Start up financing for Real Estate Investing
What is the process when a retail buyer purchases their home? They find a house to call home, go to the bank, fill out a couple forms, put down 20% of the purchase price, finance the remaining 80%, have inspections, wait and wait and wait, close on the loan, and have a long happy 30-year life with that mortgage. The end. So, how can a real estate investor possibly come up with 20% down and wait and wait and wait for bank approval AND the ability to juggle 30-year mortgages on multiple properties? The answer is easy- a real estate investor has different financing strategies! Start up financing for real state investing can be a much different process than a retail buyer. Why? A retail buyer generally owns their home for long term living. A Real Estate Investor purchases a home for several different reasons: 1) wholesale to another investor; 2) buy, prehab, resell; 3) buy, rehab, resell; 4) buy and hold. In the first 3 examples, the Real Estate Investor may own that property for only 6-9 months (depending on the property). Although these are not the standard retail buying scenarios with a standard mortgage, a Real Estate Investor must still have some sort of way to purchase these kinds of properties. Two types of start up financing are Private Money and Hard Money.
Bradloans.com by e-Mortgage, Inc. defines Private Money:
“A private money lender or private hard money lender is a non-institutional (not a bank) company or individual that lends or loans money, usually protected by deep and note of trust, for the sole purpose of financing a real estate venture. Private hard money lenders are usually categorized as relationship-based lenders.” (http://bradloans.com/private-money-lenders-definition/ March 20, 2017.)
To reiterate, a Private Money Lender (PML) lends for the sole purpose of financing a real estate venture. With this, personally knowing that PML is a big advantage. Here are other ADVANTAGES for private money start up financing both the Real Estate Investor and Private Money Lender:
- Investor can help a trusted person earn more money than the usual stock market/bank rates (For example, 12% return for real estate investing verses 0.45% for a bank CD)
- Investor and PML can collaborate to come up with terms of the loan (such as pay back loan with interest at sale of property)
- Investor can ask anyone to be a PML: friends, family, coworkers
- Potential of NETWORKING with other investors who could be a PML
- Not working with a bank
- Fast closing process without underwriting
- Perhaps using an attorney for legal advice and paperwork which is cost savings compared to bank closing costs
- A PML might be able to finance 100% of purchase and rehab costs
- Real estate is a tangible investment! The loan is backed up by the property so that if something happens, the Private Money Lender could have the option to sell the property to get their invested money back.
Private Money DOWNFALLS:
- Where can a private money lender be found if friends, family, coworkers option is exhausted?
- Would the Private Money Lender feel comfortable lending to the Real Estate Investor?
- What if Real Estate Investor and Private Money Lender have difficulties building trust when borrowing and using someone else’s money?
Private Money and Hard Money have similarities, but many differences:
From realtor.com, A Hard Money Lender is defined as: “It’s synonymous with a private investor,” says Don Hensel, president of North Coast Financial, which specializes in hard money loans. “A lender could be an individual, a group of investors, or a licensed mortgage broker who uses his own funds. This differs from a bank that uses money from its depositors.” (http://www.realtor.com/advice/finance/what-is-a-hard-money-lender/ March 20, 2017)
Again, to accent, Hard Money is typically a group of investors or a licensed mortgage broker who uses their own funds. With that, here are Hard Money start up financing ADVANTAGES:
- Short term loan
- Ideal for real estate investors
- Typically no in depth credit checks
- Fast closing process
- Some HML could finance 100% of rehab costs
Hard Money DOWNFALLS:
- High interest rates
- Possibility of paying points plus interest rate (Points could be the equivalent to $1,000)
- Hard Money Loan may have more terms, such as monthly payments
- HML typically can finance 70% of ARV of property. For example, purchase for $100,000 with $40,000 in rehab costs but ARV is $200,000, therefore, HML may lend $140,000 to have all of purchase and rehab costs covered. However, if rehab costs exceed the $40,000 budget, the HML may not lend more. Now it is up to the Investor to cover remaining financing needs.
- HML may not finance first property
- HML may not loan to a new investor
When borrowing from a Private Money Lender or Hard Money Lender, the Real Estate Investor needs to do homework on the potential property to ensure this is a good deal. A PML and HML will want facts about the property such as: neighborhood analysis, comparable property values, viability of neighborhood, not over/under rehabbing, target demographics, etc. Ensure this property is a “win-win” for everyone involved. Reel Property Solutions, LLC and our team can answer your questions about start up financing. Collectively, we could do many beneficial things: increase net worth of each other, increase neighborhood values with a newly rehabbed property, become networking partners for other opportunities ahead and much more!
If you are interested in being a Private Money Lender or Hard Money Lender, please contact us at 507-218-8788 or info@reelpropertysolutionsllc.com
CATCH A WINNER!
