Real estate investors in the San Diego area can rely on private money lenders to fund their projects. If you are wondering where you can get financing for a real estate ventures, you should explore the possibilities of hard money lenders. A San Diego private money lender could be exactly what you need to fund your projects and ensure that you can get the affordable financing you need for the best possible bottom line.
Differences between these loans and traditional loans
Private money loans are unlike traditional loans in that they can be acquired much more quickly and sometimes on more lenient terms. Those working in real estate who have explored other options should definitely look into the possibilities of this unique form of lending. It tends to take an awful lot of capital to get into the real estate market in San Diego because properties tend to be expensive. Don’t assume that you can’t get financing until you’ve explored private lending, learned what it is and how it works, and sought a deal with a private money lender that could provide you with the capital you need to make your ambitions a reality.
Properties needing a lot of repairs and requiring a lot of work often require significant amounts of capital. It’s also hard for a real estate investor to get into the business and get approved for a traditional loan to fund renovations when that investor has not yet had the opportunity to build up a history of success that a traditional bank will want to see before approving a loan.
Availability of private money loans
Private money loans are often more available because they entail a higher interest rate than a traditional loan. Also, private money loans often require a relatively fast payback. It’s often expected that these loans are paid back within only six months or a year rather than over a 30 year period that’s more typically of a traditional loan. A San Diego private money lender can help in a situation where the borrower will be able to pay the loan back quickly yet is unable to acquire traditional financing and is willing to accept higher interest rates.
Requirements for a traditional loan tend to be fairly strict. On the other hand, there are all different types of private lenders out there and requirements tend to vary significantly from lender to lender. While you’ll need to meet various credit score requirements to be approved for a loan from a traditional bank, a San Diego private money lender will typically offer more flexibility and capabilities to approve a diverse group of borrowers.
The terms and conditions that can be had on a private money loan tend to vary and can be curtailed to the unique needs of a particular borrower. While there will be some requirements that the borrower needs to meet, private money lenders are better able to accommodate those who are new to the real estate business. It’s important that anybody acquiring this type of loan understand that private money lending is not so strictly regulated and therefore offers a great deal more freedom to both lenders and borrowers.
Some things that will typically be necessary to be approved for a hard cash loan include a note, deed of trust, and proof of identity. Another thing that the lender will be particularly interested is how exactly the money will be spent. The lender will want a detailed business plan from the borrower. This detailed business plan is important because it tells the lender how prepared the prospective borrower is for the business venture and how likely the borrower will be to succeed.
What are some disadvantages of private money lenders?
Private money loans and traditional bank loans are two very different beasts. Traditional bank loans are intended for use with financing scenarios that fall into a neat box and that conform perfectly with predetermined underwriting guidelines and requirements. Private money loans, on the other hand, are typically used to finance the other scenarios that fall outside of that box. Private money loans are also used when a fast closing is needed, such as if a balloon payment due date is rapidly approaching. While there are definite instances when private money loans serve a beneficial purpose, they do have disadvantages that potential applicants should be aware of. A closer look at these disadvantages can help you to be a more informed loan applicant and can tell you more about the ideal times to take advantage of private money loans.
High Interest Rates
One of the more obvious differences between traditional bank loans and private money loans is the interest rate, and private money interest rates are often astonishingly high. There are a few reasons for this. First, private money lenders are usually private investors who are putting up their own money. These individuals or companies want to see a solid return in exchange for their investment into your loan request. There are many other lucrative places that they could invest their funds, so the return to them needs to be worthwhile. Second, traditional banks use their tight box of predetermining underwriting guidelines to reduce their overall exposure to risk. Their guidelines have been created to reduce the chance that borrowers would default on loans. Their reduced exposure to risk allows them to offer more competitive interest rates. Private money loan scenarios are riskier for investors to consider. Because of the risk that they take by extending money to finance a more creative and unique loan scenario, the rate of return needs to be higher.
In some cases, interest rate variations between traditional bank loans and private money loans may be as much as 10 percent or more. However, because many private money loans would simply not qualify for a traditional bank loan, the lower interest rate for a traditional bank loan is essentially not an option that could be considered by these applicants.
Short Loan Terms
Private money loans are also characterized by a very short term. Many residential and commercial loans funded by a traditional bank have a 25 to 30-year loan term. In many cases, these loans are fully-amortizing, and this means that there is no balloon payment due at the end of the loan term. On the other hand, a private money loan may have a term of one to two years or less. In addition, the payment is usually interest-only or partially-amortizing. This means that at the end of the very short loan term, the borrower is forced to refinance the loan or to sell the property. Borrowers typically need to have an active exit strategy in mind in order to maximize the benefits of private money financing without getting into trouble with the balloon payment. Some private money lenders do offer an extension upon request, but the longest extension period usually only keeps the private money loan in place for five years total or less.
A Large Down Payment
Another disadvantage associated with private money loans in the loan-to-value. Each private money lender has unique down payment requirements, but you can generally expect to make a down payment between 35 to 40 percent of the sales price or more. Residential and multi-family commercial projects often are on the lower end of this spectrum, and other types of commercial or development projects are on the higher end of this spectrum. However, other factors are also considered in addition to the property type. For example, the location of the property, the borrower’s qualifications, the overall loan scenario and more are all taken into account by the lender when determining loan-to-value.
Because the down payment requirement for a private money loan is substantially higher than with a traditional bank loan, there are situations when applicants do not have the financial means to use a low LTV private money loan. Remember that different lenders have various down payment requirements and closing costs. Therefore, if you run into a lender with loan terms that do not work well with your financial situation, spend time reviewing other lenders’ guidelines.
While there are downsides associated with using private money loans, these types of loans serve important purposes in specific situations. For example, a traditional lender will not usually fund a project that is a typical private money loan scenario. Private money loans are short-term loans that are often used to reposition properties so that they can later qualify for better terms with a traditional loan. These loans provide essential funds that are necessary for situations where no other financing solutions are available.