Private Money: 5 Things Every Real Estate Investor Should Know

Posted on Mar 16 2015 - 5:35am by Lance Edwards

What is Private Money? Who are Private Money Lenders?

“There are a lot of myths and misunderstandings out there about what is private money,” says Conner.

While national magazines routinely publish display ads pointing to hard money lenders or brokers as private money lenders, Conner said there are differences between the two that could mean steep savings to the real estate investor.

“A private lender is simply an individual just like us that loans their money from their investment capital or their retirement accounts,” he said. “We’re not talking about banks, we’re not talking about institutions, we’re not talking about equity partners.”

Acting just as a bank would, private lenders lend the money to the real estate investor, and in exchange receive a deed of trust or a mortgage as a security. Their names, however, will not be found on the title for the property or the house.

Hard money lenders, or brokers, meanwhile are the middle men who will go to these private lenders, and borrow money “at 7 percent, 8 percent, what have you, then lend it back out at a higher rate of 14 percent, 15 percent,” Conner said.

With origination fees of about four percent, Conner says the cost of doing business with hard money lenders can mean less to deal with in the end.
“In the first year, real estate investors will pay the hard money lender as much as 20 percent in interest,” he said.

Another important distinction between private money and hard money lenders, Conner said, are the amount of the loan you can receive. Whereas hard money lenders will typically lend up to 80 percent of the purchase price of a real estate deal, you can get 100 percent from private money lenders, plus more if you want to rehab the property or have carrying costs.

But when is the best time to use private money? Find out on the next page.

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