Private money loans are considered as saviors for many real estate investors in the industry. These loans are usually favoured for their fast processing time and bigger released amounts compared to bank loans. Also called hard money loans, this real estate financing option bases the amount released according to the collateral given by the investor when it is in good condition.
In most cases, most private money lenders release at least sixty five to seventy percent for a property in its ARV or after repair value. However, there are lenders who are willing to finance 100% on a project depending on the deal. The question is: How does a real estate investor get a lender to finance the property 100% of its restored value?
Here are the factors that can affect this financing option:
These are the three main things that every investor should consider when getting private money loans for their properties. Each of these factors definitely has a big effect on how an investor can make it or break it in the real estate industry.
The credit crisis is realality and has been absolutely devastating to commercial real estate investors. Large, conventional lenders such as national banks, Wall Street investment houses, Connecticut insurance companies and large multinational corporations (i.e. GMAC) have stopped making loans that can’t be sold to the Government or securitized. GSEs (Government Sponsored Enterprises) like Fannie Mae, Freddie Mac, Ginnie Mae, HUD (Housing & Urban Development) and FHA (Federal Housing Administration) are doing their best, providing as much liquidity as they can, but the bond market has stopped functioning as a provider of capital. There is still a massive shortage of money to lend. Hundreds of billions of good loans that should be approved are being turned away.
Desperate commercial real estate professionals are scrambling to find lenders who are actually willing to lend. Borrowers seeking alternative funding sources are increasingly turning to private equity firms to secure the funding they need.
Private equity firms are investment companies set up to invest the wealth of their sponsors and investors. They are similar to hedge funds in some respects but are structured a bit differently and can be more flexible and creative in their investment policy. Many private equity companies are flush with cash and hungry for good deals. Developers and property owners that have developed a relationship with private equity firms enjoy a reliable source of money for their real estate ventures.
Very few private equity companies are set up exclusively to be commercial mortgage lenders. Most are designed to use sophisticated LBO (leveraged-buy-out) strategies to acquire other successful businesses. However, many firms have real estate divisions that are willing to make loans and / or take equity positions in good deals they come across. These firms usually have a degree of expertise in commercial real estate and have a healthy appetite for mortgage paper.
Private equity firms are highly opportunistic and seek high returns. They charge interest rates in the mid-teens and usually tack on several origination points as-well. Private loans are not inexpensive, but at least they are available. Private equity companies lend based on the amount of equity in the collateral real estate; their loans are not driven by credit. Many borrowers with less-than-perfect credit are surprised to learn that they still qualify for an equity based loan from private equity.
Private equity is protective of its investment capital; they demand a significant amount of equity in any deal they fund. It is exceedingly rare for a private equity loan amount to exceed 65%-70% of the value of the target property. Most loans they make are “bridge” type loans that mature in less than 36 months. Before they lend money they must be confident that the borrower has a viable exit strategy.
With the banks and other big lenders out of the picture, private equity has been stepping in to take advantage of the huge commercial real estate mortgage market. For borrowers fortunate enough to know who they are and how to approach them, private equity can provide all the money they need. Borrowers without established relationships with private equity will need to use intermediary, agent or consultant that has Wall Street experience to gain excess.
MasterPlan Capital LLCÂ (http://www.masterplancapital.com)Â offers private and institutionally funded commercial mortgage loans, equity financing and asset management services to commercial property owners and investors nationwide. CLICK HERE TO APPLY FOR FINANCING – Please visit out our blog.
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