When it comes to investing money on real estate purchases, the most common source for funding that people look for is from banks. This is normally the case as banks readily offer big capital for investors at low rates and manageable payment terms. However, bank loans are not readily approved; in fact, getting approved for a bank loan is very difficult and becomes increasingly harder as the amount gets bigger. They also take into account the risk of lending so investors have to explain to the bank what they will use the money on. The bank will then assess whether or not the borrower runs the risk of going bankrupt or not. If the borrower goes bankrupt, they have no way of getting back the money they loaned which is a very big problem for them. Of course, there are always alternatives and one such alternative is looking for private money loans.
What is a Private Money Loan?
Private money is a banking and finance term used to differentiate money coming from a private individual or organization from a bank or company. Private money loans are offered by these private individuals and may have different qualifying guidelines. In most cases, when an investor’s loan request is declined from banks due to various reasons, they can still get loans from these private money lenders. Since they have less strict conditions and guidelines, they can easily get the same amount of money. On the other hand, these private money lenders can get a return that is substantially better as compared to the ones offered by banks. In an ideal set-up, this is a win-win situation for both lender and borrower. The borrower is able to get a huge amount of money for short-term investments even if they are declined by banks while the lender is able to get better returns and profits.
Who Are the Private Money Lenders?
Private money is just a big, encompassing term to separate people who lend money and banks that do this for a living. Simply put, these private money lenders can actually be anyone that has enough money that you can borrow and will allow you to borrow from them. In most cases, this type of lending is relationship based and will rely on trust rather than qualifications. That said, they must still comply with state and federal law and aren’t exempt from banking laws.
When looking for these private money lenders, you need to look for people who has money saved up on their accounts and won’t use them in the next couple of years, people who have businesses that are generating more money than they spend, those who have retired and is sitting on a big cash lump sum, and generally anyone who has money that they are willing to let other people borrow. Since they will be lending their hard-earned money, they value trust a lot more then it comes to accepting loan proposals. This also means that the first place you should look for is among your friends, family, and colleagues.
Where to look for Private Money Lenders?
If you know of a relative that has gotten a huge lump sum from their retirement or a family-friend that has a booming business and no plans to expand anytime soon, then you can approach them and ask for a loan. As this type of loans is trust-based, they are more likely to allow you to borrow money. However, since you know them personally, there are also risks involved for both parties. Lending money to an investor is always a risk and whether it is from a bank or from a private individual, once the investor goes bankrupt, the lender will probably lose their cash. It gets worse if they know the investor personally as this can cause a strained relationship. Some private money lenders ask for collateral such as the deed for real estate being put under their name so even if the borrower ends up being unable to pay, they can still sell off the property to get back their money. The risks are bigger but if they are willing to lend money and the investor delivers, they can get a sizeable sum since they can actually charge 8 – 15% as compared to the 5% rates of banks.