Private money loans are an ideal form of funding or refinancing a real estate investment, particularly if you do not qualify for a conventional loan. Unfortunately, most people are unaware of these kind of fast cash loans and situations where they are best used. This easy-to-understand read aims to change that.
What is a Private Money Loan?
A private money loan is a form of short-term loan that’s used to finance or refinance a property. This form of funding is provided by private lenders and hence the name private money loan. Unlike conventional lenders like banks and credit unions, private money lenders don’t face many strict regulations, which makes accessing these loans easier and more straightforward.
The amount you can borrow depends on the value of the real estate investment acquisition in question and the duration is usually 12 months, but can be extended to up to 5 years.
When to Use a Private Money Loan
Private money loans can be very helpful if you do not have the equity to finance your real estate venture. They’re also an excellent alternative to conventional loans as getting finance via traditional means is time-consuming and has numerous hurdles during the application process. When it comes to investing in real estate, speed is critical. Private money loans also fall in an array of categories, which are used for varying reasons like rental loans, bridge loans, fix & flip loans, cash out refinance loans, and construction loans.
Should You Take a Private Money Loan?
These types of loans give you instant access to financing real estate deals, especially in markets where speed is vital. However, they come at slightly higher rates. This calls for weighing both the pros and cons to ensure you make an informed decision.
The Pros of Private Money Loans
Easy to Leverage
Leveraging all your money on a single property is never a good idea. With a private money lender, however, you can be able to leverage your money to purchase multiple properties and have more than one source of income.
Ideal for Novice Real Estate Investors
If you are looking to be a part of the real estate investment industry but need funding, a private money loan can be an excellent way to start your venture.
Asset Based Lending
Private lenders put the most weight on the property when calculating how much to lend. Your ability to repay the loan plays a role, but the focus is often on the asset and not the borrower.
Getting a private money loan is easy, fast, and straightforward. This reduces the chances of losing an investment opportunity because you didn’t have the money and gives you a head start at the same time.
No Fines for Prepayment
Another appealing benefit of private money loans is that there are no prepayment charges. You can repay the loan as early as you wish without being penalized.
The Cons of Private Money Loans
Designed exclusively for Investment Properties
Private lenders only offer private money loans on investment properties. This makes them unsuitable for owner-occupied investments.
May Need a Substantial Down Payment
This mostly depends on your investment’s profitability and experience. In some cases, however, you may be asked for a larger down payment. However, if you intend to use the property as a fix and flip investment, then you should be able to repay the loan with the profit acquired.
Where to Get a Private Money Loan
An important thing to keep in mind is that credit unions and banks do not offer private money loans. So, if you want one, you’ll need to seek private money lenders such as private investors.