Using Private Money for Real Estate
Everyone knows you can buy a house with cash, or you can go to the bank and get a mortgage. Yes these are the common ways that people will finance a residence or an investment property. Over the past decade, peer to peer lending has disrupted this market. Now it is very common to find local lenders or investors who will help you finance your real estate investment projects without the underwriting at a bank!
What is private lending? This is when an individual or entity is created to lend their personal capital to real estate investors. It can be as simple as providing capital for a single family house to redevelop, or as extensive as a massive apartment building, or development project. The process is similar to a bank, but with much less underwriting, and much higher costs.
A bank will normally require 2 years tax returns, business filings, a credit report, your personal assets and liabilities, and much more. With a private lender, they may check a few months bank statements to see how much cash you have, and the rest is based off the actual deal itself. They are lending strictly on the asset as opposed to lending based off the borrower.
This obviously requires more risk for the lenders, and they protect their interests with well.......interest! It is common to find private financing terms at over 12-14% as well as a few points on the acquisition. A point is 1% of the loan amount. So if it is a $100,000 loan you are requesting and there are 2 points, that's $2,000 paid at closing on top of the other fees.
This might sound expensive compared to a bank! Well it is, but investors are willing to pay for the access to capital and ease of closing on properties quickly. This allows the investor to scale quickly, and leverage other peoples' money. In Pittsburgh, prices are generally low for housing compared to the rest of the US. This provides for a great opportunity for local Pittsburgh investors to accumulate several properties with very little of their own cash in the deal!
Here's how it works....
Pittsburgh real estate investor finds a property they can buy for $40,000. They believe after repairs it would be worth $100,000 all day. They think it will cost around $30,000 to renovate the property as well as take care of utilities and other misc. expenses. The investor now needs to secure the financing. They can contact their private lender and request for a loan of 70% of the after repair value. The lender is fine with this because they can take the house back as the collateral like a bank, and have a renovated house at 70% of its value.
The lender will provide the investor with $70,000 and charge them say, 13% interest. The investor now gets the property, the construction funding, and just pays an interest rate along the way. If they can complete the project quickly without many overages, they may be able to get out of this with barely any of their own funds!
This process can be completed again, and again. The hard part is showing lenders you have experience first, as well as finding private lenders with enough capital to fund your growing business.
For a list of local lenders we work with contact us directly at RaibleRealtyInvestments@gmail.com