We have learned that one of the biggest problems for real estate funding for investors is getting funding as quickly as possible. It can make the difference between making the deal or losing it at the last minute. The reality is that the real estate investor has to either find really good deals or has to bring money to the table or both. We know that investors can be intimidated by real estate and other direct investing strategies. Investing can be risky. The good news is there is good solid real estate funding for investors all around you and there are ways to protect your investment. We are going to focus on private or hard money lenders. This is a convenient option.
Structuring Private Real Estate Funds
We have learned from experience that forming a private real estate fund provides a means for the successful real estate investor to access a dedicated pool of capital to fund new investment deals without having to raise capital on a deal-by-deal basis. We understand that private real estate funds enable managers to pool capital without having to navigate the cumbersome securities registration process involved in launching a REIT or other publicly-offered investment fund (although funding with REITs is gaining popularity and is a good way to go in certain deals).
You need to know that private lenders normally demand 12 to 18 percent annual interest on their money in addition to four to eight points up front. They have a lawyer write up all the documents that big conventional lenders require. The bad news is, the investor pays for that lawyer. The good news is that when the investor signs a promissory note at closing agreeing to the lender’s terms then the lawyer will record a deed of trust securing the promissory note to the property. This protects everyone’s interests.
To tell you the truth, Private or Hard Money Lenders are often people who have saved up a good chunk of money. They lend that money to real estate investors just like mortgage companies. Be aware that they normally only lend about 65 percent of what the property is ultimately worth. So that means if a real estate investor wants to buy a home that is worth $100,000, the private lender will probably give the investor about $65,000 max. What we know is if the investor is successful and flips the home in six months, which is about the normal time frame, then the lender will probably make about a 10 to 14 percent return on their money in just six months. If the investor defaults, then the lender takes a property with 35 percent equity.
On an interesting note, real estate funding for investors may be available soon with local brokers who pool money from smaller investors—the funding of a company by selling small amounts of equity to many investors. This form of crowd funding has recently received attention from policymakers in the United States with direct mention in legislation through the JOBS Act that allows for a wider pool of small investors with fewer restrictions. This would allow smaller investors to pool their money to get the kind of returns that were available only to more affluent investors in the past.
Remember, there is no such thing as risk-free investing or easy money. Anyone who says otherwise is probably a conman. Now that you understand more about private lenders, you can proceed with the knowledge to find success in real estate funding for investors.