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Private Lenders – Loans for Investors

by admin on February 28, 2010

Many real estate investors have given up on buying investment property due to their inability to find financing. In some cases, this is due to tighter credit and income documentation rules (no more stated income loans). However, most investors have discovered that even well-qualified borrowers (great credit, cash reserves, proof of income, etc.) are unable to get mortgages to buy or refinance investment properties.
Most lenders have decided to stop writing loans for people who have more than four mortgages — even though Fannie Mae rules allow investors to have up to 10 mortgages. (See our post titled, Fannie Mae Does Investor Loans.) So Fannie would buy these loans from local lenders without recourse, but the lenders don’t care. 
Resourceful investors have figured out how to overcome this problem by using private lenders instead of conventional banks and/or mortgage lenders. In most states, no license or registration is required for the lender or the borrower, as long as the private lending is done correctly.
This means no loans from strangers immediately after running ads to find a lender (there must be a pre-existing relationship between the lender and the borrower), and the private mortgage cannot be securitized (sold and resold in pieces over time, like shares of stock). So one private mortage on a property, between a lender and a borrower who knew each other before any lending took place, should be OK. This is not legal advice, so be sure to consult an attorney before doing this.

How do you find private lenders? The best way is by spreading the word. Get some business cards, put together a credibility kit (who you are, what you do, pictures of properties that you have rehabbed or flipped, etc.) and start spreading the word that you help people earn higher returns on their retirement money, fully secured by real estate. Tell your doctor, dentist, lawyer, accountant, family members, friends, neighbors, anyone you can think of who might have some money in a savings or retirement account.

What kind of returns should you offer? More than banks pay, but low enough that you can still make a profit. If you’re a rehabber, and you only need funds for 3-6 months to purchase and rehab houses that will be resold, then you might have to offer higher returns (10% to 15% APR) to make up for the quick repayment.

If you need funds long-term (5-10 years) to buy and hold rental property, then you’ll only be able to offer a return of 6% to 7% (double the rate for 5-year bank CDs). Make sure the loan payments are interest only to improve your cash flow and make the accounting easier. (Most private lenders prefer this anyway, as it means that all their money is earning interest.)

The rates you will have to pay for private money will depend on your track record, your relationship with the private lender, and your negotiating skills. As you gain experience, the rates you pay should be going down because you will have multiple lenders to pick from. Make them compete for your business by lowering their rates.

We hope this information will help you in your acquisition of investment property in Sacramento – and achieving financial independence. For more information on private money and private lenders, see our private lending website at A-1PrivateLending.com.


{ 3 comments… read them below or add one }

1 James Mucci March 23, 2010 at 6:09 PM

Solid advice, and here’s another tip that may help – check to see if there are any local investor groups. Typically real estate investor groups have private money lenders, as well as local real estate attorneys to help.
Another option that sometimes helps, is if you can get some type of peer to peer loan, on a personal basis, especially if you are planning to buy and sell multiple properties.

James Mucci – Michigan Refinancing

2 Daphne Lacey March 26, 2010 at 10:22 AM

Very good information. My investor buyers have dried up because they are unable to get financing. Thanks for the tips

3 Corona Homes March 27, 2010 at 2:37 PM

In So Cal most banks require 30 percent down and at least proof of six-month mortgage payments in the bank. Cash offer from investors seems to be winning out of over higher offer which are financed.

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