PRIVATE MONEY & TRADITIONAL LENDING SOURCES

by Team IWP! on 25. Apr, 2010 in How to buy foreclosure, How to invest in real estate, Investing for Beginners, Lending, Money & Finance, Personal Finance Investing, Real Estate Investing, beginning investing

Private money sources might be a bit advanced for new investors. Just starting out in real estate, learning all the how to’s of effectively locating properties, hiring contractors and taking a project from A-Z may seem like a major task and obstacle. However, all of those road blocks are manageable. With a little education and training, you will no doubt learn the ropes of real estate investing and be able to move quickly through your projects. What you will find to be more important than the basic building blocks of real estate will be your ability to finance projects. It’s very simple. You can take all the real estate courses available, buy all the books, CDs and even pick up the T-shirt. But at the end of the day, what it comes down to is: No Money, No Projects.

There are two typical money sources of financing that most rehab investors use: 1) Bank Financing and 2) Hard Money Lenders. Depending on the nature of your rehab, these institutions may work to your advantage. However, it is more likely that these sources will become a disadvantage and a hindrance to your goal of funding a project.

Here are some of the disadvantages of using bank financing or hard money loans as your financial lifeline in the real estate world. You will find that utilizing private money sources will be much better for you after this understanding.

Financing with Hard Money Lenders:

Know This – Good credit is a must to obtain a rehab loan from a Hard Money Lender. With the majority of Hard Money Lenders, if you don’t have at least a 630 FICO, you will most likely find yourself without funding for your deal.

Most Hard Money Lenders Require A Down Payment – This down payment can range anywhere between 10%-20%. That’s money right out of your pocket before you ever get one dime from the lender.

Hard Money Lenders Charge Points – Typically you will find that Hard Money Lenders charge anywhere between 3-10 points per loan. That’s a huge chunk of cash out of your project and out of your pocket right up front.

Most Hard Money Lenders Will Require You To Fund The First Phase Of Your Project – For example if you have a 4-phase rehab loan with $40,000 for repairs, you would have to finance the first phase of that and come into the project with over $10,000 cash out of your pocket. This is in addition to paying your closing cost, points and down payment.

The bottom line is, most people don’t have $20,000 cash to get started with in this business. For these reasons, I say that hard money loans can become a serious road block and disadvantage to both beginning and seasoned real estate investors. Again it seems like private money sources might be the direction that you want to move in first, but let’s be sure to cover banking or traditional lending sources as well.

Bank/Conventional Lending:

With bank lending, you must show a strong FICO score, W2s and statements of earnings. Again, you must be approved by the lender.

With some banks, if you have too many properties on your credit report, they will often turn you down for a loan.

Banks can typically take between two weeks to a month to finance a loan. These time constraints can really mess up a great deal that must close now.

Banks typically will not finance distressed properties.

If the home is in disrepair, it will need to be brought up to code before they will finance the home.

With these restrictions and requirements, it may be that some people with great potential will walk away with shattered dreams of ever becoming a real estate investor. But that’s not the way it has to be. For those just starting out or those of you who have already been down this path of denial from banks or hard money lenders, I am confident that private mortgage lending and the use of private money sources will become your key to enter the “Rehab World” in a big way.

Some Benefits of Using Private Money Sources :

1) There Is No Restricted Criteria – It doesn’t matter what your credit score is or what you have in the bank. If you know how to get the job done and convince a private lender of it, you will receive the loan.

2) With Private Money Sources You Have Control Of Your Deals – When you take a hard money loan or conventional loan, the lender is in control. With private money, you are in complete control. You set the interest rate and the time frame.

3) Immediate Closing – With private money sources you will have available funding to begin your project immediately upon closing.

4) With Private Money You Will Have Recyclable Funds – This is the best part, as soon as you are done with the first transaction, you will have a ready loan that you can put right back into play. There is no hassle of submitting your paperwork to see if you get approved for a loan and there is no hoping you get the funding. You will have people literally waiting to put their money back into play with you.

Private money sources are truly an untapped resource for all your funding needs in the real estate arena. And the best part is there can literally be an endless supply of private funds if you tap the right market.

Why People Will Want To Fund Your Deals:

1) CDs are at an all-time low, offering less than 5%. Stocks, 401(k)s and IRAs are volatile and constantly changing. These are not bad investments. However most of them cannot offer a safe, secure and dependable rate of return for their investment.

2) Private lending works with a solid asset that maintains a moderate stability, unlike paper assets that are constantly going up and down with the market. This is a great advantage for the private lender and the real estate investor that is receiving the private money sources.

3) Private lending has a security factor. All transactions are backed by a first position mortgage, tied in with a promissory note and every deal lists the lender as the mortgagee on the hazard insurance policy. Compare this to the fine print of a stock, IRA or 401(k) which states that you can literally lose everything.

4) Not only will you provide all the security documents to the lender, but you will also never over finance your project. Sticking with the 70-75% rule will give your lender the added security of knowing his or her loan carries not only their principal but also 25-30% equity.

Again, there are so many wonderful options in the world of Private Money sources. Let me ask you a question – have you ever stopped to consider that all the funding resources you need may be alive and ready right now inside of your circle of influence?

Dave Overman is active investor in NW Indiana. To learn more about private money sources, visit www.rehabloantree.com and click on the Events Page.

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