We’ll tell you exactly how to find a private lender in just a minute. But first, let’s take a moment to go over the basics of private lending. (You can skip ahead if you don’t need the refresher.)
At the most basic level, a private lender is anyone who gives you money that’s not a traditional financial institution (a.k.a. banks and credit unions).
That can include individuals or companies. So your private lender could be any of the following:
- Accredited investors
- Hard money lenders
- Other private lending companies
Basically, it can be anyone with an interest in real estate investing.
As you can see, the definition of a private lender includes a pretty large spread. Some private investors loan money as a one-time favor, while others do it as their full-time business. There’s a big difference between a family member loaning you $5,000 and a private lending company lending you $500,000. These big differences can make it hard to talk about private lenders as a group, since the different types vary so widely.
With that being said, you’ll need to figure out what kinds of private lenders you’re interested in. Do you want to ask family and friends for financial help? Or do you want to keep things strictly business and stick to private lending companies?
Either way, keep in mind that private lenders usually stick to real estate transactions―especially those that involve flipping a property.
So if you plan to purchase a property, do some renovations, and then sell it for a profit, private lenders might be just the thing for you. But if you’re just trying to fund a marketing campaign for your small business, you’ll probably want to stick to working capital loans.
You might be wondering why you wouldn’t just fund your real estate deals with money from a bank or credit union.
Well, one big reason is the type of project you’re trying to fund. Most banks and credit unions don’t like funding rehab loans or other financing for flippers. Generally, to get a conventional mortgage (for commercial real estate or otherwise), the property you’re funding needs to be in good condition. Fortunately, private lenders often have no problem funding flippers.
Plus, private lenders offer some other advantages. They often have lower borrower requirements than a traditional lender would (especially if you’re borrowing from friends and family). Things like bad credit would disqualify you from most traditional commercial real estate loans. With private lenders, it might not matter.
Likewise, private lenders may offer more flexibility when it comes to rates and terms. You might be able to negotiate better conditions. Again, this is more true when you borrow from friends and family than from hard money lenders.
Of course, private lenders aren’t without their downsides—like shorter repayment terms. Traditional lenders will often give you up to 30 years to repay a commercial real estate loan. Private lenders, though, usually want you to repay your loan within a year or two. In other words, most private loans have more in common with short-term loans than commercial mortgages.
And while you may be able to negotiate rates and terms with some private lenders, there’s still a good chance you’ll end up with higher interest rates than you’d find at a bank. Commercial real estate loan rates on traditional loans are often very, very low. Rates on rehab loans from private lenders? Not so much.
But even with those downsides, private lenders often provide a great solution for your rehab, flipping, or other niche commercial real estate needs. So how do you actually find one?