Most of us at some time or another have considered the benefits of buying investments or buy-to-rent properties, either to raise cash or as part of a longer-term investment strategy. However, most of us do not have the expertise, capital, or income to be able to take the first step on the ladder. Banks and other corporate lenders will not provide money because you will fail their income-to-debt ratio tests, or perhaps you have a justifiable fear of moving to other capital sources feeling that they are somehow less reputable or more expensive.

Another good reason is employment status. Many traditional lenders will not make advances to the self-employed or contract workers. That is not necessarily the case. A new breed of lenders, private money lenders, are now able to put forward loans of differing types and financing requirements to meet a growing number of private buyers.

So who are private money lenders, and their cousins, the private hard money lenders? Simply put, they are groups of investors seeking a return on a capital investment on money they invest.

An official definition: a private money lender is a non-institutional (non-bank) individual, company, or investment group that lends money. The loan is generally underwritten by a note and deed of trust. In general, loans are advanced in respect of real estate transactions. A second group, private hard money lenders are in the same market but are generally considered to be less relationship friendly than private money lenders.

Some financial analysts include relatives and friends as potential private money lenders. Obviously, you might do so in the context of a family business, but if you have no such ties, it is seldom advisable to mix personal and business life. If the investment fails, then family ties are put under great strain. Again, it is equally inadvisable to enter into business investments with them unless of course, the friend of a friend is in that business anyway.

What are the advantages of private money lenders over traditional funding sources?

First, availability. Your jurisdiction may have strict lending rules for traditional lenders, and if you are entering the market for the first time, and particularly if you have an existing property loan, it is unlikely that you will qualify for a loan for a further property purchase, especially if you intend to rehabilitate the property and then immediately sell it.

Also coming into this category are self-employed and contract workers. Very few traditional lenders will provide property advances to this category. That may change in coming years as the ratio of traditional payroll employees to contractors and freelancers swings away from payroll employees. There is a distinct shift, particularly in the sunrise industries towards employing contractors and freelancers to provide specific skills for a specific time to complete a specific project. Private lenders have no such restrictions, basing their go/no-go criteria on their assessment of the deal itself. However, you should ensure that there are no statutory lending rules applicable to your situation.

Second, is speed. Private lenders will be able to tell you much more quickly if they are willing to advance a loan, typically in days or weeks, rather than weeks or months.

Third, the value of the loan. Traditional lenders usually require a down payment or deposit, often of a significant percentage of the amount advanced. They are also hesitant in advancing a hundred percent of the amount needed to secure, and if necessary rehabilitate a property. Finally, they may be unwilling or unable to structure a loan in such a way as to minimize tax or maximize any funds that might be available from state resources. Again, private lenders are open to structuring a loan in such a way as to maximize tax breaks, using other co-funding sources, and using the timing of advances to meet these objectives.

The final reason is cost. A traditional lender is pretty much fixed. Private lenders will base the cost on the investment return they require and the risk profile of the venture. It really varies per deal.

All in all, exploring private lenders as a funding source is a step well worth taking, but please ensure you have the appropriate professional advice to hand at all times.