Most real estate investors rely on certain private hard money lenders for their source of funds. But getting the financing for various real estate investments can be extremely hard if you approach the wrong lender. This article will help you tell the difference between these lenders and help you work with the ones that can help you…
Not all hard money lenders really understand rehab and resell investment strategy being used by thousands of real estate investors all over the country. In reality, there are various levels of private lenders:
1. Commercial investment lenders
2. Development lenders
3. Bridge lenders
4. High end home lenders
5. Residential lenders
By fully understanding your business model, you will be able to work with the best hard money lender that helps investors just like you. For me, it’d be residential hard money lenders.
Apart from that, these hard money lenders also differ in their source of funds. They are bank lenders and private hard money lenders.
Bank Lenders – These lenders get their funding from a source such as a bank or a financial institution. These lenders give out loans to investors and then sell the paper to a financial institution like the Wall Street. They use the money they get from selling the paper to give out more loans to other investors.
Since these lenders depend on an external source for funding, the Wall Street and other financial institutions have a set of guidelines that each property must qualify in order to be eligible for a loan. These guidelines are often unfavorable for real estate investors like us.
Private hard money lenders – The model of these lenders is quite different from the bank lenders. Unlike the bank lenders, these lenders do not sell the paper to external institutions. They are a bunch 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’s a huge problem with such private lenders. They do not have a set of guidelines that they remain consistent with. Since they remain private, they can change their rules and interest rates anytime they want. This makes such lenders highly unreliable for real estate investors.
Here’s a story for you:
Jerry is a real estate investor in Houston who’s mainly into residential homes. His business model consists of rehabbing properties and reselling them for profit. He finds a property in a nice part of the town, puts it under contract and requests his lender for a loan.
The lender has changed his rules regarding lending in that particular area of the city. Therefore, he disapproves the loan. Jerry is left nowhere and tries to find another profitable property in a different area of the town the lender seemed interested in.
He finds the property, puts it under contract and requests for the loan. The lender once again denies the loan to Jerry saying that the market is under depreciation in that particular area.
Poor Jerry is left nowhere to go. He has to keep altering his model and has to dance to the tune of his lender.
This is what happens to almost 90% of real estate investors out there. The newbie investors who start with a goal in mind end up frustrated and give up the whole real estate game.
The other 10% of investors who really succeed work with the right private hard money lender who play by their rules. These lenders don’t change their rules often unlike the other private lenders.
These lenders specifically give out loans to real estate investors that are into rehabbing and reselling properties for profits. The company usually has a strong real estate background and they tend to do their research before giving out loans.
They have a set of guidelines that they strictly adhere to. They don’t change the rules often like the other lenders out there. If you want to succeed with real estate investments, you’ll have to find such a lender and work with them for as long as you can.