While a portion of profits will undoubtedly be allocated to the lifestyle of their choice, investors are advised to be smart with their money. Of course, you can reinvest into another property, but if you are looking for an alternative, there may be one option you have not considered yet: private lending.
Investors who have the funds to do so should consider private money lending in real estate. This process offers the same type of underlying security and profit potential as rehabbing or wholesaling, but without acquiring new properties.
Private money lending is when individuals lend their own capital to other investors or professionally managed real estate funds while securing said loan with a mortgage against real estate. Essentially, private money lending serves as an alternative to traditional lending institutions, like big banks.
As rookie investors gain experience, they strive to aim higher. Leaving your hard-earned money in a savings account is no way to protect and grow your assets. At the end of the day,
Arizona private hard money lending allows you to secure a loan with real estate that is worth much more than the loan. In some ways, this process can be less risky than owning real estate. That is why it is important to familiarize yourself with the best real estate financing options available to today’s investors.
In the past, real estate financing typically came from banks, government agencies, insurance companies, and pension funds. However, with a list of strict requirements and a timeline not conducive to the average real estate investor, a need for alternative lending sources quickly developed. At the same time, it became obvious to those with appropriate funds that their money could better serve investors than large institutions. Now, private money lending is a critical component of the real estate investment industry. In fact, its presence makes it more possible for the average investor to run and maintain a sustainable career.
If you were unaware, there are several benefits involved for those who choose to lend private money. If done correctly, offering alternative real estate financing options can mitigate risk while simultaneously establishing wealth. Of course, this is not a path for everyone. You need to ask yourself if you can afford to do so. Having a little extra money in the bank does not necessarily mean you should throw it at the first investor who comes your way. If you are equipped to mitigate potential risks and take advantage of the opportunities that present themselves, private money lending may warrant your consideration.
You may want to consider private hard money lending if one of the following applies to you:
You are a real estate investor looking to expand your portfolio.
You are a doctor, lawyer, CEO, or professional of another kind who has a great income or a surplus of cash.
You have a sizable retirement savings account.
You are a retiree looking for a passive income investment.
You are owner of an estate or other trust fund.
You are a tech entrepreneur who owns a successful start up.
You are a lottery winner.
You want to and can help out a friend or family member.
Still on the fence? Do not worry; the following will answer any questions or concerns you may have about pursuing a private money lending business:
The concept of a private money loan is relatively simple. Three elements are required for a loan of this nature to transpire: a borrower, a lender, and a lot of paperwork.
For all intents and purposes, private money lending is perhaps your best chance to invest in real estate with no money of your own. If for nothing else, private money loans can provide for investors in need. While they seem to serve the same purpose as traditional lending institutions, there are several key differences. Private money loans typically charge higher rates than banks, but they are also more available in cases an average bank would pass on. Additionally, banks and other financial institutions typically do not provide the same combination of speed and transparency in the decision-making process.
As I mentioned above, private money lending can offer several benefits for everyone involved. It is not uncommon for investors to eventually expand into private money lending themselves due to these benefits. If you are interested in private money lending, there are a few steps you can follow:
Establish your business and obtain the required insurance.
Meet with a lawyer to create your company structure.
Identify your preferred lending focus.
Join a peer-to-peer lending platform or network to find possible investments.
Evaluate any potential clients by calculating potential returns and risk levels.
Start your business in private money lending.
The concept of private money lending Arizona is relatively simple: without money, real estate investing does not exist. Money, like in every other industry, is the lifeblood of an investor. Real estate investors need to actively work on securing private money loans to fund their deals. Often, the average investor cannot fund a deal with their own money. Moreover, even if the funds are readily available, investors will seek the assistance of private money. Regardless of a particular investor’s situation, there is a particular likelihood of them needing private money assistance. Instead of having to pool money or stretch every dollar, investors are given more options to grow their business using private money.
Perhaps even more important is the speed and efficiency in which private money may be obtained. The speed of implementation is critical to an investor, and it can mean the difference between closing on a deal and losing one. Having the money promptly can make it that much easier to close a deal.
With Arizona private hard money lending, you will be confronted with several types of borrowers. While each is unique, they are all looking for the same thing. Here are the four types of borrowers you may encounter:
Rehab/Sell: This type of investor will typically purchase a residential property and complete renovations with the intention of reselling it once the project is complete. Borrowers in this sector find private money attractive because conventional banks will often not lend to properties in poor condition. Perhaps even more importantly, access to private money is more conducive to a timely and profitable flip.
Rehab/Rent: These investors typically purchase a residential property and complete renovations with the intention of renting the property for cash flow purposes. These borrowers find private money attractive for the same reasons as investors in the rehab/sell category.
Builders/Developers: Builders and developers will purchase vacant land to permit and develop into residential or commercial use. Borrowers in this sector are interested in private money primarily based on the speed with which the funds can be available. Also, many banks will not lend on speculative development.
Commercial Investors: This population of investors may seek to use private money as a “bridge loan” for a commercial property when a conventional bank will not lend on an un-stabilized asset.
Private money lending in Arizona is attractive because of the flexibility it offers, not only to borrowers but also to lenders. You see, with a traditional loan, lenders will generate income through interest payments made by the borrower. On the other hand, private loans allow lenders to negotiate exactly how (and when) they will be paid back for the loan. This opportunity opens several perks not traditionally offered to investors. Read through the following agreements to learn more about making money as a private lender.
Joint Ventures: As a private hard money lender near me, a profit split can be one of the most attractive options for financing an investment. Investors can negotiate to receive a percentage of the final profits in this type of agreement. The amount will vary based on the contract and the investment, though it could be quite profitable. In some cases, private money lenders will even find borrowers who propose this option. Just make sure you believe in the potential success of the deal, and you are all set.
Exit Fees: This loan structure requires the borrower to pay a predetermined amount at the end of the loan term. The exit fee is often negotiated as a percentage of the overall price of the investment. In some cases, lenders may even negotiate an increasing exit fee that changes depending on when the loan is paid in full. For example, if the borrower needed a few extra months to repay the loan, then they would pay a larger exit fee.
Interest Payments: As I mentioned above, interest payments are one of several ways to generate income from a private money loan. In fact, this is the most common setup in private money. Lenders can set an interest rate at the time of the loan approval and sit back and wait for the money to arrive. Typically, private money loans are associated with higher interest rates than other loans, making this a particularly attractive arrangement for lenders.
Points: Points are essentially fees paid by borrowers in exchange for lower interest rates. Points are calculated as percentages of the overall loan, with one point referring to one percent of the loan amount. Some lenders prefer this system because points allow them to be paid in larger sums, with additional interest payments to follow. More often than not, points are paid at the beginning of the loan term and are suggested by the borrower as an incentive for granting the loan.
Simply put: private money lending in Arizona allows you to act as the bank for other investors. Rather than directly purchasing assets, you get the opportunity to fund those owned by colleagues and partners. By now, you likely realize how beneficial this setup can be. However, there are a few more things you should know before getting started. Read through the following tips before taking on your first deal as a private money lender:
Start Out Small: Identify a range you are comfortable working with and stick to it. The number one mistake private money lenders make when starting out is spreading themselves too thin. Assess your finances and your preferred level of risk and create clear guidelines for potential projects. If someone approaches you searching for more than you want to offer, do not be afraid to refer them elsewhere.
Find A Good Attorney: Becoming an Arizona private money lender does not make you a lawyer. You will still need help when it comes to negotiating and reviewing contracts. Additionally, if you start a private money lending business, there are several legal protections you need to have in place before getting started. Find a qualified real estate attorney in your area and bring them on to your team. Their role in your company will be invaluable over time.
Work Locally: There are profitable real estate deals all over the country; however, there are also deals right under your nose. If you decide to start your private money lending business locally, you can meet face to face with investors. Additionally, you will likely be more available for communications and future investment options. Do not underestimate the potential of your own market; you never know what kind of deals may come your way. You can always expand in the future.
Be Transparent: Avoid inflating your portfolio or background to attract potential investments. No matter what point you are at in your investing career, let your work speak for itself. You do not want to misrepresent yourself or your lending business. Always maintain transparency and stay true to your mission and values.
Do not Forget About Yourself: Remember, just because you aren’t purchasing assets directly does not mean you aren’t an investor. Continue your professional and financial education even if you opt for the role of lender. You still need to stay on top of market trends, financial news, and other factors impacting the real estate world. While you do not have a hands-on role in the investments you finance, you still need to have a strong business acumen.
Learn The Subject Matter: Review the types of borrowers listed above and familiarize yourself with the different deal types. Learn what factors go into a successful rehab, buy and hold, or rental property. That way, when a borrower pitches a deal, you know how to evaluate it for yourself. Obviously, they will paint the investment in a good light, but is it profitable? To be a successful private money lender, it is crucial to understand exactly what goes on in the niche you choose to invest in.
An Arizona hard money lending is another alternative to traditional lending sources and allows borrowers to use the investment (in many cases, a property) as collateral on the loan. While many lending sources rely on a borrower’s credit history, hard money lending relies on the asset in question. Hard money lending will typically require higher interest fees than traditional loans but can provide borrowers with increased access to capital and a more lenient approval process. Investors with low credit and high equity in a property will often turn to hard money for funding. Additionally, property owners at risk of foreclosure may also utilize hard money loans.
Hard money lending can represent a unique opportunity for investors with extra capital on their hands. Though, with any financial decision it is important to mind due diligence and premeditate any potential risks. If you are interested in becoming a hard money lender, here are a few steps you can follow:
Name your business and create your company structure.
Set up an online presence for your business.
Seek legal counseling on the creation of a limited liability company.
Investigate potential investment opportunities.
Make a business plan and draft the criteria of future loans.
Project the future financial outcome of any potential loans.
Launch your hard money lending business.
Hard money lending gives investors the chance to stay active in real estate without necessarily adding a property to their portfolios. Some hard money lenders may never purchase a property themselves at all. This can be a huge perk for anyone without the time and resources to acquire a real estate deal, as it allows lenders to tap into the lucrative potential of real estate without “getting their hands dirty,” so to speak.
Another major benefit of hard money lending is the degree of control it offers. Hard money lenders get the final say in who they work with and on what terms. Anyone who has purchased a piece of real estate likely remembers the process of applying for funds, waiting on application approvals, and going through negotiations. Being a hard money lender puts you in the driver’s seat—and that is quite an attractive perk for many.
With any financial opportunity, there are going to be cons involved. For those interested in hard money lending, the most obvious challenge is coming up with enough capital to get started. The amount of funds required can serve as a steep barrier to entry, but it’s important to remember that real estate offers a great way in. Investors can work their way up by managing successful real estate deals themselves; over time, they can generate the funds necessary to start lending.
Hard money lending also has an inherent degree of risk for the lender. By operating outside of the traditional loan application process that big banks use, hard money lenders can truly choose who they work with. This means taking a risk on an investor who may not be approved by some standards. To counteract this risk, hard money lenders must come up with standards of their own. Lenders should be prepared to research investors, properties and ultimately trust their gut feeling about a potential candidate.
involve anyone with a little extra cash they want to invest. Hard money lenders are similar; however, they are typically more organized and semi-institutional. Decide which is best for you and your deal by reviewing the last part of our series.
Private money lending can represent an attractive opportunity for both parties involved. Investors seeking alternative financing sources will find the benefits include a faster approval process and increased access to funding. On the other hand, those lending may find they have unique access to potential investments and deals. No matter which side of the transaction you are on, private lending is a viable option for expanding your financial portfolio and wealth building.
Level 4 Funding LLC
Who is this Dude? Dennis brings with him substantial experience in residential real estate. Dennis has extensive experience purchasing, renting, and selling numerous homes over the past 45 years. His first purchase was a property in California when he was 18 years old. Dennis graduated from California State University Pomona with majors in Computer Science and Business Management. He is a Licensed Mortgage Broker, Licensed Mortgage Originator, Licensed Real Estate Agent, Licensed Insurance Agent Certified Sort Sales Specialist (CSS), Certified Negotiator (CNE), and FAA Licensed Private Pilot.
*All rights reserved. The information contained in this material is neither a promise to lend nor a guarantee. This is not a Good Faith Estimate and should not be considered as such. Costs, rates, and terms can only be determined after the completion of a full application. Mortgage rates could change daily. Actual payments will vary based on your individual situation and current rates. Products are available in Arizona/Texas/Colorado/Nevada Only. For 5.99% APR the borrower needs a FICO > 750, LTV 55% or Less, and a DSR of 1.5%. Please remember that we don't have all the client's information. Therefore, the rate and payment results shown may not reflect your actual situation. Costs, rates, and terms can only be determined after evaluating: 1. Property location, 2. Loan to Value (LTV) based on a down payment or equity, 3. Credit Score (FICO), 4. Ability to repay, 5. Your capabilities/experience and 6. Site Inspection and title report. For example, A loan of $250,000 at 6% for 12 months payment would be interest-only payments of $1,250/month for 12 months, a balance of $250,000 due at end of the loan. The borrower would have a FICO Credit Score of 740 and an LTV of 55%. Normally, borrowers who apply for the loans, their rate ranges from 8.5% to 13.9%. For a second position loan, the rates vary from 18.9% - 29.5%. Closing Costs consist of the following: 1. Origination fee, documentation fee, and credit report fee, 2. Escrow fee paid to the title company, 3. Title Policy paid to the title company, 4. Servicing Setup fee plus monthly fee paid to loan servicing company. These are Non-Consumer, Non-Owner Occupied, Bridge Loans, Construction Spec Homes, or Commercial Loans. You are not required to pay any upfront fees. However, some programs may require you to pay for an Appraisal or BPO. Appraisals/BPO are handled by a nonaffiliated 3rd party and all fees and costs are collected by the 3rd party not by us at Level 4 Funding LLC. You are not required to complete this loan merely because you have received these disclosures or signed a loan application. If you obtain a loan, the lender will have a mortgage/deed of trust on your property. You will lose your property and any money you have put into it, if you do not meet your obligations of the loan. You should have sufficient cash reserves and experience to complete the project. As mortgage brokers, we offer a wide variety of loan options. You may still qualify for a loan even if your situation does not match our assumptions. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of this and all loan programs are subject to change without notice. Level 4 Funding LLC is licensed in the state of Arizona, NMLS 1018071 AZMB 0923961.
Costs, rates, and terms can only be determined after the completion of a full application. This is not a Good Faith Estimate (GFE) or a Guarantee.