The Price of Utilizing Private Money in Real Estate Investments
Real estate investing is a great way to diversify your portfolio and acquire a valuable asset. One of the ways that experienced real estate investors access capital for investments is through private money. This article will explain what private money is, the pros and cons of using it, and the cost associated with obtaining it.
What is Private Money?
Private money is capital sourced from individuals or small companies/corporations not associated with banks. This capital may come from family, friends, business contacts, or other investors. Private money is often times based on trust, as the investor has no control of the asset or invests in the deal without due diligence. The terms and conditions with private money deals vary depending on the lender and are discussed in detail before an offer is accepted.
Pros and Cons of Private Money
Using private money offers advantages over traditional lending, but drawbacks should also be considered.
Pros
- Quick and easy access to capital
- Less rigid criteria for loan approvals
- Generally less regulations and paperwork
Cons
- High interest rates
- Shorter loan terms
- No access to federal or commercial loan programs
Price of Private Money
The cost associated with a private money loan can vary depending on the lender, the asset, and the deal. Generally, one can expect the following costs when using private money:
Loan Fees
The lender will typically charge loan fees for private money loans. These fees represent part of the agreement’s cost and can range from 0.75% to 3% of the loan amount for processing and other company-specific charges.
Points
Many private money lenders also charge points. A point is equal to one percent of the loan amount and is used to cover the cost of loan origination. Points are generally non-refundable and many times non-negotiable.
Origination Fees
Thirdly, origination fees are also common with private money loans. Origination fees are the fees associated with the work done to secure the loan and can range from a few hundred dollars to 1% of the loan amount.
Interest Rates
Finally, private money lenders often charge higher interest rates than traditional lending sources. Interest rates can vary from 5%-20% depending on the lender and the details of the deals. Borrowers must be prepared to accept the interest rates offered by the lenders.
The cost of private money can vary, but it is generally more expensive than traditional loans. It does, however, offer an attractive alternative for acquiring capital to fund real estate investments.
Conclusion
Private money provides investors an attractive alternative for financing investments. Although it can be expensive, it is often times faster and easier to obtain private loans than through traditional banking sources. Before pursuing private money, make sure to evaluate the associated costs, the trustworthiness, and the terms and conditions of the loan.