I am a new investor in Ohio and just wanted to ask some basic questions about private financing. I keep hearing about how great it works and how easy it is to find. I would like to speak with someone who has experience in this. I guess I don’t understand how to make it work. It seems most investors/private money sources want a higher interest rate than what the banks are charging; how do you make it financially feasible to do this then? I don’t see how to make a profit on a property paying these high rates. Do most money investors want monthly or yearly payments? How are they structured? Thanks for any insight.
Well, there is private money out there…but people want to make it ‘worth their while’ of course. These sources are also being more careful in how much they will lend in the declining market…which makes sense…they need to protect themselves and aren’t doing anyone favors.
I would say a private investor would almost always want more than the banks charge, but the banks can borrow from the Govt aka taxpayers at extremely low rates, so it is different from someone lending out their own earned money.
Most private lenders want monthly payments.
People use hard money or private money sources of funding because they have more flexibility than dealing with a bank. A bank wants w2s,ficos,income statements,etc,etc also banks are usually pickier on the types of properties they lend on and they also have certain minimums etc.
Other restrictions , like they might not like to lend on investment properties, while private money and hard money often prefers investors.
People make it work because they usually use these loans for the short term to acquire a property and sell it relatively quickly…or they refinance the loan.
There are three basic categories of financing:
Conventional loans - Usually full Doc, Partial Doc or No Doc. This is through a bank or a mortgage lender. This loan is the best financing rates which float with the prime rate. Right now Prime rate - 0 (Zero) and best owner occupied rate around 5.25 with 750 Fico Score.
Private money loans - These lenders may require to see your credit report and verify your employment. They loan money for short terms between 6 months and 3 years. They generally charge between 8 and 12 percent depending on the deal and LTV. They want to charge additional points ranging from 3 to 10. They can generally close in 7 to 15 working days. These companies will generally only loan up to 75% LTV.
Hard money lenders - These lenders do not check credit or your job, the property qualifies for the loan. These companies can close a loan in as little as 24 hours. They generally charge between 15 and 18% interest. Points may be charged between 0 and 5 depending on the rate and LTV. These companies may also supply construction funds draws for rehab costs and carrying costs. The maximum LTV is roughly 65%.
Also, these days they are asking for a downpayment. We are in the process of looking for a hard money lender for a 130K loan. ALL asked about credit score (so far we spoke to about 30-35), a lot of them asked about our personal debt to income ratio, and any liquid capital. The size of the required downpayment varies from 5% of purchase price and rehab cost to 10% of ARV!!! Most of them asked to personally guarantee the loan for our 3-unit residential investment property, even though we are incorporated. They did not even wanted to consider the property itself guarantying the loan. PLUS, they require proof of reserve funds! Some ask for points at closing, without working them into the loan to be paid when we refinance with the bank.
There is the other option of the private individual with a SDIRA/401k, CD or just a large savings account. Any and all of these are more than likely underperforming or bringing returns of 2-6%. You get a loan from one of these individuals and offer them 8-12% they will probably jump at it. And with these individuals, you can negotiate whether, you pay, monthly, quarterly, yearly, after house is sold, by the hour, next time Haley’s comet comes through, you get the idea.
Is right i am see and hear more about hard money sounding more like sub prime lenders
Wantting to see your credit and your job assets ect
I do not belive there is any more true hard /private money to be had
But i really would like some one toprove me wrong on this thought
There is a lot of ways you can do it, the great thing is that you make the rules with private investors as you present them a take it or leave it opportunity. You can negotiate a little bit, but banks and hard money lenders set the rules which makes private investors much better. A key is to find a great deal, not a good deal, a great one. The numbers have to make sense even if you are paying 15% interest. If you are new, I recommend high cashflow deals or to wholesale for quick cash. After the stock market went down 38% last year investors are facing a lot of uncertainty and many would love a 10-12% return on there money. They have to be comfortable with the risk, therefore you have to illustrate it for them. Like what if you died today, what would happen to the investment? Or what if the market went down and what legal documents protect and secure their investment.