Private Money Loans
Private Money Loans 101
As banks make it increasingly hard to obtain real estate investment loans, investors are turning to private money loans to bridge the gap.
A private money loan comes from a private lending company rather than a bank. The money is often available in days instead of weeks, with less-strict requirements for credit history. Private loans enable cash offers with less hassle. Ultimately, they streamline the real estate investing business, giving investors a powerful tool to act on profit-making opportunities.
What is a Private Money Loan?
A private money loan is money for real estate investors like fix-and-flip or long term rental properties. The cash comes from a private company and is geared more toward the real estate investor.
Investors often prefer private money loans for a number of reasons, including:
- Speed. Private money loans are fast. Most private money changes hand in days rather than the several weeks a bank loan can take.
- Ease of entry. Private money loans take things like credit score, income and cash-on-hand into account, but not as strictly as a bank loan does.
- Cash offers. Private money loans enable up to 90% cash offers. That’s a huge bargaining chip when buying real estate.
- Less hassle. Bank loans add a lot of red tape and paperwork. Private money loans make real estate investment easier by cutting down the paperwork significantly.
- Private money loans let investors act on several deals at once, removing the loan-quantity barriers that prevent banks place on investors, thereby preventing them from scaling their businesses.
What Kinds of Properties Does a Private Money Loan Cover?
What’s the scope of a private money loan? In other words, what kinds of properties will it work for?
Generally speaking, private money loans are not for traditional family real estate deals. Anyone looking to buy a family home with good credit and a solid income history should go the traditional route.
Private money loans are ideal for:
- Rental properties. These are ideal for private money loans because they often show definite profit potential that attracts investors.
- Fix and flips. Time is money with fix and flips. That’s why private loans beat traditional bank financing when it comes to these deals.
- Multi-family homes. The demonstrable income stream from multi-family homes makes them excellent candidates for private money loans.
- Single family homes. Where the buyer has credit issues or needs to act fast, speed is the best feature of private money.
- Fast real estate deals. The fast turnaround of private money loans makes them ideal for deals that pop up quickly like bank foreclosures and short sales.
Private Money Loans: How Much Do They Cover?
What is the limit of a private money loan? How much of the property’s purchase price will it cover?
That depends on the lender, but generally a private loan covers some percentage of the total value based on cost, value or after-repair-value (ARV).
- Loan To Cost (LTC). Some private lenders cover 70% to 90% of a property’s purchase price.
- Loan to Value (LTV). Some private money loans cover up to 90% of the property’s estimated value.
- After Repair Value (ARV). Sometimes, a private money loan covers 65% to 90% of a property’s estimated value after the borrower has improved it.