Private money lending occurs when private organization loans money to a person or company, such as an LLC. Private money lending is common in the real estate investment industry. Private money lenders loan money to investors who purchase and, often, renovate properties for resale or rental including Multifamily properties. Private money lending is less regulated and more flexible than lending by licensed lenders such as banks.
The Private Money Lending Basics
The defining characteristic of private money lending is that the money for the loan is provided by an individual or a private organization such as an LLC. A private money lender is an organization, it is not a bank or other licensed lending organization.
Private money lending is not subject to the same regulations that govern other lenders, but the business is not completely unregulated. Private money lenders do have to follow state usury laws that limit the amount of interest that can be charged. They may also be limited in the number of loans they can make.
Interest rates on private money loans tend to be higher than loans from licensed lenders because the easy borrower qualification vs the high risk to the lender. However, in the case of a loan from a friend or relative, they may also be lower than market rates. Private money loan payments may be interest-only or full Principal and interest for the term of the loan.
Qualifying for a private money loan is different from qualifying for a regular loan. The lender is likely to focus as much on whether a specific deal makes financial sense as on the credit history or score of the borrower. In most cases, lenders like ROC Financial Solutions do not verify a borrowers income.
Terms on private money BRIDGE loans are often short, just six to 12 - 24 months, but may also be payable over up to five years. They generally require a down payment and often are secured by the property. The lender will typically require a written plan describing how the money will be spent.
A Fix and Flip loan is also a type of Bridge loan. This type of loan with include funds to repair and update a property so that it has a higher re-sale value. Our Fix and Flip terms are very competitive offering up to 90% of the purchase price along with 100% of the renovation cost. *Not all transactions will qualify for these terms.
Private money lending is similar to hard money lending, but less expensive. They are both often used in real estate investing and involve getting financing from somewhere other than a bank. Hard money lending, however, is more similar to mainstream lending, such as from a bank and less like friends-and-family financing via private money loan. It may be harder to qualify for a hard money loan.
Pros and Cons of Private Money Lending
Private money loans are more flexible than traditional financing. Borrower qualification guidelines are fewer and less strict, including no income verification, or low credit scores. One key difference is that private money lenders are more likely than others to be willing to finance the acquisition of distressed property in need of significant repair. This allows investors who are short of cash to purchase low-priced properties and pay for renovations that increase the value of the properties.
The flexibility of private money lending also makes it faster. A borrower can get the money to do a deal in as short as 7-10 business days with ROC Financial Solutions, rather than waiting several weeks to get funded by a conventional mortgage which is much more difficult.
Private money lending also carries added risk for both borrower and lender. Private money lenders are taking more risk due to their less strict qualification guidelines. To compensate for the added risk, private money lenders charge higher interest rates than banks. Also, when using loans that are short-term, a borrower has to be able to sell or refinance the property relatively quickly, before the loan comes due. For many investors, we offer the Fix and Flip loan, then in as little as 90 days, we refinance the property into a long term rental property using the After Repair Value (ARV).
It can be more difficult for borrowers to find private money lenders, since they may not advertise like banks. Talking with friends and
family is one way to find sources for loans.
You can also follow us on social media, Facebook, Instagram, Twitter (now X), and LinkedIn to learn more about our products and service's. Borrowers can also find us online at https://www.rocfinancialsolutions.com.
Private Money loans are also called Business Purpose Loans
A business purpose loan is used to purchase an investment property or a cash out refinance where the funds are used for any business purpose. This means a Mortgage Loan where the proceeds of such loan are primarily used for a non-consumer, business purpose as provided for in Section 1026.3 of Regulation Z of the Truth in Lending Act.
* (We just released a detailed email about this). You can email us at info@rocfinancialsolutions.com to request a copy of that email.
In Conclusion
Private money lenders are individuals and organizations that provide money to investors, usually for real estate loans. Private money lending is less regulated but more costly than other sources for loans, such as banks.
This is not just for short term solutions, but also long term and unique situations. Many private money loans come from organizations like ROC Financial Solutions that specialize in this type of lending.
We encourage you to contact one of our Funding Consultants and learn hoe Private Money loans can help you build your portfolio. Below are some great educational BLG post and resources for you from ROC Financial Solutions.
