Working with a private lender as opposed to a conventional lender is often the financing of choice for many real estate investors and developers. For one private money tends to move faster than conventional lenders, you might not have to deal with invasive background or credit checks, and on top of that, depending on your investment (fix and flip or construction), choosing to finance your purchase could be less expensive than a conventional lender’s loan.
But what should you consider before working with a private money lender? There are pros and cons to each different lender, so here are questions you should ask yourself before choosing who you want to work with.
Prepayment Penalties
Prepayment penalties, as the name implies, are a penalty fee that gets added into your account balance if you pay off your loan early. Lenders include a prepayment fee to ensure that they earn up to a specific number of month’s interest. This can harm real estate investors that are looking to fix and flip a property, as they will be required to spend more on their private money loan than for selling their fix and flip faster.
While this is a common practice for some private lenders, Capital Fund 1 doesn’t enforce prepayment penalties on loans that are less than $1,000,000, making it easier for real estate investors to receive a greater ROI. Knowing that a prepayment penalty will not be added onto their loan once they sell, wholesalers find this to be a great choice for financing their investment property purchases.
Dependability (Available capital, turnaround times, won’t change terms)
When considering the dependability of a lender, you want to make sure they can provide 3 things:
- Available Capital
- Fast Turnaround Times
- Won’t change Terms
Working with a dependable lender can make all the difference in your investment and will make it easy for you to succeed as a real estate investor. For example, if you won a trustee sale, you would want to work with someone who can close a loan in 24 hours and not have to worry if there is enough capital available.
Additionally, you want the loan quote that is provided to you to be the same once you sign the loan documents, not changed to have a higher interest rate or lower loan amount, leaving you in an uncertain position to manage the investment. Or worse yet, they say they can fund the deal, but in the last hour, they inform you that they do not have enough money to fund your deal. If you find yourself working with a private lender such as this, you may find yourself unable to be as successful as you could be if you worked with someone more reliable.
Capital Fund 1 is proud to say that we always fund on time and our loan quotes don’t change once you come to sign the documents. We recognize the importance of providing reliable results with each loan we close.
Draw Process
If you are a construction developer or plan to add square feet to a fix and flip you may find that you’ll need to work with loan draws. A Loan draw is where you have part of your loan held back at closing, and upon completion of work you make a request for a draw which will give you some of that held money back to be used for furthering the project. Not all private money lenders provide draws as an option for their loans so you will need to put this into consideration before deciding on which lender you want to work with.
Depending on where you go, the set up for loan draws may be different. If choosing to work with Capital Fund 1, you will find yourself able to save money as we only charge interest on the principal balance of the loan and not the full original balance.
Loan Terms and Ability to Extend Loans
Knowing what the available loan terms are from a lender is important. If you are planning to purchase a buy & hold rental property you may want to receive a 2-year loan term as opposed to if you were looking to do a quick fix & flip on a 6-month loan. Depending on where you look, loan terms may vary in length, so think about what you would need to be successful with your investment.
In addition to loan terms, knowing if the lender can and will provide an extension on a loan is also important. While the market is hot, it is also highly competitive to those trying to sell. That said, if you are close to the maturity date of your loan, getting an extension isn’t a bad idea. This can allow you time to sell the property, finish construction on a property, or even refinance into a longer-term loan for a rental property.
At the end of the day, you know what the best choice for you as a real estate investor will be, but these things will help you determine that even better. Think we might be a great choice for your lender? Give us a call or submit your loan request online today.