Which is better? Private lender or Line of Credit?

18 Replies

It would be good to have the cash I need at my disposal to use at moments notice. My investing partner keeps bringing up how I should get a business line of credit to use as cash to buy homes. My thing is, which is better to have? Private lender or line of credit? If line of credit, would it be best to get secured or unsecured line of credit? My credit scores are 742 and 733 if that is good enough.

I would recommend the line of credit as well given your credit score. The holding costs are typically much less on a line of credit than on private money. We use this strategy, although on a HELOC, not a business line of credit. We have been able to purchase multiple properties this way. We purchase a property, use the income to pay off the HELOC then start again. It's a great snowball strategy!

Originally posted by @Eric Black :

I would recommend the line of credit as well given your credit score. The holding costs are typically much less on a line of credit than on private money. We use this strategy, although on a HELOC, not a business line of credit. We have been able to purchase multiple properties this way. We purchase a property, use the income to pay off the HELOC then start again. It's a great snowball strategy!

Where is the best place to get a HELOC? What is needed to apply and qualify for a HELOC? I never used it before.

You can reach out to most banks or credit unions. I would start with your existing bank since you already have a relationship, but shop around. We used US Bank and the process was pretty simple. Each bank will have their own requirements but most will run your credit and do some kind of appraisal, even if just a "drive-by" appraisal. You'll need to provide information on the property you'll be getting the line of credit against. It's a pretty simple process really. Nothing like a traditional mortgage. 

@Eric Black I checked my bank and their HELOC or home equity loans as they call them are designed for primary residence occupants only. I need money to buy investment properties to buy and resell or buy and hold. HELOC may be good to buy turnkey rentals too seeing how the house is already cash flowing.

Yes, HELOC is a home equity line of credit. Some banks will only lend them on a primary residence. We got one against our primary residence to buy turnkey rentals. We were able to get a HELOC on one of our rental properties through our credit union. Start calling other banks since your bank won't do a HELOC on a rental. Try a credit union or small local bank. Again, the house has to have equity to lend against. If you don't have that then a business line of credit will function the same way. If you have a business and have established, or can establish credit then you can do the same thing. Either way, a HELOC or business line of credit is going to be cheaper than private money. With private money you also typically have a shorter repayment period, often 6 months to 1 year. With a line of credit it will typically be at least 10 years or more.

@Eric Adobo What is the downside to doing that if it is that bad? I'm just looking for other options.

@Eric Black I do not own a home, so I may have to go with business line of credit if I can qualify. My bank is a credit union. Are you saying try a different credit union? I do not know of any other credit unions in my local area or small local banks as we have none in my area.

@Eric Adobo , can you explain the rational for your bad advice? Did you have a bad experience? Did you make bad decision after bad decision? We have now purchased 3 TK properties using our HELOC, which is paid off, and those 3 properties produce over $1500/mo in positive cash flow. I would not say "never ends well." If you buy the wrong property, or from the wrong provider, or aren't responsible about paying back the HELOC then yes, it can be bad but those are all your responsibility.

@Tony Marcelle , don't listen to the other Eric. Sounds like he had a bad experience due to his own bad decisions. It may not be the right strategy for everyone but his generic statements should be ignored. If you don't own your home then obviously you can't get a HELOC on that, but you can get a HELOC on a rental property with some banks. Do you already have a rental property that has equity or are you trying to buy your first rental property?

@Eric Black I feel the same way as you because I actually thought using the money to invest in turnkey rentals that is already producing steady streams of income was a good thing. I am still waiting on his response to back up his statement. I do not have a rental, but I would like to have a turnkey rental someday soon.

All things being equal, bank financing as a better gig.  I would take as much bank financing as you can get.  Debt to income quickly gets used up in real-estate investing.  The calculation for rental income and self employment income is considered less valuable than w2.      

When you can no longer can get bank financing, I would look at private money. 

HELOC

and home equity loan are two different things. Your HELOC payments start only when you take money out.

Payments for home equity loan start immediately after setting the loan. 

So if you already have a deal you can go the loan way. If you like me and searching for a good deal you can open HELOC and don't worry about payments until you find a deal and then take money out for downpayment or to buy for cash depending on the cost of your deal.

@Lana Lee Never mind that question. That was an error. Am I missing something? I thought I had to be a homeowner to get a HELOC, which I do not own a home.

Originally posted by @Tony Marcelle :

@Lana Lee Never mind that question. That was an error. Am I missing something? I thought I had to be a homeowner to get a HELOC, which I do not own a home.

Some banks and credit unions will offer a HELOC on rental property maybe with slightly higher interest rate and lower line. Ask everyone and I am positive you'll find one. You can even ask investors here on BP to recommend you lender who will be willing to give HELOC on rentals. I personally have a HELOC on my primary residence, but I read here investors do it with rentals all the time .

Being a little older- one thing a person should watch for is try to have a fixed rate on helock. Govt intervention or a drop in market value causing a decreased cash flow could put you upside down on payments. Always try to have some cash in reserve for such a situation. Historically RE usually gets tricky with sudden mkt crisis  or Govt. Tax change as I stated.

Get a LOC with the bank first. Then also line up private lenders. Do both! LOCs are nice because you can get the cash almost instantaneously (depending on the bank). I pull from my LOCs first then if I need more tap into private loans. I think the key is to use them (either one) for short term financing only. With the idea to either replace them with a long term, fixed rate mortgage (the Refinance step of BRRRR) or pay it off when you sell it as a flip.