For many years, real estate investors have used private money to finance their rehab projects. The investors feel that it is better to use private money for rehab projects than it is to use conventional loans that are offered by credit unions, banks and any other traditional moneylenders. Investors in the real estate market have a horde of reasons for using private money financing.
One of the primary reasons that investors in the real estate market have for choosing private funding over lending institutions is the fact that they are able to close the deal without putting any of their own money down as payment. If you apply for credit through a traditional lender, you will get enough funding to purchase the property. When it comes to investors who purchase rehab properties, this amount is not quite enough. If you purchase a rehab property at a low discount price, you will also need the money it takes to fix the property and market it for sale.
The Benefits of Private Money
Investors who invest in rehab projects also need extra money to pay for closing costs and any other unexpected expenses that may arise. Even though traditional loans have lower interest rates, it may just not be enough money to cover everything that is needed.
This is the reason why many investors choose private financing to purchase and fix rehab properties, in spite of the higher interest rates. If you borrow the money that you need from a private moneylender, most likely you will have enough to pay for the property, rehabilitation expenses and marketing expenses.
Private moneylenders provide funding on the basis of collateral. In the case of rehab properties, the property is the collateral. Moneylenders estimate the price of the rehab property in good condition and give you a percentage of the value, which is referred to as the “after repair value”. The percentage that is paid depends on the lender and the location of the property, but average is around sixty to seventy percent of the after repair value.
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Tags: interest rates, private financing, real estate investors, real estate market
{ 3 comments… read them below or add one }
Private money means less paper work, less queries and less time period.
Hi Sean,
I couldn’t imagine a situation where I’d seriously consider private financing before reading this post. I never even thought that it might be a better option than the bank and yet it is.
The bank does require a lot of money upfront. Private financing does seem to be the best option considering I want to buy fixer uppers.
The banks have been especially “tight” lately due to GFC….where do people go to aquire Private financing?