How Private Lenders Can Help You Build a Real Estate Empire

real estate private lenders

When it comes to investing in real estate, money does make the world go around. However, the function of money in real estate might come as a surprise to most casual observers. For most people taking out a loan to buy a property usually means heading down to the bank to apply for a mortgage.

However, seasoned property developers often turn to another source of funds – private lenders. So, if you want to build a real estate empire of your own, then here is your chance to learn more about private lending and what it can do for you.

How Does Private Lending Work?

It doesn’t matter if you are looking to acquire Denver Commercial Properties or rural land in Texas, you don’t need to turn to commercial banks for all your financing needs. While the composition of private lending groups varies, the basic characteristic is that the funds for these loans will come from investors.

In some cases, the money will come from family offices. These are corporate entities set up to help manage the wealth of one or more wealthy family. While in other cases the funds which seed private lending pools can come from institutional investors – these could include wealth managers, pension funds, and even investment banks.

There is also a third way in which these lenders get the money they need – individual investors. While this is often considered peer-to-peer lending, the classic approach to private lending at scale does not put the investors in direct connection with loan applicants. Instead, origination and underwriting is managed by professional managers who write loans based on set criteria.

In terms of the loan process itself, getting a loan from a private lender is much the same as applying to a bank. It starts by providing a loan application which outlines how much you want to borrow, your credit history, and your income. In addition, you will need to sign a release to allow the lender to run your credit history with the various reporting agencies.

From there your application will go to underwriting where it will be measured against the firm’s underwriting criteria as well as the status of the lender’s loan book. While much of this step has been automated, some private lenders might do the work manually. This is especially true when the lender is looking at larger loans – usually, the types made by property developers.

In these cases, the loan application will not only get scored based on the firm’s underwriting criteria but it will also need to go through a loan committee, also known as an investment committee. These committees will take the information from underwriting and then compare it with the viability of other big-ticket projects the lender is considering to fund.

From there, it is pretty simple. If the loan is approved, then the lender will inform the borrower and in the case of real estate transaction, the closing date and details for payment will be organized.

Why do Developers Choose Private Lenders?

In many cases, these loans are a good fit for those who are looking for short-term loans, like flipper for example, or portfolio investors who either need more flexibility in their financing options or are looking to move some of their debt off balance sheet.

Beyond this, these lenders also help developers who need a fast close and then intend to refinance the transaction within 6 to 8 months. The need for speed is usually due to a special situation sale – e.g. off-market or auction – that needs to close sooner than a commercial bank could finalize their due diligence.

As you can see the flexibility and speed of private lenders is a big reason why developers will turn to them for financing. However, the ability to get the money they need usually comes with some strings attached. For starters, interest rates for private loans tend to be higher than traditional bank loans. While the specifics of each loan may vary, the reality is that many of the loans funded by private lenders are what is considered non-bankable. This means that banks will not finance these loans without additional collateral.

Another thing to know about private lenders is that their loans tend be shorter in term compared to bank loans. A big reason for this might be the rules which investors agreed to seed the fund. While another reason might be the types of loans these lenders tend to underwrite – many of which might not have much demand on the secondary markets.

So, if you are considering building a property empire, then you need to find out which private lenders are operating in your area. Not only will these relationships give you access to the additional sources of funds you need to build your empire.



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