You’ve just found the perfect investment property. It might be a six-unit commercial strip or it might be a fixer-upper house that’s in foreclosure. Your next question should be: How am I going to fund this purchase? One possibility is private capital lending.
Traditional loans from banks or other financial institutions may be difficult to secure for a purchase of this type, so you may need to consider this alternative. Before you plunge ahead with a loan from a private lender, also known as a hard money lender, these tips will make the process easier for you, especially if this is your first private money loan.
• Banks and other financial lenders may feel that the risk factors involved don’t merit a loan. However, private capital lenders are businesses that use funds from private investors HULT PRIVATE CAPITAL to provide funding for borrowers. This means that quite often, hard money lending requirements aren’t as stringent as those from a bank which means getting a loan is much more possible.
• Private capital loans are usually based more on the property rather than your personal credit qualifications. Reputable lenders set a certain percentage, such as 75 percent, of the property’s fair market appraised value as the loan limit. You should avoid hard money lenders who use a property’s quick sale value to determine the amount of the loan because quick sale values are frequently far below fair market value.
All this flexibility comes at a price.
• Hard money loans tend to have higher interest rates than conventional loans, and may be as high as to 20 percent. Interest rates can vary depending on the risk associated with your property and business.
• The term of loan is shorter, ranging from six months to two or three years, boosting your monthly payments.
• Another factor is closing costs which are usually between two and ten points where a point equals one percent of the loan total.
During the hard money lending application process, you’ll find that both your financial situation and your business plans are important.
• You’ll need to be prepared to have all your paperwork in order such as tax returns, pay stubs and account statements from your bank and investments as well as your application.
• This is a business transaction, so approach it as such. Discuss this property with a detailed and organized plan. Crunch your numbers before you meet with the lenders. For example, if you’re planning to rehab a fixer-upper, present a detailed schedule and reasonable estimates from reputable contractors.