Private Lenders vs Banks - Why I would gladly pay higher interest

This is the story of what caused me to want to swear off banks for purchases.....

This is the story of why I'm ok paying higher interest rates....

This is the story of the win-win relationship that is private lending....

Most of my projects have been funded by banks up to this point in my career. They will lend on rentals and flips. The terms are pretty typical - up to 80% ARV or 90% cost, 5-6% interest, 15-20 year amortization, will lend purchase+rehab costs. These are all local banks and my contacts there are and as far as banks go, they are easy to work with. 

A couple years ago, I was telling a friend from college about my real estate investing career. We were talking about the flips, rehabs, rentals, etc. He's in finance for a ForEx company so he was interested in returns. One thing led to another and he volunteered to lend me money to fund some projects. 

At this point I didn't really understand how much smoother and easier it was to borrow from private individuals. He was happy because there was a very low risk against his money as we kept the loan value at 75% or below collateralized against the property. Not to mention he was making a solid return - 8% annual interest only. I was happy because I could close in 2-3 weeks instead of 4-5 weeks now. Also, I was helping him grow his savings. 

Fast forward to today. The whole point of this article, the showdown between private money and bank money. To me, this is summed up in two deals I have under contract. 

Here are the details, you decide what you like better: bank lender or private lender. 

Deal #1

House built in 2014, 3/2 in great area. Only repairs it needs are carpet cleaning paint touch up. I had it under contract on June 7th at $150k. It will retail, after repairs, for $185k. There are several comps to prove this. I am borrowing the money from a local bank. It is July 11th and the bank has still not funded this. Why? Aside from a bank just generally taking longer (underwriting, appraisal, slow communication, committee meetings, etc.), the seller moved out of state before closing and has the keys. The bank wanted a full appraisal. We didn't have access. I spent a few days arguing with them but finally got approval for drive by. 

Deal #2

House built in 80s, 3/2, in good part of college town. New roof, new hvac, new water heater, recently re-tiled bathrooms, foundation/electrical/plumbing all good. It's a well kept house in an area that will sell quickly. Repairs? New flooring, paint, trim. Buying house for $72k, will sell for $120k. I got it under contract July 5th. Over 1 month AFTER the first deal. I am borrowing the money from a private lender for purchase/rehab. I sent him an e-mail one night and the next morning he said "Let's do it.". Funding is done. In 12 hours. We will close on this one BEFORE we close on the 1st deal. 

To be fair you could argue the bank had a tougher deal to work with but this is pretty indicative of the benefits between private lenders and banks. Banks are cheaper, but slower. I'd gladly pay the higher interest with private lenders than deal with the red tape at a bank. 

My goal for the rest of 2018 and onward is to go with as much private money as possible. Not only is it easier for me, but the lenders get great returns. I also get the joy of helping them out. A friend from college looking to grow his savings. A lady running a cat rescue that uses the interest to fund her operations. A man running a trust for his family's retirement. A local business owner just looking for a good return. It is so much more rewarding borrowing money from private individuals in my eyes. 

If you have questions on how these deals work or private lending works, don't hesitate to comment below or message me on BP.