1) When Does It Make Sense To Use Private Equity Loans/Hard Money Loans?
For Short-Term (under 1 year) Investment Opportunities (Banks & traditional mortgage companies only finance long-term loans)
For Properties in Need of Rehab (Banks require properties to be in average or better condition to finance)
When Investors Find Great Deals (Banks require 20-30% down. Lenders like Restoration Capital require no minimum down payment if you find a deal below 70% of the fair market value)
For Investors that Need to Tap Into Equity (Many private equity lenders can offer temporary cash-out refinance loans on investment properties, with fewer income and credit requirements than banks)
For Deals that Need Quick Settlements (Banks can take 30-60 days to close; Restoration Capital can close in 3-5 days)
2) Interest Rates & Fees
Because of the short duration and risk that private equity lenders assume with these type of investment loans, interest rates and fee are typically higher than long-term loans found with banks. Depending on the lender and overall risk of the deal being funded, rates can vary:
Interest Rate: 10% – 18%
Fees: 2% – 6% (of the loan amount)
3) What To Expect When Applying For A Loan
Generally, the loan application process is less complicated than applying for a bank loan.
Identify a specific property you wish to purchase. (Most borrowers apply after the property is under contract; some ask for pre-approval)
Contact private equity lender, discuss financing needs and loan purpose.
Submit basic information about property, self and loan amount requested. (Includes sales contract, property address, closing deadline, loan exit strategy, etc.)
Sign & fax/email agreement allowing lender to pull credit.
Lender determines property value, then issues Commitment Letter approving funding. (Lender may call to discuss loan options, amount and terms)
Sign & fax/email Commitment Letter. (Sometimes a commitment fee is required)
Choose settlement company. (Lender usually has recommendations available)
4) What Do Private Equity Lenders Look For?
Collateral – As the name suggests, equity lenders look first and foremost at the collateral being offered. Generally speaking, lenders will fund 60% to 70% of the property’s value. Lenders like Restoration Capital also work with borrowers who may be equity rich but cash poor; allowing a second property owned free and clear to be substituted for a down payment.
Exit Strategy – When requesting a short-term (6 month – 1 year) loan, lenders want to see a viable plan for paying off the loan. There are two accepted strategies 1) selling the property 2) refinancing the loan.
Borrower Strength – Requirements such as income, credit, real estate experience and personal wealth vary from lender to lender. As a whole, lenders want to see that a borrower knows what they are doing, has the income or wealth to make payments and ability to refinance if needed.
5) How to Find The Right Private Equity Lender for You Talk to real estate investors… they’re all around you! There’s no better source for information than investors who have already found a lender they can trust. Real estate auctions, settlement companies and business websites (i.e. LinkedIn) are also great sources for recommendations.