How Private Money Lending Works!

Private money lending occurs when a wealthy individual or private organization loans money to a person or company. Private money lending is common in real estate investment. Private money lenders loan money to investors who purchase and, often, renovate properties for resale or rental. Private money lending is less regulated and more flexible than lending by licensed lenders such as banks. A financial advisor can help you decide whether a private money loan makes sense for you.

Private Money Lending Basics

The defining characteristic of private money lending is that the money for the loan is provided by an individual or a private organization. Often, the lender is a family member or friend of the borrower. When the private money lender is an organization, it is not a bank or other licensed lending organization.

Private money lending is not subject to the same regulations that govern other lenders, but the business is not completely unregulated. Private money lenders do have to follow state usury laws that limit the amount of interest that can be charged. They may also be limited in the number of loans they can make.

Interest rates on private money loans tend to be higher than loans from licensed lenders. From 15% to 20% is typical. However, in the case of a loan from a friend or relative, they may also be lower than market rates. Private money loan payments may be interest-only for the term of the loan, with a single large balloon payment at the end.

Qualifying for a private money loan is different from qualifying for a regular loan. The lender is likely to focus as much on whether a specific deal makes financial sense as on the credit history or score of the borrower.

Terms on private money loans are often short, just six to 12 months, but may also be payable over up to five years. They generally require a down payment and often are secured by the property. The lender will typically require a written plan describing how the money will be spent.

Private money lending is similar to hard money lending. They are both often used in real estate investing and involve getting financing from somewhere other than a bank. Hard money lending, however, is more similar to mainstream lending, such as from a bank and less like friends-and-family financing via private money loan. It may be harder to qualify for a hard money loan.

Private money loans are more flexible than traditional financing. Borrower qualification guidelines are fewer and less strict, especially when the lenders are friends or family members. One key difference is that private money lenders are more likely than others to be willing to finance the acquisition of distressed property in need of significant repair. This allows investors who are short of cash to purchase low-priced properties and pay for renovations that increase the value of the properties.

The flexibility of private money lending also makes it faster. A borrower can get the money to do a deal in days, rather than waiting several weeks to get funded by a conventional mortgage. Contact us today for more information on finding a Private Money Lender! Passive Home Investor Team – [email protected]