A private money lender is a private individual or company willing to offer funding to an investor, typically to finance a real estate deal. They’re usually wealthy individuals or organizations not affiliated with traditional lending institutions such as banks or credit unions. Although private money lenders are held to specific regulatory standards, they are not under as much scrutiny as conventional lenders. Therefore, they can often be more flexible with the loan terms and qualification requirements. So, if you are having trouble getting approved by a bank to fund your real estate deal, private money lenders may be a viable alternative.
- When You're Looking to Finance Your First Deal
- When You Don't Qualify For a Bank Loan
- When You're Looking For Fast Funding
1. When You’re Looking to Finance Your First Deal
Many banks and traditional lenders will want to see a proven track record of success before they’ll be willing to give you a large sum of money. But gaining the necessary experience can be difficult if no one will lend to you. However, private money lenders may be more willing to work with novice investors if the deal makes sense, making them a smart option to finance your first deal.
2. When You Don’t Qualify For a Bank Loan
Private money lenders are also helpful if you don’t qualify for the standard requirements of a bank loan. Perhaps you have issues with your credit, or you don’t have the verifiable income to meet their underwriting standards. Private money lenders tend to be more lenient with approval requirements, so you may find it easier to get approved for a loan.
3. When You’re Looking For Fast Funding
Another perk of working with a private money lender is fast access to cash. They typically won’t require a long, drawn-out pre-approval process but will instead provide you with a lump sum of cash or whatever arrangement you negotiate as soon as your loan is approved. This can be useful if you need hard cash to make a purchase or if you’re facing competition from other investors and need to move quickly.
- Start Within Your Own Network
- Look Online
- Join a Local Real Estate Organization
- Work With a Real Estate Agent or Lending Specialist
1. Start Within Your Own Network
If you know any high-net-worth individuals or investors looking for their next big deal, start there. Having a personal relationship with the lender may make it easier to negotiate favorable terms and seek approval without the standard requirements, especially if they have firsthand experience with your character or skillset, which may not translate on a loan application. However, be cautious about mixing friendship and business and structure the loan the right way to avoid uncomfortable conversations.
2. Look Online
Beyond your personal network, doing a quick Google search for private money lenders is an excellent place to start. Be sure to do extensive research on any company you come across. You can analyze their web presence, search for available reviews or testimonials from previous clients, and check their ratings with organizations like the Better Business Bureau. This will help you avoid any potential scams or nefarious characters.
3. Join a Local Real Estate Organization
Joining a local real estate investors organization is a great way to build your network and connect with private money lenders. You can join the local chapter of the National Association of Realtors, become a member of a local Real Estate Investors Association, or simply look for events on sites like Meetup or Eventbrite. Even if you don’t meet any lenders directly, you may be able to connect with other investors who can point you in the right direction.
4. Work With a Real Estate Agent or Lending Specialist
Another smart strategy is to work directly with a real estate agent or lending specialist with connections with private money lenders. You may have to pay them a fee or commission for their time, but it will be well worth it if they can connect you with someone willing to finance your deal.
1. Be Clear About Your Expectations
Don’t beat around the bush when searching for private money lenders. Be upfront about what you need and what you’re able to provide. For instance, if you have a low credit score, it’s best to look for lenders with lower credit requirements than waste time trying to negotiate a deal that will never work. So, before you start looking for lenders, establish the following:
- How much money you need
- How long you need the money
- How much money you have to put down
- Any key players involved in the deal (partners, contractors, realtors, etc.)
- How soon you need the money
Being upfront about what you need and what you’re willing to offer will save you time in the long term and make it easier to find the right lender.
2. Understand the Risks
It’s also important to understand that there are often added risks and consequences of working with a private money lender. The fact that they are willing to work with riskier borrowers means they may be slightly riskier than a traditional lender. Although there are plenty of reputable private money lenders out there, you may be hit with a higher interest rate or be required to make a larger down payment to mitigate the risk to the lender. Plus, you should always do your research on the lender to verify their reputation and ensure you know where the money is coming from.
3. Look for Referrals or Reviews
When researching private money lenders, it’s always smart to look for any reviews or get referrals from trusted sources. Even if they have a professional website and seem to offer what you need, you won’t know exactly what it’s like to work with them until you’ve already accepted the funds. Looking for reviews and referrals from previous clients may help save you from complications and headaches down the line.
4. Compare Multiple Options
If you’ve been rejected multiple times by banks, it may be tempting to jump on the first lender willing to offer you the funds you need. But it’s always better to shop around and compare options before you commit to one funding source. You may get a better interest rate from another lender, or perhaps one lender will give you more time to pay the loan off, allowing you to complete upgrades that will result in higher profit. So, look for as many options as possible and see which lender offers the most value to your deal.
- RCN Capital
Klavi is an online lending platform that offers fast funding and low-interest rates for real estate deals. Rather than looking at just your credit and income, Klavi analyzes the anticipated rental income of the property to underwrite the loan, allowing even low-income and self-employed borrowers to qualify. Interest rates start around 9%, and borrowers can access funds in as little as ten days.
2. RCN Capital
RCN Capital is another private lender offering competitive rates and low down payment requirements. They are great for fix-and-flips because borrowers can get 100% financing for the renovation’s costs and other associated fees. Borrowers can qualify with a 620 FICO score and above and receive up to 85% of the purchase price of the property. They require borrowers to have some real estate investing experience and an upfront fee of 2-5% of the loan amount. But they are an excellent option for intermediate investors looking for fast cash and affordable rates.
Corevest is the best private money lender for those with a low FICO score because they have no credit requirements. Borrowers must have previous real estate experience; however, if approved, they can receive between $75,000 and $50 million, with rates starting at 8%. They also offer a variety of loan products, including rental loans, bridge loans, and multi-family loans, and borrowers can access their funds within 21 days.
Private money lenders are a great source of financing for investors struggling to obtain bank approval. In many ways, they offer more favorable terms for real estate investors than traditional lenders, such as fast funding and no prepayment penalties. However, not all private money lenders are reputable or equipped to finance every deal, so you must do extensive research before signing the dotted line.