You cannot discuss real estate investing without talking about private money lenders. Due to the competitive nature of the real estate industry, investors always find themselves in need of large capital, which may be out of their reach. Mostly, the real estate deals that rack in fast profits happen quickly, and only the investors with cash at hand make a killing on such deals. It is especially true for the fix-and-flippers and buy-and-hold investors who buy cheap property, renovate it and sell it at a profit.

For such investors, private money lenders are God-sent because they would have nowhere to turn to get large sums of capital in real-time. With the strict and prohibitive terms applied by the mainstream financial institutions, private money lenders provide a much-needed alternative for investors in need of quick loans. Additionally, private money loans do not require you to wait for 30 days as it is the condition with most conventional lenders who mostly favor owner-occupied loans.

A private money lender would be anybody who has cash at hand and is willing to lend to an investor with the understanding that the loan will earn interest. As such, they are classified into three categories; primary circle, secondary circle, and third-money circle. Primary and secondary lenders are people you have an established relationship — such as your relatives or work colleagues, and they trust you with their money. Third-money circle lenders are the main private money lenders in the industry. They are well-known investors and, for the most part, are referred to as hard money lenders.

How Do Private Money Loans Work?

When an investor spots a good deal in the market, for instance, quality low-priced property, they have to move fast to close the deal by being the first to buy the property. However, the investor may not have cash at hand to see this through. The investor will turn to the private lender to borrow the capital needed. Private money lenders will, in turn, do their due diligence and then lend the investor the money. The property serves as collateral for the loan as the investor pays monthly interest rates as agreed. Private money lenders earn profits from monthly interest. As such, the interest rates are higher than the conventional mortgage rates. At the end of the loan term, the investor pays back the full amount of money owed. Ideally, this works smoothly for the fix-and-flippers investors who rehabilitate property then sell off at a profit. The money earned in the sale pays the private money lender and other incurred expenses, and the investor keeps the difference as the profit made.

Some of the benefits of private money loans are:

1. Flexible Terms and Conditions

For the private lender who already has a prior relationship with the borrower, they will discuss and agree on favorable interest rates and repayment terms. For the most part, hard money lenders will mainly be interested in the profit they stand to gain from the money they loan an investor. As such, a lack of a good credit score or poor financial history will not prevent the investor from obtaining a loan, as long as they have an actionable plan to make money from the deal. Additionally, the investor may request a top-up to supplement the loan if need be.

2. Speed of Approval

The most desired advantage of hard money loans is the speed of approval, typically, within seven to eight days. Additionally, you may want to secure a loan to rehabilitate a damaged or vandalized property. While the conventional financial institutions will shy off from such loans, hard money lenders will approve such a loan. The fast approval process ensures that the investor does not miss out on a good deal because of delays. It is a win-win for the private lender and the borrower.

Private money lenders effectively bridge the gap created by the punitive mortgage loan terms imposed by banks and mainstream financial institutions. The most successful investors in real estate will attest to their importance in the industry. Without private money loans, most investors without enough capital would most likely not make it big in real estate.