Most real estate investors rely on some private hard money lenders for their source of funds. But getting financing for various real estate investments can be extremely difficult if you approach the wrong lender. This article will help you tell the difference between these lenders and help you work with those who can help you…
Not all hard money lenders truly understand the rehabilitation and resale investment strategy used by thousands of real estate investors nationwide. In reality, there are different levels of private lenders:
1. Commercial investment lenders
2. Development lenders
3. Bridging lenders
4. High-end real estate lenders
5. Residential lenders
By fully understanding your business model, you will be able to work with the best money lender that helps investors like you. For me, that would be residential lenders.
Apart from this, these hard money lenders also differ in their source of funds. They are bank lenders and private lenders.
Bank lenders – These lenders get their funding from a source such as a bank or financial institution. These lenders make loans to investors and then sell the paper to a financial institution like Wall Street. They use the money they make from selling the paper to make more loans to other investors.
Since these lenders rely on an external source of funding, Wall Street and other financial institutions have a set of guidelines that every property must qualify to be eligible for a loan. These guidelines are often unfavorable to real estate investors like us.
Private hard money lenders – The model of these lenders is quite different from that of bank lenders. Unlike bank lenders, these lenders do not sell the paper to outside institutions. This is a group of investors who are looking for a high return on their investments. Their decision-making is private and their guidelines are quite favorable to most real estate investors.
But there is a huge problem with these private lenders. They don’t have a set of guidelines that they stay consistent with. Since they remain private, they can change their rules and interest rates at any time. This makes these lenders very unreliable for real estate investors.
Here is a story for you:
Jerry is a real estate investor in Houston who is primarily interested in residences. Its business model is to rehabilitate properties and resell them for a profit. He finds a property in a nice part of town, puts it under contract and asks his lender for a loan.
The lender has changed its rules regarding loans in this particular area of town. Therefore, he disapproves of the loan. Jerry is left nowhere and tries to find another profitable property in another part of town that the lender seemed interested in.
He finds the property, puts it under contract and requests the loan. The lender once again denies Jerry the loan saying the market is under depreciation in that particular area.
Poor Jerry has nowhere to go. He must continue to modify his model and must dance to the rhythm of his lender.
This is what happens to almost 90% of real estate investors. Newbie investors who start with a goal in mind end up getting frustrated and giving up on the whole real estate game.
The other 10% of really successful investors work with good private lenders who play by their rules. These lenders do not often change their rules unlike other private lenders.
These lenders specifically provide loans to real estate investors who wish to rehabilitate and resell properties for profit. The company usually has a solid background in real estate and tends to do their research before granting loans.
They have a set of guidelines which they strictly adhere to. They don’t change the rules often like other lenders. If you want to succeed with real estate investments, you will need to find such a lender and work with them for as long as you can.