’s not a financial institution (such as a bank). Private money can come from someone from your family circle, or it could be from someone who never met. Private money is also available from private organizations, although they would be called hard money, which is a little bit different than private money.
Private money lending is based more on relationships than other method of funding. Make no mistake, private lenders would still need a very good deal in order to hand you any amount of money upfront. With private money, the interest rate is between 8-12%, that’s higher than what bank would offer. But it comes with other advantages that make it a first choice for many real estate investors.
If you are just starting out in real estate investing, you might be confused about what type of funding you should use, whether it’s conventional loan, private money, cash, or private money. In this article, we’ll go over 2 main circumstances where you should consider private money lending as your funding source.
When should you use private money?
You Need Funding, Fast.
One of the benefits of private money is that they approval time is significantly shorter than other methods of funding. For example, to get approved conventional loan you’ll need to wait for up to 45 days, and it’s not guaranteed that you’ll get approved after the wait time.
Banks have very strict guideline regarding who and what it can fund. Houses that are in poor conditions, which is perfect for house flippers, will not be approved and funded. House flipping is a very time-sensitive business, and you’ll need funding as quickly as possible in order to turn properties into profits.
If you are someone who is looking to buy and hold, you’ll still need fast funding. A property which is selling for a great price will not stay forever. A property bought in at a low price will produce more cash-flow in the future.
So, what is the approval time for private money lending? As little as 3 minutes for pre-qualification and 10 – 15 days to receive funding. This is why private money is considered the first choice for many investors.
You Have A Low Credit Score.
Maybe you are in no rush for a funding to come. But credit score is still an important factor to consider. Banks take credit scores very serious, and coupled this with their strict requirements, it’s almost impossible for you to get funding from a banks with a less-than-stellar credit score.
On the other hand, private money lenders are more concerned with the quality of the deals than your credit score. In other words, if they see that they can make a lot of money with the deal you presented, they will give you the cash, that’s all it takes.
What if you just need to buy a house live but have a bad credit score? This is when you should really weigh in the difference between conventional and private money loan. Although you can get a loan to buy a house with private money, the interest rate is not the best. This can eat up your income before you know it.
Private money: is it worth it?
Private money lending is a great tool for real estate investors to get funding fast with fewest restrictions. It can be the diffidence between you closing the deal and you walking away with nothing. However, you have to think about it cons and decide for yourself if this is a good idea. The higher interest is something you really have to research further, a higher interest rate means that you’ll make less money as an investors.
P.S Need some help? Check out PrivateMoneyMastery.com. It’s a training program that teaches you everything you need to know about private money. You’ll learn what private money is, how to raise it, where to find private lenders, how to approach them, and how to get your private lenders to re-invest their money in your deals so you never run out of funds or have to depend on a bank ever again.