How Private Money Lenders Work
Private money lenders typically offer loans that are secured by a real estate asset. These loans are used to purchase a house, condo or multifamily building.
When people think about private lenders, they’re most typically referring to hard money lenders. This is because hard money lenders issue short-term real estate loans used to purchase and renovate an investment property. Hard money loans are good for both short-term fix-and-flip investors as well as long-term buy-and-hold investors.
There are three degrees of private lenders. Each are based on the relationship between the borrower and the lender.
The three degrees of private money lenders are as follows:
- Primary circle: Family & friends
- Secondary circle: Colleagues, professional & personal acquaintances
- Third-party circle: Accredited investors & hard money lenders
Hard Money Lenders are Private Lenders
Hard money lenders are considered to be “third-party” private lenders, which is the furthest away from a borrower in terms of relationship. However, hard money lenders are considered the best private lenders because they’re the most reliable and have standardized interest rates, costs, fees, and loan terms.
Private money lenders are predominantly right for short-term fix and flippers who want to compete with the short timeline of an all cash buyer. However, private loan lenders are also right for long-term investors who want to rehab a rental property before refinancing into a permanent mortgage or seasoning a property before refinancing.
Who Can Benefit from a Private Money Loan?
Private money lenders are right for the following types of people:
- Short-term and long-term investors who need financing quickly.
- Buy-and-hold investors looking to purchase and renovate a property before refinancing with a conventional mortgage.
- Long-term investors who can’t qualify for a conventional mortgage but plan on refinancing once they meet qualifications.
- Long-term investors who need to season the property
Private lenders often issue loans to short-term investors looking to make money flipping houses. Private lenders also issue both rehab loans as well as traditional hard money loans to buy-and-hold investors looking to purchase and/or renovate a rental property.
The best use for a private loan is for a fix and flip project. Fix-and-flippers often seek short-term financing options that allow them to purchase, renovate, and sell a property within a short period of time. However, long-term real estate investors who invest in rental properties can also benefit from private money loans.
Residential and Commercial Properties
Private money loans can be used to fund a wide variety of properties including residential and commercial properties. Specifically, private money loans can fund the following property purchases:
- Single-family homes in most conditions
- Multi-unit properties in most conditions
- Apartments and condos in most conditions
- Commercial real estate in most conditions
In fact, hard money loans are often the best financing options when it comes to properties such as:
- Non-distressed REO properties
This is because these types of properties tend to move quickly and investors often have to compete with all-cash buyers. The quick pre-qualification time and time to funding of a hard money loan allows investors to purchase these types of houses.