Private Real Estate Money: the 5 Advantages of Private Money Over Hard Money Loans or Mortgage Loans

For real estate investors there are numerous benefits and advantages to private real estate money versus hard money loans or mortgage loans to fund your real estate investing business. Knowing the advantages can mean the difference between making a real estate deal work or losing a good deal to your competitors.

As the credit-bubble continues to unwind, traditional sources of real estate financing are drying up and real estate investors need to find alternative sources of capital such as private real estate money.

Advantage #1: Speed and Cash Flow

The ability to close a real estate deal in less than two weeks is a huge advantage over having to wait weeks or even months for a typical bank loan approval. The importance of speed cannot be overstated in a competitive market and quick cash gives you a big edge over other investors.

Imagine if you are the seller and someone comes to you to buy your house and has a two or three month escrow period before closing plus several financing contingencies versus another investors who will close in two weeks with no contingences.

Not hard to tell which offer the seller will accept. And the real power of this offer is the seller may accept a lower price to close quickly with no contingencies. So not only do you get the deal from the other investor, but you get it at a lower price. The power of private real estate money is the ability to close quickly and drive better deals terms to your advantage.

Advantage #2: Simple Paperwork

Have you ever gone to a closing on a traditional mortgage loan and had to sign 2 inches of paper work. Now image going to closing and only signing two or three documents (yes that is not misprint).

Private real estate money deals are incredible simple and the total paperwork is normally less than 10 pages and includes two or three simple documents. The documents included in a private real estate money transaction are a mortgage (Deed of Trust), an installment note and possible a disclosure statement. The only other required paper work is to name your lender on your property insurance as you would in any normal loan situation.

Advantage #3: You Control Terms and Conditions

One of the incredible advantages of a private real estate money transaction is you control the terms and conditions of the loan. For example, you can offer a very short term loan of only 6 months if you know you are going to flip the property for quick profit. Or you can offer a 5 or 10 year term if you plan on holding the property for a long term rental.

You can also control the conditions of the loan such as not allowing a prepayment penalty for early prepayment. Most normal mortgages and hard money loans require a 1% to 10% prepayment penalty to pay a loan off early. With private lending transaction you control the conditions and can simply add a clause that allows an early prepayment without a penalty. That can mean a huge savings down the road.

Advantage #4: Reduced Fees and Costs

Private real estate money is less costly than mortgage loans or hard money loans. For example, most hard money loans can ultimately have total interest cost of 20% or greater by the time you factor in all the fees, points, interest and other costs. Even mortgage loans can be very costly with fees and upfront points factored in and the high interest rates most investors must pay versus home owners. Loans from private real estate money sources usually have no points and very few costs. The total cost of most private loans is somewhere in the 9% to 15% range with little upfront or back-end fees.

Advantage #5: Flexibility

Private real estate money provides tremendous flexibility for both you the borrower, but also for the private lender. The private lender can invest small amounts of $5,000 or less in deals or large amounts to fund larger apartments or commercial property purchases. You can also work with lenders to structure a term that fits the lenders needs.