You’ve got the passion and the business sense you need to flourish in the competitive real estate market, but do you have a healthy bank account to go with it?
If you could use some outside funds to help you to kick start your real estate investing business, there’s good news. The lending market for commercial real estate was robust last year, despite increased trade tensions coupled with volatility in the financial markets. So, there’s promise that it will fare well this year, too.
The question that remains, though, is, should you seek funding from a private investor or should you stick with real estate investment loans from the bank? The reality is that choosing to find private investors offers several advantages over seeking out traditional bank loans. Let’s take a look at a few of them.
This is one of the major benefits of choosing private investors. The grim reality is that banks usually have requirements for credit scores, down payments, and income verification that are very rigid. You’ll basically need a credit score that is near perfect, a financial history that is squeaky clean, and an explanation of your outgoing and incoming funds.
Other documents you’ll need when seeking investment property loans from a bank include 1099 or W2 forms, bank statements, personal financial statements, profit/loss statements, and tax records. And there’s more. Be prepared to submit paycheck stubs, records of your existing mortgage payments, and a list of your current assets and debts. If what you look like on paper doesn’t match what the bank is looking for, you likely won’t get the loan you need.
Private investors you find as you network, on the other hand, are more interested in your track record of finding and making great deals and the proposed asset’s value. You get to know them on a personal level and will likely work with them over and over. These kinds of working relationships provide you with some flexibility based on trust.
In addition to being inflexible, banks usually have lengthy approval processes. With a bank, you may not secure cash for a whopping 90 days. That’s because gathering all of the abovementioned documents takes time and can be challenging. In addition, the paperwork itself can be extensive and you’ve got several levels you have to clear.
Meanwhile, with capital from a private lender, the process of qualifying for funding is less complicated and thus less time-consuming. Instead of having to clear multiple levels and deal with an annoying middle man, you’ll be dealing with your lender directly. And this lender raises and controls all of the funds and makes its decisions in-house.
As a result, you won’t see your approval times dragging on for several weeks. Instead, your private lender will work with you directly and will simply assess your particular project to see if you qualify for the hard money loan you need. Same-day approvals are not uncommon, so you can easily expect your funding within one week.
If you decide to find private investors, you’ll quickly learn that you’ll have much more liberty to develop a repayment plan that is based on ROI. With large financial institutions, this freedom simply doesn’t exist. Instead, you’ll have no choice but to accept the bank’s payment terms. You might be able to make some adjustments, but more often than not, you’ll have to abide by the bank’s established payment structure. And to make matters worse, you may face hefty pre-payment penalties.
Once you find investors with whom you’d like to work, you’ll simply start discussing with them your financial need. Then, you’ll work toward a mutually satisfactory plan in which you each receive a portion of the monthly rent (if you invest in a rental) and the final sales price. You can easily come to your own terms since no established lending requirements typically exist.
When you choose to find private investors, you’re essentially choosing to save money in closing costs and fees. That’s because bank investment property loans tend to be more costly in these areas.
You will also not end up shelling out thousands in interest rates if you work with investors. Many banking institutions demand application fees upfront, even before you are approved. In addition, rates and terms may vary significantly. Still, banks often offer fixed rates and lower interest rates that you can repay over a certain number of years if you’re actually able to secure funding. If your loan terms are fluctuating, or adjustable, you may end up with higher payments over time.
If you’re ready to take the plunge into real estate investing, now couldn’t be a better time to try to find private investors. They’ll help you to get started on your real estate investing career without the hassle you’ll experience with big banks.
Understandably, though, knowing where to start when it comes to finding the right lender can be challenging. As with any type of loan, it’s critical that you understanding your investment property loan terms as well as the impact it will have on your financial health. This is where doing your due diligence in researching your various lending options comes in. That’s the only way you’ll get the best deal available to you right now.
Get in touch with me, Joe Fairless, to find out more about how to find private investors and kick your real estate business into gear.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.