Private Money InvestingFor those curious about high yield private money investing and the world of private lending, it’s important to understand how private money or hard money lending actually works.

Because few are aware of the inner workings of private lending, it’s necessary to understand the various terms involved to fully appreciate how this industry provides investment returns that few vehicles can match.

  • Private Money vs. Public

The initial reaction when first introduced to private lending is that it’s just that; it’s private. It’s an “invitation only” club. Compared to a bank or similar institution where anyone can open up a checking account or apply for a mortgage which might be considered “public.”

Yet a private lender is so-called because the lender approves mortgages using its own terms with its own funds, not because it’s closed to the general public. Far from it.  Private lenders actively seek out individuals to provide financing for real estate investments.  A private lender doesn’t have to conform to third party lending guidelines and evaluates, approves, funds and services its own loan portfolio.Public Money

A private lender sets its own interest rates and loan terms and finances real estate investments that traditional lenders can’t or won’t approve. A private lender provides financing to the general public as any lender can and is not considered “private” in the traditional sense.

  • Hard Money

Hard money is a term often heard in the realm of private lending, but it is really synonymous with private money. The term “hard money” indicates the rates and fees for borrowing are higher when compared to a bank loan and oddly enough, hard money loans can be easier to qualify for compared to conventional mortgages. For example, a hard money loan might be issued to someone with bad credit offset with a greater down payment.

Hard money lenders typically place short term mortgages on real estate with mortgage programs designed to assist real estate investors acquire distressed properties, often with funds needed to rehabilitate the home at the same time.

Borrowers access hard money loans due to the advantages a hard money lender provides, primarily issuing funds quickly on properties banks won’t fund.

  • Private Lending Process

The private lending process is similar to other mortgage approvals yet under the guidelines of the private lender. For example, a real estate investor sees an opportunity to buy a distressed property that when repaired, would yield a sizable return.

The investor applies for a private mortgage and the lender begins the approval process. The investor’s profile is reviewed along with credit and financials, and an appraisal is ordered. The appraisal will typically note the “as is” value of the subject property as well as the “after repaired value” sometimes referred to by the acronym ARV.

Once the project is approved, the loan is funded. Funds to finance real estate come from a pool of funds financed by private individuals. Finally, a private note created. The note secures the property to the lender and is like any other mortgage note in today’s mortgage marketplace.

While private lending follows its own guidelines and establishes its own rate of return for its investors, private lenders are far from careless when evaluating a potential project. In fact, private lenders can be very specific about their loan programs. Hard money doesn’t mean “easy” money, and the private lender expects to be paid back on time, every time.

  • Private Notes

Private loans provide high yield returns to their investors yet unlike other investment promises a private loan is secured by real property. It’s not an investment in a company or buying a stock or bond, a private loan provides consistent, high yielding returns on physical property: real estate. It’s an investment you can actually drive by and look at.

A note is created, securing the private lender’s interest in the property with a recorded lien and should the loan go into default, the private lender has the right to foreclose on the property and recover their collateral.

Individual investors can provide their own capital to finance private notes and benefit from the higher yields these notes provide.

  • Direct Lending

Private, or hard money lenders are direct lenders. Direct lending is the process where a private company makes a loan directly to an individual or business. Conversely, a mortgage broker is an individual who simply arranges financing between a borrower and a direct lender.

Direct lending is an efficient lending model where the lender accepts the loan application, evaluates the loan and provides the final funds for the mortgage; everything is done “in-house.” Individual investors provide the funds needed to finance various projects and are able to participate in the higher yields that private lending provides.

Individuals who partner with a direct lender can decide how much or how little to provide based upon the individual investor’s portfolio and long term financial plan.

  • The Private Money Purpose

Pirvate Note High Yield ReturnsLenders, specifically banks and traditional mortgage companies have scaled back their loan approval guidelines, making it much more difficult to qualify for a mortgage compared to just a few years ago. While this newfound prudence is applauded, the result is fewer loans for real estate are approved.

Mortgage companies approve not just the borrower but also the subject property. The loan cannot move forward until each has received its own approval and unless the property meets current lending requirements a mortgage approval is less likely working with a bank.

Distressed real estate abounds but long term, conventional financing can’t help an investor buy a distressed property until the property is rehabilitated. Investors can’t obtain financing to rehabilitate a property because of the property’s current condition.

However, private money lending fills this niche and facilitates the acquisition and rehab of distressed real estate. Once these properties are repaired, traditional banks can place a mortgage on the property, allowing any qualified buyer to obtain financing. Without a private lender, such real estate investment opportunities would never exist and keeping homes with potential off the market.

Edited by, Sydny Cohen: EquityBuild News Editor