Real Estate Investment
Private Money Lender: How to Get Them and How to Keep Them Long-term
Finding a private money lender is an essential part of any real estate investor’s business. In the old days (pre 2006) you could easily get a mortgage or even hard money loan simply by showing up in the lenders office and filling out an application. If you could walk and talk you qualified for a loan.
But today in the post credit-bubble market those days are over. Getting money for your real estate investing business is much more difficult and likely to get even more difficult as the credit markets sort things out. So how do you get money for your real estate investment business?
The answer is a private money lender.
One of the keys to finding a good private money lender is determining if they have similar goals and objectives as yours. You need to understand what they are trying to achieve and if your private lending program fits their needs. For example, if the private money lender wants an investment for a 10 year period, but you plan on doing quick flips every 6 months, it will not be a good long-term relationship. You and your private money lender need to have similar goals for a good long-term relationship that will result in repeat business.
So how do you determine if you and the potential private money lender have similar goals. You need to discuss your plan and ask questions similar to a job interview. We would recommend a series of questions similar to those listed below. Obviously, you can modified these questions to fit your personality, but the information you get will go a long way in determining if this is a person you want to do business with.
Important Questions to Ask
How much do you have in liquid funds?
Do you have other monies you might want to consider for an investment program that pays 9% to 15% and secured by local real estate?
What type of investments are you in right now?
How much are they making on your current investments?
How long do you want your money invested for and do you have plans coming up that will require your principal back?
How available is your money or is it tied up in investments that are not readily accessible?
Are you a “Qualified Investor” (person must either have a net worth of about a million dollars or have an annual income in excess of $200,000)
Do you know anything about real estate investing?
When would like to start investing?
Asking these questions will flush out how close your goals are and will foster a good long-term relationship.
Private Mortgage Lender: What to Expect From a Private Lender
A private mortgage lender is essential to the success of your real estate venture and your business relationship with the lender during the life of the real estate loan. For many real estate investors, working with the right lender means the difference between a sweet deal and a deal gone bad.
Many real estate investors opt to work with private mortgage lenders to escape the bureaucracy involved with the conventional lending process. The global real estate market is competitive and often the speed of the transaction is crucial to the success and outcome of a real estate deal.
Loan-to-Value: Private mortgage lenders are concerned with loan-to-value (LTV) ratios which is the calculated percentage of the requested mortgage to the total appraised value of the property. When working with a private lender, you will want to learn what their criteria are for lending when it comes to the loan-to-value ratio. This will vary depending on the type of real estate investment you are seeking to finance.
For instance, a private mortgage lender will typically lend a lower percentage on raw land and a higher percentage on a multiple unit property that produces cash flow. If the property and the borrower meet the criteria of the lender, they will be more likely to lend the maximum percentage. If the deal is considered less than ideal, the percentage of the loan will be significantly lower.
Private Lender Property Interest: It is important to find out the property interests of the lender with regard to the type of property they would most likely be willing to fund. Typically, the private lender would be interested in a property that is easy to sell if the borrower lands in default. This would most likely be a property that produces cash flow as opposed to a non-income producing property such as raw land.
Property Income Potential: Another consideration of private mortgage lenders is how much emphasis they place on the income potential of the property being considered for financing. Some private lenders insist on a property that provides sound collateral because this adds a great deal of security to the loan. In other instances, private mortgage lenders will also consider cash flow from other existing properties as a substitute.
Exit Strategy: To be sure to keep your private lender happy and hopefully doing business with you on new deals it is very important to a repayment strategy. Private lenders will evaluate whether or not the plans for repayment by the borrower are feasible or questionable. For example, if the borrower plans to satisfy the debt by obtaining another mortgage, the private lender will need to consider the credit history of the borrower.
Decision Making Process: You can expect the private mortgage lender to use a similar decision making process to a conventional lending institution when considering you as a borrower and the property you are financing. The nice part is the private lender may fund a venture that the conventional lending institution would refuse and will provide creative methods when it comes to repayment terms.