Private Money Lenders: The (ULTIMATE) Guide

Private money lenders play a crucial role in the modern real estate industry. But, who are they? How do you find private money lenders? How do you get a private money lender to give you a loan for purchasing a real estate investment property? These are some of the questions that this article answers!

• What Is A Private Money Lender?
• What Is A Private Money Loan?
• How Do Private Money Lenders Work?
• Do Private Money Lenders Need To Be Licensed?
• Is Private Money Lending Legal?
• Will Private Money Lenders Do A Loan With No Money Down?
• How Are Private Money Loans Structured For Real Estate Investments?
• What Interest Rates Do Private Money Lenders Charge In Real Estate?
• How Do I Get Private Money Loans For Real Estate Investing?
• How To Find Private Money Lenders For Residential Real Estate Deals?
• What Do Private Money Lenders Look For?
• Will Private Real Estate Investors Work With Me If I Have Little To No Experience?
• Are There Private Mortgage Lenders For Bad Credit?
• Will Private Money Lenders Work With Me If I Have No Credit?
• What Are The Benefits Of Using Private Money Lenders For Real Estate Investing?
• What's The Difference Between Hard Money Lenders vs. Private Money Lenders?
• Where To Find Private Money Lenders Near Me?
• How Do I Become A Private Money Lender?
• How To Find Private Money Lending Investment Opportunities?
• Should I Use Private Money Lenders For House Flipping?
• Can I Use Private Money For Down Payment?
• How To Raise Private Money For Real Estate Deals The Right Way?
• How To Get Private Money For Real Estate Investing Today?

What Is A Private Money Lender?

A private money lender is an individual or entity that issues loans secured by a trust deed and note to fund a real estate deal or transaction. Generally, private money lenders are relationship-based lenders. These are non-institutional lenders that provide short-term loans for the purchase of investment properties. An investor can also get a rehab loan from a private money lender.

A real estate investment deal is incomplete without money. As a professional real estate investor, you should always be actively looking for ways to bring in private money lenders to fund real estate investments and tie up deals. 

Typically, private money loans are best utilized by short-term fix-and-flippers. However, private money lenders also provide funding to long-term investors in need of cash-out refinancing, fast funding, and loans for rehab projects.

What Is A Private Money Loan?

A private money loan is money that a wealthy individual or private organization lends a real estate company or an individual investor. The private organization (or wealthy individual) that lends money is called a “private money lender.”

A private lending company can also pool private funds to broker loans for real estate transactions. However, private lenders are mostly high-net-worth individuals that want to passively invest money into real estate. Compared to traditional lenders, private money is a faster and easier way to obtain financing.

This loan amount is usually offered without the qualification guidelines of traditional bank loans or lending institutions. This can lead to private money loans being on the riskier side for both the lender and the borrower, but more so for the lender.

Since private money loans have minimal regulations, borrowers enjoy greater freedom in terms of the use of their loan for purposes that may not seem ideal. In most cases, private money loans follow the current interest rates though they can be more expensive and require a higher down payment compared to traditional lenders.

Once a private money lender knows how the borrower intends to use the money, they can charge higher interest rates. This is usually the case when the lender considers the project where the money will be invested as having a higher risk level.

How Do Private Money Lenders Work?

Private money lenders typically work by offering bridge loans to investors with the real estate asset as security. Borrowers use private money loans to purchase multifamily buildings, condos, mobile homes, land, houses, and all other types of real estate. Since a private money loan lender can be a personal friend, private money lenders are typically known as relationship-based lenders.

Some people think private money lenders refer to hard money lenders only. However, this is not always the case. See, hard money lenders are also third-party private lenders, but are much more structured in the business of lending.

Whereas, private money lenders are usually from relationships, such as: friends, close family, relatives, mentors, colleagues, and those in your network who have access to capital. Nevertheless, private hard money lenders are also private money lenders.

So, why would some people prefer hard money over private money? Some people prefer hard money better because their interest rates, fees, costs, and loan terms are generally more standardized, and accessible.

Private loans from hard money lenders are ideal for purchasing real estate investment properties & also for funding the renovation of the property. In some cases, they can also be suitable for long-term buy-and-hold investors.

Generally, private money lenders can be categorized as follows:

• Primary circle - These are friends and family members.
• Secondary circle - These are personal and professional acquaintances as well as colleagues.
• Third party circle - These are accredited hard money lenders and investors.

Essentially, private money lenders loan real estate investors that do not qualify for traditional loans or don’t want to wait for the long approval process for conventional mortgage loans.

 Do Private Money Lenders Need To Be Licensed?

This isn’t always the case! In some places, private money lenders may not need licensing because they are not banks or lending/financial institutions. In some states, there is a limit set on the number of loans a private money lender is allowed to offer. Exceeding this number of loans can require the lender to get a banking license.

Keep in mind that private money lenders are required to follow both federal and state usury laws. The lenders can also be subjected to the banking regulations of their states. Basically, there are no routine regulations applied to these lenders as well as their loans.

Is Private Money Lending Legal?

Private money lending is legal as long as it complies with the federal usury and state laws. A private money lender is not exempt from the existing banking laws in their state. Nevertheless, they can be exempt from the routine regulations that may include banking exams. In states like New York, private money lenders that give more than 5 real estate loans are required to acquire a lending license.

Licensed private money lenders are transparent with their charges, interest rates, eligibility requirements, and fees. They also do their due diligence when giving loans. For instance, they consider the income of borrowers and their total debt to determine their ability to repay the loaned amount.

It’s usually advisable for borrowers to choose private lenders wisely. That’s because some lenders have more aggressive collection methods when borrowers are unable to repay.

Will Private Money Lenders Do A Loan With No Money Down?

Yes. Some private money lenders will give you a loan with no money down as long as a real estate deal meets their criteria for the requested loan type. In fact, some lenders have direct lending models that do not require down payments! Even more, these private money loans can typically fund up to 70 percent of a property’s after repair value (ARV). The 70 percent funding covers property purchase, loan costs, and renovation costs.

In place of a down payment, a private money lender may require a borrower to have collateral. This is for the reason that if the borrower fails to meet the loan payments, their collateral can be seized and liquidated by the lender to make up for the missing payments and capital.

Similar to a down payment, collateral mitigates the lender from the risk of default by the borrower. It also shows your private lender that you have “skin in the game” & stand to lose if you do not repay the loan.

How Are Private Money Loans Structured For Real Estate Investments?

Different private money loans are structured to suit different niches of real estate investments. They usually include multi-family lending, single-family lending, commercial property lending, and non-owner occupied rehab loans.

Most lenders are smaller companies that mainly work on word of mouth and referrals. That’s why finding your ideal private lender can be a challenge, at first. Be prepared to conduct extensive research to find the right lender for you depending on the nature of your real estate investment.

Private money loans can be structured in multiple different ways:

• The loan can fund 50%-100% of the acquisition and the rehab costs.
• The private money loan can fund property acquisition only.
• The private investor loan can fund everything & only include a straight interest rate.
• The private capital loan can fund everything including holding and closing costs and allow you to defer interest payments until you sell the property.
• The private loan can fund everything but you give the lender an interest payment and a cut of the profit made at the end of the deal.

Always understand the structure of your specific private money loan so you can make an informed decision on whether to take it or not.

What Interest Rates Do Private Money Lenders Charge In Real Estate?

Generally, private money lenders are all a little different. Therefore, their interest rates for real estate deals can vary. Nevertheless, private money lenders, like hard money lenders, give loans with interest rates that range between 7% and 13%. Lender fees or points can range from 1% to 10%. Closing costs can range between 2% and 5% while independent appraisals can charge an amount that ranges between $300 and $500.

Unlike conventional mortgages, monthly payments for private money loans are not amortized. Although a private money loan may have a higher interest rate than a conventional mortgage, monthly payments can be less when compared to a mortgage.

Private money interest rates may fluctuate based on the property's loan-to-value (LTV), a measure of lending risk used to determine the appraised value of your home compared to the loan amount you are seeking to borrow.

This can make fix and flippers that want to reduce holding costs as they prepare to sell their properties prefer private money loans. Even more, these loans can become a preference for buy-and-hold investors because the monthly payments do not cost too much while looking for alternative conventional mortgage financing. 

How Do I Get Private Money Loans For Real Estate Investing?

To get a private loan that suits your real estate investment, look for lenders that understand real estate investing. This will increase your odds of getting a private money loan that suits your needs.

Some private money lenders have websites where they provide details of their loans. Therefore, you can start your search for a private money loan by searching on the internet. You can contact the lenders directly & find out more about the structure of their loans offered to make an informed choice.

Another great way to find private money lenders is to attend meetings of local real estate investors. This will enable you to establish a network of private investors in your area near you. Using this network, you’ll be able to find a private money lender with loan terms and interest rates that suit you.

Also talk to your colleagues, friends, and family members. These types of people are common private money lenders, or at the very least, they can refer you to reputable lenders.

How To Find Private Money Lenders For Residential Real Estate Deals?

Now that you have seen the power of private money lending you might be wondering “how do I move forward with this?”. There are several strategies you can implement to get started in finding private money lenders.

The first place to look are the various directory services to find lenders that will gladly fund your real estate deals. Directories like these enable you to search for lenders based on their location, your preferred loan type, and keywords like “rehab loan” or “construction loan”.

Another great location to search for private money lenders is your very own network. Whether it's friends, family, or colleagues, these relationships that you have built are worth a fortune. Many times people within our network will be more willing to invest in your real estate deals than strangers.

Reaching out to your network will not only open the doors to getting funding from your relatives but will allow for referrals from within their networks as well.

One of the best places to find private money lenders are local real estate investor associations and events. These may include conferences, meetings, cocktail parties etc. Many times private money lenders attend events like these with the aim of connecting to potential borrowers and investors like yourself.

You can also find private money lenders by networking with real estate professionals. These include title companies, real estate brokers, fellow investors, attorneys, and real estate agents. These professionals can refer you to reliable private hard money lenders.

What Do Private Money Lenders Look For?

Before issuing a loan, private money lenders take several factors into account.

One of the most important factors is the property value. Remember that in real estate, borrowers tend to use the property types they want to invest in as collateral.

Private money lenders also consider the plan their borrower has for the property. A well thought out plan will increase one's chances to get the loan approved. For instance, a borrower may plan on renovating a property or even renting for passive income property.

Other key factors may include the proposed amount of the loan, the properties neighborhood, and future value in the market.

Will Private Real Estate Investors Work With Me If I Have Little To No Experience?

Experience within the real estate industry plays a vital role when working with private money lenders. While some lenders may give out loans to new investors, the majority prefer working with investors that have a lot of experience. This gives them reassurance that their money is safe.

However, new real estate investors can build strong relationships and build trust within private money lenders to receive funding for their deals.

Are There Private Mortgage Lenders For Bad Credit?

Securing a mortgage via a conventional financial institution like credit union or bank is not easy when you have bad credit. However, there are private mortgage lenders that will lend you money even when you have a bad credit.

It’s important to know that the meaning of ‘bad credit’ varies from one lender to another. That’s because there are many types of credit which can vary depending on the scoring model and credit bureau.

However, 90% of lenders use FICO scores when making lending decisions. The Experian, a credit reporting agency breaks down FICO credit score as follows:

• 800 or higher - Exceptional
• 740 to 799 - Very good
• 670 to 739 - Good
• 580 to 669 - Fair
• 579 or lower - Very poor

When it comes to private mortgage lenders, it’s crucial to note that lenders have varying underwriting standards. Factors that affect credit’s role in the approval process include assets, income, and the property you need financing for.

Will Private Money Lenders Work With Me If I Have No Credit?

A bad credit score is often considered detrimental to real estate investments. This is particularly the case when financing a rental property. Fortunately, private money lenders will work with you even if you have a below-average credit score. Essentially, private money lenders will lend you money without subjecting you to the traditional credit guidelines and requirements.

Credit unions and banks avoid working with investors with no proof of steady income or those with bad credit. Private money lenders on the other hand give loans to real estate investors, many times regardless of credit and income.

As a real estate investor, you can sit down with a private money lender to discuss your options, negotiate terms and agree upon the amount of money to borrow. However, due to the increased risk these private money lenders are taking, the interest rate on these real estate loans tend to be higher than a conventional loan.

What Are The Benefits Of Using Private Money Lenders For Real Estate Investing?

There are several reasons to use private money lenders for real estate investing. Here are the major benefits of using private money lenders when investing in real estate:

Quick Approval

A good real estate deal won’t wait for you to get money. Unlike traditional lending institutions, private lenders approve loan applications faster. That means you can have the financing you need to lock a real estate deal within days.

Minimal Security Requirement

To get a loan from a bank, you have to collect, sign, and submit documents making this process very tedious and tiresome. Private money lenders on the other hand know how critical time is when it comes to executing an effective deal. Therefore, they just need a trust deed and a promissory note to be signed before issuing a loan.

Flexible Terms And Conditions

Private money lenders do not have strict terms and conditions like conventional lenders. In fact, terms of private money loans are decided during the meetings of lenders and investors. Loan terms and conditions are tailored to suit the needs of investors making the process of fixing and flipping a home with a flip loan much smoother.

Creditworthiness Is Not An issue

As discussed, private money lenders just need a signed trust deed and the property to act as the collateral. For this reason, most lenders may not be interested in the credit score, track record, and income of the investor. Thus, you will most likely not be asked about your credit score when getting a private money loan.

Transparency

Private money lenders are mostly local investors that want to fund local projects. They are generally interested in seeing the projects they invest in succeed because they are part of the community. Private lenders are also transparent about the costs, fees, and interest rates that are added to the principal amount issued.

What's The Difference Between Hard Money Lenders vs. Private Money Lenders?

A private money lender is basically an individual that wants to invest capital. Private money lenders use their money to fund real estate deals. That’s why they are ideal for time-sensitive transactions allowing borrowers to act quickly.

Hard money lenders on the other hand are more organized, semi-institutional entities that provide high-rate, short-term loans. Their loans cover renovation expenses and purchase costs. Hard money lenders must be licensed to issue loans to investors.

The difference between hard money and private money is that private money comes from less conventional sources. Since the lender can be a friend, business partner, family member or any other acquaintance, terms of a private money loan can be more flexible. The interest rate can also be lower than that of a hard money loan.

Where To Find Private Money Lenders Near Me?

There are many places where you can find private money lenders near you.

Here are the major places to look:

• Local clubs for real estate investors
• Real estate events and seminars
• Online forums for real estate investors
• Public records
• Local private money lenders directories

Talking to players in the local real estate industry is a sure way to find a hard money lender that will give you a loan that suits your investment needs.

How Do I Become A Private Money Lender?

Becoming a private money lender means you will be funding real estate deals for other people. But, before you become a private money lender, there are things you should do to maximize profit and avoid loss, such as:

Learn About Private Lending

Private money lending can provide you predictable returns. It also can be profitable and secure because the value of the property used as collateral must be higher than the loaned amount. However, private money lending can be risky for those not well-informed. It also requires a great deal of capital.

Know How To Minimize Or Mitigate Risks

Many things are likely to go wrong in private money lending. For instance, a borrower can fail to pay in a timely manner or even fail to pay at all. With that being said, the best way to mitigate risk is to find investors with a trustworthy track record. Some things to keep an eye out for are referrals from previous financing partners and case studies on past deals. Bottom line, the more reliable and trustworthy the investor, the lower the risk.

Be Organized

Get your procedures and documents organized to run a successful private money lending business. Since you will lend severally and to multiple borrowers, come up with a system that will save you time and enable you to avoid unnecessary hassles.

Do your due diligence before funding any deal. Also invest money in small amounts and run the numbers yourself.

How To Find Private Money Lending Investment Opportunities?

To find private money lending opportunities you must analyze where the majority of your borrowers will come from. Due to a need for quick and easy funding in the investment community, Many private money lenders will find their borrowers in the form of fix and flippers and other real estate driven investors.

Many times these investors do not qualify for conventional loans and rely on funds from private lenders to put deals on the table. Once a reputation is built within your local market referrals become common and your business will scale.

Nevertheless, once you decide to become a private money lender, you can get investment opportunities by attending local real estate events, seminars, and meetings. You can also leverage your existing networks to see if there are people in need of funding for their real estate projects.

Online peer-to-peer lending platforms can also be great places to find private lending investment opportunities. These platforms bring borrowers and investors together. They give private money lenders many investment options to choose from.

Should I Use Private Money Lenders For House Flipping?

When it comes to house flipping, there are costs associated with holding a renovation. These include utilities, taxes, and insurance costs amongst others. Unfortunately, securing funding with mortgage companies and banks is not easy even for experienced flippers.

Private money is a great solution to the major funding hurdle most flippers face.

Can I Use Private Money For Down Payment?

Yes. Private hard money lending enables you to venture into real estate investing without money. Basically, you can get 100% financing for buying a property and its rehab. However, you need to identify the right private money lender. Usually, most private money lenders will lend you up to 70% of the property’s after repair value (ARV). That means if you find a well-purchase-price property, you can get away without money down.

How To Raise Private Money For Real Estate Deals The Right Way?

Even if you are inexperienced in sealing real estate deals, you can raise private money for real estate deals the right way. To do this, start with the cash you already have and maintain a meticulous record of what you do. This will enable you to establish yourself with other lenders. Also talk to other people in order to find resources while educating others about private lending.

Once you start lending and seal deals successfully, don’t shy away from discussing the success you make. That’s because discussing success will make lenders develop interest in you. But, while doing this, pay keen attention to details.

And above all, have the bigger picture in mind. Focus on establishing solid relationships with individuals that will help you get private money and grow your career in real estate investment.

How To Get Private Money For Real Estate Investing Today?

The internet is awash with information about private money lenders. Sometimes it is hard to filter out the truth from the fluff. This is why we have created an in-depth training that walks any investor through the strategies that have been proven to raise money for thousands of deals thus far.

With years of experience, this training covers the steps on how to obtain all the money you need, how to invest in any type of real estate deal, how to use OPM (Others People’s Money) as leverage, and how to generate passive income. To obtain access to this training, please email us at [email protected]