Buying with Private Money
When buying a property, sometimes it is better to use other people’s money (OPM) rather than your own. This is actually how a lot of successful investors got their start. There are several different ways to do this, however the two most common are Hard Money Loans or Private Money Loans.
When using a hard money lender, you may have to pay points up front to get the loan, then a percentage rate of interest only payments until the property is sold or the term of the loan has been met. A typical example of this would be as follows. Using round figures, let’s say you borrowed $100,000 at 5 points and 13% interest for 1 year. You would have paid $5000 up front (5 points) and then 13% interest only payments until it’s paid off. Normally there isn’t pre-payment penalty for an early payoff. Also, the lender will typically only loan 65 to 70% of the Loan to Value (LTV) of the property to insure the money in case the loan defaults. The lender will loan based on the after repair value (ARV).
Private money loans are also based on about 65 to 70% of the properties ARV and, unless specified, will otherwise go for 12 months or less. These loans in my opinion are easier to get because more people can do private money than are in the business of hard money. Both hard and private money will secure a lien on the subject property to guarantee payment. While I said private money might be easier, let me share my opinion and clarify why.
Hard money lenders are “in the business” of loaning money and do it as a major income stream, and therefore charge points. A private money lender may do this less frequently and commonly charges a flat interest rate without points. Private money can be a person loaning money from a self-directed IRA or 401k and do it for a tax-free or tax-differed return on their investment.
Private money lenders might use a flat rate as well, commonly being about 10% interest only. This can build wealth quickly and at much higher dollar amounts than just your annual allowance. If someone is making ½ to 1% interest on their money, then the opportunity to make 10% and being secured with a property is a very appealing prospect. Private money may also come from other sources such as friends, relatives and business acquaintances. The rules for using self-directed IRA and 401k funds are stricter, so be sure to do your due diligence and discuss these restrictions with your plan’s custodian before taking any action.
As far as information on using a hard money lender, my suggestion is to join your local real estate investment association (also known as a REIA). They are the best source for new and seasoned investors alike and offer education as well as reliable contacts for hard money loans, mortgages, insurance, buyers, sellers, contractors and basically everything an investor on any level would need.
When choosing a REIA, I suggest that you find one that is a member of the National Real Estate Investors Association (National Reia). They are a nationwide governing body (a trade association) of investment clubs from all over the country. They make sure that all member groups meet strict ethical and moral standards – which in turn means that you are dealing with the best investor associations out there. I have been a personal supporter and member for over 20 years and attend their annual winter cruises (an vacation with an education…what a blast!) as well as the mid-year conferences to share new ideas and such.
They also provide benefits and discounts such nationwide groups as Home Depot, Office Depot/Office Max and many more. Please visit NationalReia.org for more information.
Here are a few, but not all, of the requirements that need to be met to be considered for hard or private money loans nationwide:
Prospectus For Private Money Loans
- You MUST have the property under contract before applying! Otherwise there is no deal for prospective lenders to consider.
- The terms of the contract must be clearly stated in the offer. This includes purchase price and a specific closing date. Ex. 30 Days
- The after repair value (ARV) must be documented to show profit. This includes comparable sales and days on market till sold.
- If using a real estate agent, include listing document for details. Lender will need to know who pays commission affecting profit.
- All lenders require that renovation estimates be submitted. Profit potential cannot be determined without fix up costs.
- Our lender’s limit is 65% to 70% of the after repair value of house and is secured by placing a lien on subject property as collateral.
- The interest rate they receive is 10% interest only paid monthly. Unless specified otherwise, principal to be repaid in 12 months.
- The money used to purchase the property is sent to the seller. This is done to insure the money gets to the seller securing deal.
The basic guidelines above will give borrowers an idea of what they need before expecting to be considered for private money.
A common misconception is they hear “we loan money for deals” and immediately think it’s any deal. You can’t just contact a realtor and say Hey send me some deals, I have a money lender. First, we will but rarely fund properties listed with realtors. We buy wholesale deals not RETAIL. We focus on “fix and flip” deals so we get our money back quick and re loan it.
Always remember THE DEAL IS BASED ON THE INFO YOU PROVIDED before asking for a loan. The more you provide the better your chances.
Pete Youngs also known as “Mr. Rehab,” is a national speaker on rehabbing homes for up to 50% off. He does seminars and bus trips promoting his new training system called SWAT (Simple Ways And Techniques). He is contractor/investor of over 25 years. Click here to visit his website, PeteYoungs.com.