Financing Deals Made Easier Thanks To Private Lenders
Once you have found the next property you want to invest your time and money in, you are faced with the hard decision of where are you going to get the funding you need to purchase the property and, in many cases, to rehab it. Real estate investors have the option of using all cash or supplementing their cash with debt (i.e. loans) to fund their investments; the question is which is best. In the past, when debt was considered, it meant getting a loan from a bank. Now there is a new, arguably better, source of debt called private lending. Below, we’ll take a look at each potential funding source: cash, bank loans and loans from private lenders. Depending on your goals as an investor and your current situation, each of these presents both advantages and disadvantages that will need to be considered.
Option #1: All Cash
Let’s look at Investor Karen who has amassed enough wealth that she can afford to purchase a property outright with an all-cash offer. This will completely remove any debt she may incur from a loan, but she’ll have to consider the fact that she is tying up a significant amount of her money in just one property, which can potentially be problematic.
Although she has the money to immediately purchase this initial home, what does she do if another property comes along that she is interested in? She’s used up all her available cash and now has to wait until renovations are completed and the property sells before making back a profit to put towards the next purchase. While she waits, the second property sells to another investor and she misses out on this opportunity because she didn’t have enough funds to buy it herself.
So let’s look at options to fund with debt…
Option #2: Bank Loans
Consider Investor Jason who has done quite well for himself. In an effort to keep growing his real estate business, he wants to close quickly and simultaneously on multiple properties and needs the funding to make this happen. He has located a few places he feels will make valuable investments and wants to purchase all of them before other interested investors beat him to it.
At banks, the process for qualifying can be discouraging because it generally requires an extensive amount of paperwork and a long period of time (sometimes even months) between the application stage, approval, and dispensing of the loans. Additionally, banks often limit the number of real estate loans they are willing to provide per customer. Therefore, not only may Investor Jason not have enough time to wait for financing, but he may face some difficulties when applying at his bank for multiple property loans at the same time.
Option #3 Private Lender
The final option is applying for a loan with a private real estate lender. If we examine Investor Dean’s current situation, he has just attended an auction where he bid and won a property. He had enough cash for the down payment but now has to come up with the rest of the funding he’ll need in order to close the deal or risk losing this potential investment to someone else. All the rest of his cash is currently tied up in another property, which hasn’t sold yet, and he knows if he applies for a loan through his bank, it will take too much time before he is able to receive the financing he needs.
Private lenders evaluate the property value first and then consider the experience, tax information, credit, and assets of the applicant in order to make an informed decision regarding the loan. The application process tends to be shorter and the overall time to be approved and receive financing is faster. By choosing this method of financing, Investor Dean can save more of his own cash, and thanks to a direct private lenders’ speed, he can receive the remainder of the money he needs to purchase the home before his window of opportunity closes.
So Which Is The Best Choice?
Real estate investors need financing sources that can facilitate the pace and volume to match their desired business growth. Although each financing option has its pros and cons, it seems the best of both worlds (speed and overall growth) is a private lender. You won’t have to worry about using all of your own cash to finance a deal and you won’t be constrained by the lengthy time frame that banks require before approving of your application and the limited number of loans they’ll provide. When you are assessing financing options for your next property, consider the benefits of working with a private real estate lender.