Scenario #1: Well Seasoned Investor who has been investing in real estate for many years has a $100,000 line of credit at their bank. They have never been late or missed a payment. They get a new property under contract, contact the bank for the wire to close to find the line of credit has been canceled. Deal is lost.
Scenario #2: The same investor has 10 rental properties on a note with the local bank. Has never been late, has never missed a payment and has rolled the note 3 times. His original note amortized over 20 years and has a 2 year balloon, but with good steady payments, the note can be renewed every 2 years. He is all set to renew and he gets told he has to pay off the note or be foreclosed on. No other bank is lending and he does not have the full amount in cash, so he looses all 10 properties to foreclosure. Investors Credit is Shot.
So these two scenarios played out over and over and over again between 2007 and 2009 as the banks stopped lending to investors, started calling notes due and pretty much put a halt to all lending for a while.
Then banks, well they came back to life and offering some loans to the real estate investor again if you can find the bank, have the down payment and can meet their requirements and many can’t because of Scenario #2, because they could not refinance a note, the bank foreclosed and now they have a foreclosure on their record, so no more loans for a while.
Well back in 2007 and 2008 there was a very little known secret called Private Lenders. The Real Estate Investor who had the private lender could gain access to money faster than working with the banks and mortgage companies, could get loans for less closing costs if any, and for a lot less in interest.
Because the private lender is lending partly because of the investors credibility and experience and based on the equity in the house, typically there is no credit check involved. And because you are borrowing or partnering with a private individual, there is no reporting to the credit bureau. This is a good thing, not because you are going to default on the loan but because it keeps your credit clean of multiple house loans so when you need to use your credit to get a mortgage, it is available to do so. Remember, often times lenders say you can only have so many loans in your own name on your credit report. So if the private lender does not report it, the loan does not count against this arbitrary number of traditional loans you can obtain.
Fast forward to 2017 and Private Lender and Private Partner and Joint Venture are the catch phase.
So with a traditional bank, you and I, the general public put our money in the bank for safe keeping and hopefully a 1% rate of return on our money. In turn the bank lends it back to us for say 4 to 6% interest. They make the spread.
With the Hard Money Lender, the guys that charge more . . . they take contributions to their fund from people wanting a better rate of return and offer them a much better rate of return than the bank will pay . The Hard Money Lender then administers the fund to lend money back out to the real estate investor with Points up front and a much larger interest rate.
With the Private Money Lender, we take out the middle man spread. The Real Estate Investor pays less for the money and the Private Money Lender makes more for their investment. But because the middle man is not there to deal with the fall out should things go south, there is more risk, but remember the private lender is getting paid more to take on that risk.
So where are you going to find a private lender . . . well, typically they are going to be people that know you who know and trust you both on a personal level as well as your business sense in investing in real estate who are going to be willing to take the risk to lend you money.
There are steps you can take to attract the people you know so they want to do a deal with you. The best being letting them know about your latest great deal you have just completed. The more good deals you do, the more likely they are to want to partner with you. My first two private lenders, well , they came to me. “If I could do one or two more deals a year with their money and pay them $5,000 a deal, would it be worth it too me?” Sure, we did several, I made more money and they made more money and my intro to the world of Private Money was started.
Article provide by Kim Tucker from www.KCInvest.com.