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What is private money?

When a loan is secured by a hard asset, such as the collateral worth of a piece of property, it is called a private money loan.

The Yin and Yang of Private Money

Orlando private money is easy money, some say, because it is readily available to average investors and business owners and relatively easy to qualify for. This kind of loan is offered by high-net-worth private lenders direct to borrowers or by companies who pool the funds of private lenders (who may be property owners/developers) and then loan to borrowers.

Because the investment property itself and its value is used to evaluate/qualify the loan, the lender can decide and process the loan quickly, within days rather than weeks or months, and borrowers don’t have to go through the same stringent screening that they would with a bank. Lenders like asset-based lending because they don’t need to do excessive paperwork. Borrowers with a short work history or not enough documented income or credit to qualify for a conventional loan from a bank may find that private money, secured against property, is a good alternative source of funding.

>> You May Also Like: Private Money Loan FAQ

Private money is expensive money, though. The ease of getting the money means lenders will set harder terms. Interest rates will be higher than the federal rate and repayment terms will be shorter than the borrower would find with a traditional bank loan. Interest rates can be 10% to 18% (or more) and terms can be as short as 6 months and usually not longer than 12 months. Origination fees (points) and monthly payments will be high.

When a Private Money Loan Makes Sense

If the terms can be met and the numbers work, private money lending can be quite beneficial to both the private lender and the private borrower:

• The entrepreneurial-minded may like the speed with which private money can be obtained.
• In real estate, where there is the potential to get a better deal closing quickly, private money is a very good alternative financing source for all kinds of properties: single family, high-rise developments, and land deals.
• Because private money can be used as renovation funding, not just to acquire property, real estate investors like it for buying properties to flip; they accept the higher costs and shorter terms because they plan to get out fast anyway to realize the potential profit from the property (maximize costs upfront, generate larger return later). If the exit strategy is to rent rather than sell, owners will look for longer-term funding to finance the property for rental.
• Because private money can be used as renovation funding, not just to acquire property, real estate investors like it for buying properties to flip; they accept the higher costs and shorter terms because they plan to get out fast anyway to realize the potential profit from the property (maximize costs upfront, generate larger return later). If the exit strategy is to rent rather than sell, owners will look for longer-term funding to finance the property for rental..
• Private money may suit new investors who might otherwise be shut out of an opportunity because they don’t qualify for a bank loan, as well as experienced investors who are already leveraged or holding multiple mortgages and need a new loan to buy a property.
• Private money is an option for any property owner with equity who needs quick access to cash.

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