Most real estate investors rely on certain private hard money lenders for their source of funds. But getting financing for various real estate investments can be extremely difficult if you approach the wrong lender. This article will help you differentiate between these lenders and help you work with the ones that can help you…
Not all hard money lenders really understand the rehab and resale investment strategy used by thousands of real estate investors across the country. There are actually several levels of private lenders:
1. Business Investment Lenders
2. Development Lenders
3. Bridge Lenders
4. Senior Housing Lenders
5. Residential Lenders
By fully understanding their business model, you will be able to work with the best hard money lender that helps investors like you. For me, it would be the hard money residential lenders.
Other than 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 obtain their financing from a source such as a bank or financial institution. These lenders make loans to investors and then sell the paper to a financial institution like Wall Street. They use the money they get from the sale of the paper to make more loans to other investors.
Since these lenders rely on an outside source of financing, Wall Street and other financial institutions have a set of guidelines that each property must qualify 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 that of bank lenders. Unlike bank lenders, these lenders do not sell the paper to outside institutions. They are a group of investors 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 is a big problem with these private lenders. They don’t have a set of guidelines that they stay consistent with. Since they remain private, they can change their rules and interest rates any time they want. This makes such lenders very unreliable for real estate investors.
Here’s a story for you:
Jerry is a real estate investor in Houston primarily engaged in residential housing. His business model is to rehab properties and resell them for profit. He finds a property in a good part of town, puts it under contract, and applies for a loan from his lender.
The lender has changed their rules regarding loans in that particular area of the city. Therefore, you disapprove of the loan. Jerry is left nowhere and tries to find another profitable property in a different area of town that the lender seemed interested in.
Find the property, put it under contract and apply for the loan. The lender once again denies Jerry’s loan saying the market is depreciating in that particular area.
Poor Jerry has nowhere to go. He has to keep altering his model and has to dance to the rhythm of his lender.
This is what happens to almost 90% of real estate investors. New investors who start out with one goal in mind end up frustrated and give up the whole real estate game.
The other 10% of really successful investors work with the right private hard money lenders who play by their rules. These lenders do not change their rules often unlike other private lenders.
These lenders make loans specifically to real estate investors who are interested in rehabbing and reselling properties for a profit. The company usually has solid real estate experience and tends to do research before making loans.
They have a set of guidelines that they strictly adhere to. They don’t change the rules as often as the other lenders. If you want to be successful with real estate investing, you’ll need to find such a lender and work with them for as long as you can.
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