How does the structure of private lending work exactly? Is it money from friends, family, and everyday average Joe investors? Is it simply just an I.O.U. and keeping track yourself of who you owe money or does it still require to undergo written contract agreement? If I still require a mortgage even after receiving some funds form private lending, wouldn't it raise a red flag to the bank where I got the money from when showing proof of assets?
A private lender can be any non-traditional lender. It could be a family or friend or it could be a hard money lender. Hard money lenders are lenders with less regulations than traditional lenders (banks) and they can help the borrowers with their investments more efficiently than banks. However, the interest rates are generally higher. Hard Money lenders really don’t look at credit like traditional lenders because the loan is based on the value of the property that serves as collateral.
@Account Closed How do we keep track and accountability? Are there legal contracts to sign or does the person just take the money and deposit into their account and give the investor an I.O.U?
When getting financing from a financial institution they will issue an IOU note called a promissory note which secures the loan and details the terms, repayment, penalties, etc. In this case, the property serves as collateral. If you are getting a loan from a friend or family member, it is a good idea to use an IOU note in case you need evidence of the debt in a court of law. If it is a considerable amount of money, it is best to speak to a accountant or lawyer beforehand.
It may vary depending on the source of capital and the deal itself. There is no one structure for private lending, equity partnerships, or any capital financing for that matter. Terms and conditions, such as interest rates, points, application fees, promissory notes, inspections, LTV, length of project, appraisals, etc can all factor in to what makes or breaks a funding arrangement. In my experience, private capital is the way to go for funding flip projects, and conventional institutional lending for rental properties. It depends on your track record and relationships, but more importantly what the deal can do for everyone involved.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing