If you are looking to expand your real estate portfolio, you may need to consider using a private money loan. Private money loans, also sometimes called hard money; these loans can be an effective way to finance your real estate projects especially when you need quick cash to seize an opportunity. Here are several ways for you to effectively use private money loans to expand your real estate portfolio:
Have a Solid Plan
Before you consider applying for a private money loan, it is important to have a well-thought-out plan for your real estate project. This plan should include the following:
- A detailed timeline: Your plan should have a timeline that outlines all the major milestones of the project, including the start and end dates of the renovation work and when you expect to put the property on the market.
- A budget: You should have a budget that covers all the costs associated with the project, including renovation expenses, closing costs, and any other fees or expenses that may arise during the process.
- A realistic estimate of the property’s value: You need to have a clear idea of what the property will be worth after the renovations are completed. This estimate will help you determine whether the project is a viable investment opportunity and how much you should borrow.
In addition to the above, you should also consider having a solid exit strategy in case things do not go as planned. Consider creating multiple back-up plans for what you will do if you are unable to sell the property or refinance the loan as you had hoped.
Choose the Right Lender
When it comes to private money loans, not all lenders are created equal. It is important to do your research to find a lender that is right for you. Here are some factors to consider when choosing a lender:
- Experience in your market: Look for a lender that has experience working with real estate investors in your market. They will have a better understanding of local market conditions and will be able to provide better guidance throughout the loan process.
- Understanding of your goals: Make sure that the lender understands your investment goals so that they can help you achieve them. They should be able to provide insights and recommendations that align with your long-term objectives.
- Fees: Be sure to ask about all the fees associated with the loan. These may include origination fees, underwriting fees, and appraisal fees, among others. Make sure that you understand each of these fees and how they will affect the overall cost of the loan.
By taking the time to research and compare multiple lenders, you can find a private money lender that is right for your real estate investment needs.
Be Prepared to Put Down a Large Down Payment
For hard money loans, borrowers should expect a large down payment of 20% or more due to the high-risk nature of the loan. This ensures the borrower has a stake in the property and motivates them to make repairs. However, a larger down payment can lead to lower interest rates, lower overall loan costs, and quicker equity building, benefiting long-term goals. Understanding down payment requirements and benefits can increase chances of success.
Understand the Risks
When considering a private money loan, it is important to understand the risks involved. Here are some key points to keep in mind:
- Higher interest rates and shorter terms: Private money loans typically have higher interest rates than traditional bank loans and also offer shorter terms, often ranging from 6 to 18 months. This can make them more expensive in the long run, especially if you are unable to pay back the loan quickly.
- Potential for loss of property: If you default on a hard money loan, the lender can foreclose on the property, which means you could lose the property entirely. This is a significant risk, especially if you have invested a large amount of money in the property.
By understanding the risks and taking the necessary precautions, you can make an informed decision about whether a private money loan is the right choice for your real estate project. Remember to always have a solid plan and exit strategy in place, and to do your due diligence to minimize the risks involved.
The easiest way to save on a rental property investment is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & 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. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance an investment property? Connect with us today.