For investors contemplating the fix-and-flip model of real estate investing, one of the initial decisions that you will have to make is the type of funding to use to acquire and renovate the property. One of the most ideal financing options are private money loans. The following is a quick overview of private money real estate loans, the potential pros and cons of utilizing this type of funding and what types of transactions are best suited for this approach.
Private Money Loan Basics
Committing to a real estate investment is a potentially lucrative endeavor and can present a viable approach to accruing generational wealth, round out your collective investment portfolio and earn passive income. Private money loans, also referred to as “hard money” or “bridge” loans, are relatively short-term lending instruments that investors can leverage to cover the costs associated with acquiring and renovating properties for a profit. Private money loans are sourced from pools of private investors as opposed to banks or credit unions that generally extend conventional mortgages.
In contrast to bank loans, real estate investors can obtain the capital they need from private money lenders without having spotless credit scores or substantial amounts of cash reserves. Instead, private lenders concentrate on the value of the underlying property asset—which is also used to collateralize the loan itself. More specifically, private lenders premise the amount they can lend to a borrower on the ‘after repair value’ or ‘ARV’, which is an estimation of the property’s value after the completion of the rehab or development stage of the project. ARV is calculated by referencing local comparable properties sold in recent history to the subject asset (also called ‘comps’) that are closely relatable in terms of condition, year built, square footage, style and build.
Benefits of Private Money Loans
There are several potential advantages for using a private money loan to fuel real estate investment transactions instead of conventional financing options. Here are a few of the main upsides private money has to offer:
- Efficiency: The application process for conventional financing through banks is a lengthy and involved process, partially due to recent regulations implemented in the mortgage industry associated with the Dodd-Frank Act. Traditional loans can take months to close, a delay which could jeopardize potential deals in a competitive market. Alternatively, private money loans can disburse funds in a matter of days or weeks. That’s a significant plus if you’re planning a big development transaction and need to complete the project on time to remain within your budget.
- Flexibility: Because private money lenders are not restricted by excessive regulatory measures, they have more freedom to negotiate with borrowers and develop innovative funding solutions that fit their financial needs. They may be able to adjust repayment schedules or reduce origination fees as part of the relatively short underwriting process.
- Collateral: Private money loans are typically secured by the property being acquired—but lenders may afford borrowers some leeway in this aspect of the loan as well. For example, some lenders permit investors to secure the loan using their personal assets such as with retirement funds or their primary residences.
The Time is Now
Private money real estate loans are an ideal option for investors looking to obtain funding quickly without having to navigate the complex approval process associated with conventional financing. Coastal Capital Funding adopts a client-focused approach specifically designed to deliver innovative and efficient funding solutions that are individually tailored to fit each and every one of your needs. We have years of experience in assisting successful investors reach their goals—contact us today to learn how we can do the same for you!