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When Does Using Private Money Make Sense?

Have you passed up an investment opportunity because private money was expensive and it was your only option for financing?

Private money, or hard money financing, is non-conventional financing. The funds are not coming from a federally insured source, as in a bank or credit union. A private money lender is usually an entity or individual not regulated by the federal government, which allows for increased flexibility and common-sense underwriting to accommodate a borrower’s specific financing needs.  

Wise investors look at the big picture when analyzing the feasibility of a real estate investment and may consider private money as a tool to accomplish their goal. Often the cost of missing a great investment opportunity far outweighs the cost of private money.

Private money works best for short-term, bridge financing opportunities when value is created or where time is of the essence in funding a transaction, along with a viable exit strategy as in a refinance with conventional financing or sale of the property.

Private money is not the optimal financing source for every real estate investment. However, if private money will allow you to quickly pursue an excellent investment opportunity where the added value exceeds the cost, private money should be considered.

Here are four scenarios where private money financing makes sense:

1.  Timing: When timing is critical to accomplish your goal.

    • For example, a buyer was purchasing a property, and all contingencies were removed, and the conventional lender could not meet the deadline to close.  The consequence of not closing the transaction was the loss of the buyer’s non-refundable deposit, which exceeded the cost of using private money financing; therefore, using private money to fund quickly made sense.

2.  Added Value: When there is an opportunity to purchase a property at a below-market price or a potential to create value well above the initial cost.

    • For example, a buyer purchased an apartment where all the units were rented at below-market rents. With some slight renovations after the acquisition, the rents could be increased substantially, creating value that far exceeds the cost of using private money financing.

3.  Streamlined Loan Process is Desired: When a borrower does not want to go through the bureaucratic process of obtaining a conventional loan, which requires extensive paperwork and intrusive due diligence by the lender.

    • For example, a borrower owns numerous properties with multiple entities where a conventional lender requires extensive amounts of information, creating an administrative hassle for the borrower. Therefore, the borrower would rather pay the higher cost of private money than go through the stress of getting a conventional loan.

4.  In lieu of Bringing on a Partner: When a borrower has a choice to either give up equity ownership to additional partners to get conventional financing or obtain private money financing.

    • For example, to qualify for a conventional loan, the borrower needed to have excess cash reserves, which the borrower did not have. Therefore, the borrower could bring in a partner taking equity ownership in the property or go with private money financing that was less expensive than giving up ownership equity.

Don’t eliminate a great investment or refinance opportunity because the financing costs may be higher than you are used to paying because private money financing is usually a bridge loan. The higher cost is only for a short period of time.

If you have the chance to acquire or refinance an asset where timing is critical, there is value created, and conventional financing is not feasible. Consider private money financing as a way to accomplish your goal.

Fidelis Private Fund is a competitively priced direct, private money lender and provides extraordinary customer service where it is more about the relationship than the transaction. So let us see how we can help you accomplish your goal.

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