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Private Money: Good Luck Without It
By Vic Hurlstorm | June 20, 2009
The most common excuse many people make for not investing in real estate, besides fear of taking action, is lack of proper funding. In actuality, is has not been easier or more profitable to invest in real estate than now. In the past the only options available for private money loans were conventional financing through banks or high interest loans through hard money lenders. However, conventional lenders often require a large down payment of 20%, if not more, a load of paperwork, and an underwriting process that has derailed a fair number of transactions.
The alternative has been to use hard money loans, however rates are typically sky high, which means the transaction must have substantial margin for the investor. Today, as we know, the lending environment has tightened significantly and credit markets are slowly beginning to thaw. The banks that will lend money on real estate today require substantial down payments and walk-on-water credit from the borrower.Furthermore, hard money lenders are charging borrowers higher than normal rates because they know there’s nowhere else to turn.
While the current economic downturn has created issues with investors, it also offers outstanding investment opportunities for those who recognize this. This market has opened the doors for a new breed of loans called transactional funding, which is normally used to fund short sales, and private money, which is similar to hard money. Private money loans are preferable to most investors because the terms are generous and the investor has more control over the deal.
Private money loans can be raised in a number of different ways. Brokers can pool funds from wealthy individuals or investors, investors can approach individuals about loaning funds, etc. The erratic moves in the stock market and global capital markets has made many investors running for more secure places to put their money.
Consider the private money lenders point of view. Where do you believe he would prefer to place his money…in the stock market, which has been incredibly volatile, or a local property investment that would have substantial equity? No need to guess which option makes more sense. That’s primarily why investors are successful in getting private money to fund their deals.
The banks will eventually loosen their purse strings and the credit will begin flowing again, but private money loans represent a new breed of lending that’s here to stay.
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