Looking for a Private Lender? Some Things to Think About
Banks continue to stand on the lending sidelines as uncertain economic factors and rising interest rates continue to weigh on the banking industry. Increasingly, private lenders have become the go-to lender to get deals across the finish line. However, a challenge with private money lenders is that reliable and trusted sources can be difficult to find.
Let’s start with some key takeaways.
- Private money lenders make loans to real estate investors and are an alternative to traditional funding sources like banks or credit unions.
- Private money loans, sometimes known as hard money loans, can be used to fund a variety of real estate deals, including fix and flip properties and single-family rental homes.
- Because a private money lender works directly with an investor, loans can be more easily structured to meet the needs of a borrower.
- When reviewing a potential loan, a private money lender generally is more concerned with the before and after property value rather than a borrower’s credit score.
- Private money lenders can provide funds faster and with more flexible terms, although an investor may pay a higher interest rate and larger loan fees.
As an investor, important steps must be taken to find and vet a good private money lender include asking for referrals, creating a pitchbook of the intended deal, and reviewing past transactions a private lender has funded.
Where do I find a qualified private lender?
So how does one find a good private lender? Private lending is based more on relationships compared to larger banks or even a local credit union. Once a private lender knows they’ll be repaid on time and can trust a borrower, the greater the odds are of obtaining funding for future deals.. In general, private lenders usually get business through word-of-mouth versus advertising to the general public, thus they can be a little more difficult to find, but also well worth the time and effort.
Besides the slowdown in lending by banks, other reasons why an investor might seek private money lending include qualification, which is easier for a borrower since private lenders focus more on the specifics of a transaction and less on a borrower’s credit score. The process of funding is faster and requires less paperwork because private lenders fund and hold private money loans in-house. Cash deals may put an investor’s offer ahead of a buyer with a financing contingency and a private lender can fund multiple transactions at the same time, helping to bypass the loan limits that traditional lenders may place on real estate investors.
Make sure you vet the lender
While the field of private lenders is growing, it’s important to understand that not all private lenders are a good match for the borrower. Here are some suggestions you might follow when you begin your search:
- Request references from a private lender for other real estate investors that have had recent transactions funded by the lender.
- Verify that a private money lender is licensed if state law requires a lending license.
- Review past deals a lender has been involved in, such as funding renovations on an investment property, to better understand a lender’s familiarity with various real estate projects.
- Understand where a private money lender’s capital is coming from, such as the lender itself, or a syndicated loan with funds contributed from various investors.
- Ask if funds are released in one lump sum, or if there is a draw process where loan money is received at different stages of the transaction.
- Study loan terms from the private lenders, including documents required from a borrower, annual interest rate, points and fees, length of loan and amortization period, penalty for early loan prepayment, requirements to extend a loan, time required to fund a loan, and whether or not the private money lender has every backed out of a loan.
Newport Capital has emerged as a valuable source in the private lending market. Established in 2012, Newport Capital executives have decades of commercial real estate experience, including fund management, property acquisition, management, and disposition. We are an established operating platform that efficiently originates funds and services real estate private credit. With all operations and investment approvals handled in-house, the company prides itself on making decisions in a timely manner and upholding the terms and timeframes to which it commits. In addition to its broad industry knowledge, Newport Capital has established relationships and networks in private credit financing. Our niche expertise is invaluable to borrowers in providing support and guidance. Newport’s relationship-driven approach to lending can help connect borrowers with strategic advisory services to support their growth. If you would like more information, click here: Real Estate Private Credit - Newport Capital.