If you don’t have a source for private money, you should find one. In fact, any seasoned real estate investor will tell you that private lending is an important cog in the real estate investing wheel. Private lenders lend on prusing private money for real estate investmentsojects that traditional banks will not.

The trick is to acquire and rehabilitate a distressed home for sale or rent in the open market, as quickly and efficiently as possible. Once the rehabilitation is complete, the private lender’s initial loan is repaid.

Terms for private loans are expectedly high, especially when compared to traditional financing from banks. Private loans are also issued for shorter terms anywhere from 90 days to two years or longer. The fees for private funds are also higher than on other loans and different private lenders can have different terms. It’s their money and they can market it any way they see fit, as long as the loans conform with local usury and anti-discrimination guidelines.

How high are private rates? It’s not uncommon for a private lender to ask for, and receive, rates of 12, 13 and 14 percent or more. And the fees? Private lenders typically won’t charge standard lender fees such as underwriting or loan processing but you can expect to pay points. Points, expressed as a percentage of the loan amount can add up and it’s not uncommon to see private funds with four or five points tacked on. On a $200,000 project, five points is another $10,000. So should you shop around?

Of course. As a real estate investor, not only should you have a source for private funds but you should have more than one. Sometimes certain private lenders prefer a particular property type over another and will price their loans in accordance. So yes, certainly find your best deal but remember the primary driver using a private lender: they get the deal done.

If you find a property at $500,000 and need to borrow $250,000, a private loan might cost you four points, or $10,000 with an interest only rate of say 14 percent over one year, or $35,000 in interest. During your evaluation, you determine you can sell the property for $850,000 once completed. Your private money math looks this way:

Sales Price            $850,000

Loan                     ($250,000)

Interest                 ($  35,000)

Points                   ($  10,000)

 

Balance               +$555,000

 

Private money is more expensive than other loans, but that’s not the point. The point is helping your project get off the ground and less about the cost of funds borrowed.