Hope your Thanksgiving found you well!
Question for the masses.
Why is private money, from friends and family what I hear is "the way to do it" such a good thing, when I am seeing private money mortgage brokers offer 6-7% loans 30 year fixed? The reason I ask is if you are to borrow from family and friends I thought the norm is about 8-10% in interest but if I can get a loan from a primate money broker for 6-7% with no limits on loans, why should I strive to get money from friends and family and potential have more people to answer to?
Just curious as I have started to make a name for myself on my inner circle and are now starting to get people coming to me who are willing to put up their money with me as they see I am doing fairly well.
Whether it is friends, family, or hard money lenders, it’s all private and the rates should reflect market conditions. When funds start to dry up, you’ll find less lenders, so rates go up. If cash is readily available in your area, the rates be 3 to 4% higher than the banks. IMO I would always avoid family and friends. If you’re well established, just use their funds and go 50/50 of some deals. I’ve seen that work once trust is established and you’ve shown proof of concept.
If your friends and family charge 8-10% interest, but on the other hand you can get money from a broker for 6-7%, 30 year fixed, with "no limits on loans" - there really wouldn't be much advantage in your case to using money from friends and family. However, often times investors can get better rates and close much quicker with less strings attached when using private money from friends/family. Just go with whatever works best for you.
Purely anecdotal, but we are purchasing a home from family with seller financing. Due to the relationship, we agreed on a 3% down payment and the IRS minimum interest rate for a family loan (in our case, 2.47%). The loan has a 30year term. We are also getting the home for below retail. Although we don’t anticipate any issues, we had a proper agreement of sale, mortgage and note, and we are closing with a title company (so there was a title search and we have title insurance) and will be using a loan servicing company to avoid any confusion about payments, balances due and taxes. In other words, it’s possible to get private money at a favorable rate from friends/family or other lenders. You can treat it like any other lender and have the same structure in place for managing the loan. It helps to understand your lender’s motivation. If it’s purely a for-profit venture for the seller, then yes, rates may be higher. Our seller was interested in cash flow on a monthly basis and wasn’t concerned about overall profit margin as much. We would have had no issue getting conventional financing, but in this case it made no sense since we could get the money at such a low rate for an extended term.
TL;DR - with private money, almost everything is negotiable, which is a good enough reason to pursue it.
When you have established relationships w private lenders it is typically the best route to go. Yes the rate may be a little higher, but there is not near as many obstacles to get the money and use it. Banks/credit unions/“portfolio lenders” will usually require loan applications, financial history docs, other various paperwork before being approved and most take a bit longer to close. You will still need 10-20% down w the bank. With private money you can do things fast and leverage “other peoples money” for the entire purchase...
It all depends on the situation.
For example, hard money, although it has a high rate, you can usually close very quickly and if you have a good deal, you might not have to bring any money to the table.
So, all things considered, private money is usually the best for reasons mentioned above, but that doesnt mean that other financing options should never be used or explored. You always want to see what works best for each situation and obviously when you can do a deal w little to no money down, then that is a pretty awesome scenario!!😎