Choosing to partner with a private lender can be a successful financial move to generate passive revenue streams from real estate investment assets while mitigating the most significant risks and inefficiencies typically associated with managing multiple properties. With that being said, you must first have a thorough understanding of the private money lending sector before getting started on your investment journey. Here’s an overview of private money lending to help get you started on the right foot.
Private lending is a cover-all term referring to a private entity—in other words, not a bank—that is engaged in the business of loaning capital to borrowers with the associated real property asset functioning as securitization for the loan. Most private lending activity is conducted between passive investors and individuals actively investing in real estate.
Private money lending enables borrowers to leverage borrowed funds to generate profits. To illustrate, say you make a $60,000 profit on a $300,000 fix-and-flip transaction, but you only used $60,000 of your funds and relied on borrowed money to cover the remainder—you just realized a 100% overall profit margin. Private lenders can disburse funds in a fraction of the time it takes conventional financial institutions—enabling investors to close deals faster and with more budget-friendly terms.
Understanding the tremendous upsides of using private money instead of a conventional bank loan when it comes to real estate investing is key. What do private lenders have to offer that banks don’t? Quite a lot….
Unless you’ve been living under a rock for the past year or so, you know that the real estate market is on fire right now. And while that is fantastic news for aspiring investors in the sector, the increased transactional activity means that things are getting more and more competitive. When it comes to locking in a promising investment asset, scoring the most favorable deal typically requires having the ability to close in a short timeframe. To tick that box, you need liquidity. Private lenders allow you to tap into cash funds in a matter of days instead of the weeks or even months it takes for banks to approve loans.
Banks are often stingy when it comes to their underwriting standards. Accordingly, many investors find it challenging to obtain bank financing due to many factors—whether it’s simply the size of the initial mortgage, condition of the underlying property asset, or debt-to-income ratio minimums. Private lenders take a more holistic approach to underwriting. They consider the after-repair-value (ARV) of the property or what the property will be worth after the investor completes their renovations and are more willing to work with individuals to develop creative and practical funding solutions.
Real estate investors can take a proactive approach in preparing themselves for a successful private lending experience. Here are a few things private lenders look for in evaluating potential borrowers that you can work to improve to obtain financing more efficiently and on better terms:
There’s no substitution for a proven track record of success in the specific property class you are looking to invest in. Lenders generally like to see the details of previous projects you have worked on so they can more accurately gauge your abilities to generate sustainable cash flow.
Be sure to have a well-vetted Plan A, B, and C—each with a viable exit strategy. There are many moving parts in any real estate project, and things can change in the blink of an eye. Lenders will want to know that you have a plan in place to adjust to unforeseen developments and still pull off a profit.
Having a reliable network of trusted general contractors, realtors, attorneys, and other professionals goes a long way in boosting your credibility as an investor and enhancing your profile from a lender’s perspective.
For decades, Gauntlet Funding has been assisting successful real estate investors to accomplish their business goals. Our team of financial experts specializes in crafting individually customized funding solutions for projects of all shapes and sizes. Contact us today to learn more about how partnering with Gauntlet Funding is the best investment decision you can make!
The Investor’s Guide to Private Lending | Gauntlet Funding – Melville, NY