New Development Investing: Why Private Money
Learn the benefits of funding your next project with a private financing.
Let’s start simple. What is a private money lender? For starters, private lenders aren’t banks. A private money lender is a non-institutional company (or individual) that loans money typically for the purpose of funding a real estate deal. Private lenders are unique in that unlike most traditional lenders where you might work with a different person each time you contact or visit a branch, private money lenders form a relationship with borrowers looking to obtain financing for a commercial real estate (CRE) investment.
Quickly Secure Funding
Speed is certainly the primary advantage of private lending—funding can be secured extremely quickly and the qualification process is much less laborious and intricate when compared with traditional lending options. If you’re already in the commercial real estate game, you know that your ability to instantly adapt and move on deals is usually the difference between a close and a missed opportunity. A quick close with a private lender entices sellers and sets your offer apart from other buyers with slower conventional funding. In most situations, private money deals can be completed and funded within a week. Compare that to the 45-60 days it takes, on average, to secure a bank or credit union loan and it’s no contest in that department.
Quick private financing with hard money is perfect for new development…
- when the investor needs to act quickly
- construction projects
- properties in a remote location
- properties with unclear value
- properties with value based on land alone
Focused on assets—not financial past
To piggyback on the quick turnarounds private lending provides, private lending is also asset-based financing. This means the days of relying on your credit score and financial history—private lending approval comes from the value of your asset(s) or collateral. Most private lenders won’t require tax records, paycheck stubs, list of debts and other information that can be difficult and time-consuming to gather. In addition, private lenders won’t go after your personal assets and use the real estate you seek as the loan’s collateral. It should be noted that depending on the loan-to-value ratio, you may need to cross-collateralize to secure the full financing request.
Add a private lender to your support team
Talk to any seasoned commercial real estate investor about their keys to success and they’ll inevitably talk about the people they surround themselves with. Whether you’re a real estate rookies or a seasoned investor it’s important to surround yourself with professionals who can help you determine timing, location, and can even negotiate and close deals on your behalf. Here’s a few experts that are good to have in your corner when you begin to embark on a multifamily property real estate deal:
- Accountant: This person is vital when it comes to determining what you can afford and analyzing the tax and operating budget benefits.
- Lawyer: You need to get the lawyers involves to, at the very least, complete the transaction. You may want your lawyer to negotiate on your behalf, as well.
- Mortgage broker: This person acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses. This person can also help organize and research financing options.
Mitigating risk is a top priority for successful private lenders. Each lender considers about eight factors (give or take a couple depending on the lender) when deciding whether or not a potential loan opportunity is viable. Typically, the eight factors are as follows:
- Market Value
- Borrower Credit
- Borrower Equity
- Additional Collateral
- Lien Priority
- Pricing Strategy
- Exit Strategy
- Due Diligence
Try to keep these in mind when putting together