You probably have experience with a home mortgage or a car loan, so may you think you have an understanding of the loan process. But it’s impossible to fully grasp the advantages of conducting your fix and flip business with a private money lender unless you have previous experience working with a private lender.
Let’s review some benefits of borrowing from a private money lender:
Your personal financial history, in terms of credit score, is not that much of a factor in your approval for a private money loan. Private loans, instead, are mostly based upon the potential value of the property you seek to acquire.
The lender will hold a primary lien on the property, which serves as their insurance of repayment, rather than relying upon your ability to make monthly payments under a traditional mortgage.
A private lender requires you to fund a certain percentage of the purchase price of the property — normally 20 percent to 30 percent. Some private lenders also are willing to finance a portion of the rehab cost of the property. The lender’s goal remains to keep their cost below a certain percentage (say 60 or 70 percent) of the expected value of the home once the rehab is complete. All of these target numbers are designed to ensure the lender will not lose money if you default on the loan and the lender acquires the house through foreclosure.
Minimal Cost During Construction
Another advantage of an asset-based loan is that you are not expected to pay against the principal on the loan until you sell the house. A traditional lender will require monthly payments on the principal and interest beginning immediately after the loan is issued. Private lenders require only a monthly interest payment.
Without the search of your personal credit history and all the other hoops a traditional lender will require,a private money lender can handle paperwork quickly. You will be required to provide a guarantor, who agrees to pay the loan if you are unable. The lender will need to know the purchase price of the property and the expected value after rehab. They will have a staff member or an independent contractor in your community check the house to determine your numbers are valid.
The primary advantage of a private money loan is that you get the money normally within 24 hours. This gives you a great advantage in purchasing property because sellers will give preference to offers, and frequently accept lower offers, when they know they will be getting cash within a couple of days, rather than waiting a month or more for closing.
The final advantage of using a private money lender is that you can expand your business to run more than one fix and flip at a time if you have less money tied up in one house. The possibility of having three or four houses in the works at the same time for the same cash outlay can fiscally outweigh the interest you pay.
All of these benefits do come at some price as private money lenders’ loan rates can be higher than traditional sources. Some “hard money” lenders do take advantage and charge extremely high interest rates. When you find a reputable private lender who seeks a meaningful relationship with your business, you’ll work with reasonable interest rates that will allow you to grow your flipping business.
If you are planning on starting a fix/flip project soon, contact Center Street Lending to get more details on how a private lender can help you start and grow a house flipping business.