Private Lending vs. Bank Financing: Which Is Better for Real Estate Investing?

Today’s real estate landscape is incredibly competitive, with high rates and low inventory limiting activity in markets across the US. Typically, the good deals that do make it to market get snatched up quickly and well above their listing price because of multiple competing offers. For real estate investors, this can be an incredibly difficult environment to make a profit in. Success in the space will require investors to get creative with their strategies, especially when it comes to finding and financing good deals.

This is where private lending steps into the picture. Private real estate loans allow borrowers to secure properties fast & reliably, and they have more flexible terms that help investors win more often. Read on for everything you need to know about private lending and how it compares to traditional bank financing in a number of scenarios.

What Is Private Lending?

In the context of real estate, private lending refers to an individual or organization that finances a property purchase outside of conventional lenders like banks or credit unions. Unlike traditional mortgages, a private loan is typically secured by the property itself as collateral. This can give borrowers more flexibility when it comes to loan terms, since it means there’s less risk on the part of the lender. It also means loans can be approved much faster.

The way private lenders work can vary widely, but usually these are organizations that are well-established in the real estate space, and they offer a variety of programs to meet the needs of any given investor or buyer. Common loan programs offered by private lenders include rental property financing, fix and flip financing, new construction financing, and bridge loan programs.

Key Differences Between Private Lending and Bank Financing

Private loans differ from bank loans because they are underwritten in a fundamentally different way. Whereas traditional mortgages tend to focus on the borrower’s credit and personal income, private lenders are more concerned with the property itself and if it makes a good investment. This asset-based approach can offer many benefits, especially for investors. There’s less paperwork to get through, loans can be approved faster, and there’s less restrictions on types of deals that qualify.

Credit scores play less of a role in loan approval, but liquidity becomes more important. That means even borrowers with poor credit or non-W2 income can still secure financing so long as the numbers support a profitable deal. Private loans do typically come with slightly higher interest rates than their conventional counterparts, but the cost is often outweighed by gaining access to more flexibility, speed, and the ability to secure lucrative deals.

Private Lending vs. Bank Financing for Home Flipping

Traditional mortgages tend not to lend themselves well to the structure of fix and flip projects. For starters, the 30-year timeline and slow approval process of these loans are not suitable for such time-sensitive deals. Bank loans also have strict lending criteria, which means they may not be willing to finance properties in need of heavy renovation. The same goes for borrowers who don’t meet the loan’s minimum requirements. These may seem like minor issues you have to navigate to secure the lowest interest rate, but in reality, they cause investors to miss out on great opportunities.

Private fix and flip loans don’t suffer from any of these drawbacks. They have a short timeline that can be tailored to the length of a project, loans can be approved faster, and lenders are much more flexible with loan terms and approval. Plus, these programs often provide additional funding for renovations after the purchase, which maximizes the investor’s leverage and allows them to focus their available capital on completing the deal.

Bridge Loan Scenarios Where Private Lending Shines

It’s often the case that the timing of a lucrative opportunity doesn’t align with an investor’s available liquidity. Let’s say that you’ve found a great property in your local market, but you’re currently in the process of selling an existing property. Bridge loans give investors access to fast, short-term financing that allows them to move forward with the purchase and repay the loan when more permanent funding is available. They’re an ideal solution for time-sensitive transactions like these, as well as off-market deals like distressed properties or foreclosures that have shorter buying windows. Bridge loans can also be used for making value-add upgrades to existing properties, so owners can improve occupancy or cash flow to secure more favorable financing terms.

Rental Property Financing Considerations

There’s an increasing number of investors using DSCR loans to finance their rental property deals, and when you consider the constraints of conventional programs, the reasons become clear. Most bank loans have strict limits on the number of properties that can be financed by a borrower, and every borrower is expected to have W-2 income in order to qualify. When it comes to private lenders, though, approval is more about cash flow than the borrower’s financial profile. DSCR stands for debt-service coverage ratio, and it measures the income of a rental investment against its debt obligations. Since private lenders use a fundamentally different underwriting process for these programs, they’re typically more flexible when it comes to loan terms, and they’re easier to qualify for.

DSCR loans are also a great solution for experienced investors with established portfolios. Many of these investors don’t have taxable income; managing the portfolio is their job. And while this might cause issues with traditional mortgage underwriting, DSCR programs utilize the income that investors already try to maximize.

Private Lending vs. Bank Financing In Each Scenario

RCN Capital

If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers, and small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer private real estate financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.