Do you have a real estate investment in mind, but funds do not come in as you have expected? Private Money Loans has become a viable alternative source of funds for situations where your traditional sources have become less reliable than expected. Established and small private money lenders in your home state can help you bring in the investment you have been eyeing a lot faster and with a lot less of the requirements and paperwork of a traditional loan.
Private loans usually come from sources who are closer than you might think. It may come from your next of kin, relatives, friends, real estate investors, and other high net worth individuals.
Funds can also come from professional private money lenders like well-established private financing companies in the industry. These organized lending companies are sometimes also called hard money lenders. One of the well-established local private money lenders in Houston, for instance, is GL&L Holdings who has been in business for more than a decade.
5C’s of Traditional Loans
Traditional Lenders usually need to establish a lot of factors about the borrower and the loan collateral. They almost always strictly follow the five C’s of credit criteria to formulate a decision on your financing proposal. With this, these institutions emphasize your Character, Capacity to Pay, Loan Collateral, Conditions, and Capital. The result is a long-drawn-out application process that may cause you to lose your investment transaction.
So how do these 5C’s affect your loan application?
Character
Banks need to make sure you’re a good debtor and you have a proven track record of paying your debts in the past. In short, your credit score should look good.
Capacity to pay
Your capacity should prove your ability to repay the loan in an agreed period. More importantly, you should have a favorable debt to income ratio. Too many loans is a no-no. If you’re looking to grow an investment portfolio of 10+ properties and are seeking financing for each one of them, you may find your DIR to fall through.
Collateral
They must check on the property and its valuation. It should be more than enough to cover the loan in case you miss payments and they need to foreclose.
Conditions
The conditions include the viability of the loan purpose, the loan amount, the terms of the loan, the interest rates, and all other prerequisites and documents. This may also include the market condition and macroeconomic factors such as prevailing interest rates.
Capital
Lastly, your capital, which is generally your net worth or how much funds you have.
Difficult as they may seem, conventional lenders, are still indispensable when you’re investing in real estate in the long term. They can often refinance your investments at a more favorable rate, which can help you purchase even more properties.
But with private loans, these 5C’s are still considered but on a more subtle or dialed-down version.
Applying For A Private Loan
A private loan is not only an alternative source of funding for real estate investments, it also provides some flexible loan options that sometimes even eclipse those of traditional financial establishments.
A good starting point in getting a private loan to finance your real estate project is to be very knowledgeable about your project. It is best to cover all corners when a Private Money Lender asks about the details of the project. Do not come empty-handed and appear to be scrambling for the answers to your meeting. You should cover the following:
- Project Location. Location is one of the factors that need to be considered for a project since it affects the marketableness of the property. It is also wise to check real estate trends and integrate them into the design of the rehab plans.
- Time-frame. Be conscious of the project’s time frame. Any delays can mean additional materials and labor costs. A delay in the project will eat into your profits and alter the timeline to your disadvantage, which could affect the business relationship you have established with your Private Money Lender.
- Costs of acquisition and repairs (if any). The funding requirements and their disbursements are factors in the project as they ensure the smoothness of the rehabilitation process. In line with this, the project investors should present a cost and profit projection of their Real Estate Project. For instance, if you are a House Flipper, you would need to know the buying price of the property, the costs of rehab detailing the materials and labor costs, expenses for the open house, and the projected selling price or the After-Repair Value. These figures will help you and the lender visualize the project. It will also be helpful to discuss the fund releases during the rehab process as Private Money Lenders will need proof of the ongoing project before release. One way of documenting these releases is to present a Bill of Materials, the Scope of Work, and a checklist for the accomplishments.
- Loan to Cost. Private Money Lenders 100% financing of projects is about as rare as a rain shower in summer. Such instances are not always on the horizon, especially if you are working on a strict schedule. Most local private money lenders in Houston and other areas only finance a portion of the total project cost. This means you need to prepare for your out-of-pocket expenses or your cash out for the project. Say, if the private money lender gives you a maximum of 75% of the After Repair Value or ARV, you need to provide the difference to start the project. Having some “skin in the game” acts as an assurance that you are committed to the project as much as they want you to be.
- Release of funds. If you’re doing a rehab/fix and flip, your lender might release funds in tranches. The initial release will cover the acquisition cost of the property, while the following releases depend on the progress of the repairs. Say, for instance, the ARV of the property you are interested in is $200,000.00 with an acquisition cost of $110,000 and rehab cost of $40,000. Supposing the lender is willing to shell out 70% of the After Repair Value of the property means that you will have to shell out the remaining rehab costs. If there will be three releases, and the first release will be a check for a title company, releasing the rehab cost will be in two tranches of $20,000. Their release shall depend upon the presentation of proofs of accomplishments.
- Loan repayment. Another factor is the loan repayment plan. How will you source the funds that will allow for a continuous payment of your amortization? Make sure you establish this early on.
Mortgage Loans Versus Private Loans
As private money lenders usually focus more on the collateral and the purpose of the loan, these risks are often compensated with higher interest rates. You can find private lenders charging up to 15% plus fees. However, having balloon payment terms can significantly reduce your monthly loan payments.
A typical mortgage loan is paid every month with principal and interest until the loan is paid off at the end of the term. 𝗔 𝗯𝗮𝗹𝗹𝗼𝗼𝗻 𝗽𝗮𝘆𝗺𝗲𝗻𝘁 is a way of repaying a loan with relatively lower monthly amortizations, then the balance is paid with a large balloon amount at the end of the loan term. This is common in short-term hard money or private money loans.
For example, you have a $200,000 loan with a 20-year amortization period, 10% annual interest rate, and 12-month balloon term. In this scenario, the assumption is that interest compounds monthly and is calculated on a 360-day basis. Your loan set-up is might look something like this:
Loan Amount: $200,000
Annual Interest Rate: 10%
Actual Interest Rate/360 days: 10.139%
Amortization Period: 240 months
# of Regular Payments: 12 months
Monthly Payment: $1,689.81 (Months 1-11)
Balloon Payment: $201,689.81 (Month 12)
At the end of your loan term, you can choose to pay off your loan, refinance or do an extension depending on your exit strategy. If you’re holding the property to lease it, then it would probably make sense to refinance through a commercial bank. If you’re going to sell the property, then you can do so at a good price, pay off your private loan, and keep the difference as your profit.
Here at GL&L Holdings, we can provide you with a balloon term of up to 36 months without any prepayment penalties. That means if you were able to sell your property before your 12-month term is due, then you can close the loan without paying any additional fees. More profits toward your pocket!
Finding Private Money Lenders Now
Here are some ways to find private money lenders in your area.
- Google Search. The most common is to search for “private money lenders near me” online and start calling for appointments.
- Online Groups. Another way is to join groups in the same industry as yours. People who share the same interests will usually share and compare information about private money lenders. It would not also hurt if you can get an endorsement from them.
- Ask A Friend. Or anyone in your circle who has a high net worth and would want to invest in real estate as a lender.
We Can Fund Your Deal
GL&L Holdings is one of the established local private money lenders in Houston. We have served the area for more than a decade. We specialize in the following private loan programs:
- Single-Family Residential and Commercial Property lending that is not to be occupied by the owner
- Cash-out loans
- Rehab Loans / Fix and Flip Loans for Residential Properties
- Construction Loans for Residential Houses and Buildings
- Lot Purchase / Development
GL&L Holdings grants a 70% LTV with rates ranging from 9.9% to 14.9%. Depending on the purpose of the loan, repayment terms can go as much as 20 years. The loan process takes an average of 7 to 15 working days, shorter than loan application processes with traditional lenders.
At GL&L Holdings, we promise a smoother service and a faster turn-around time for your application. Our rates are competitive, and unlike other lenders, our loan terms are flexible and conform to your needs. You do not have to look elsewhere; call us now at (832) 770-9415 or send us an email at info@gllholdings.com.
You can also visit our website and fill up our pre-qualification form. GL&L Holdings is present on various social media platforms. Follow us on Facebook, Instagram, and LinkedIn.
Let us work with you; your future is our future, too.
