Questions to Ask When You Borrow Private Money
Private lending. At some time, most real estate investors will need to borrow money from a private lender. Sadly, many investors are so focused on the rate, that they forget to ask other questions.
So, here are five questions that will help you to pick the right private lender for your next deal:
Loan to value – Which lender will provide you with the loan to value that you need? For example, if you have enough funds for a 20% down payment, it doesn’t matter what rate is being offered at a 25% down payment. Make sure that you figure out up front how much capital that you have towards the down payment.
Renovation funds – Do you need money for renovations? What percentage of the renovation funds do you need? Some lenders will only offer 75% of the renovation budget. Others will go up to 100%. You need to ensure that you have enough capital to both start and finish the project.
Lender’s lawyer – Most private lenders require that you pay for their lawyer to draw up the mortgage documents. Some lawyers charge up to $2000 to do so. Others will do it for $700. It may be cheaper to go with a lender that is charging a slighting higher rate if their lawyer charges less.
How long is the term? What is the minimum interest payable? If you need the money out for eight months, but the term is only for six months, you could find yourself in trouble in the middle of the project. Likewise, if you only need the money for three months, does it make sense to go with a private lender that wants a minimum of six months of interest? Read those terms and conditions carefully.
What happens at renewal? Some lenders will charge .5% at renewal as a fee. Others will charge you 2%. Depending on how long the project may take, you need to understand the consequences of having to renew your mortgage, and what those costs may be.
Private lending is simply another tool in the toolbox. Feel free to reach out if you have any questions about finding the right tool for your next deal.
-Mike Schroeder
