Investing in real estate is essentially one of the smartest and safest strategies to promote wealth building. With the proper foundation and knowledge, investing in real estate can be highly lucrative for anyone. But let’s be honest, you already knew that. However, of particular interest is what an investor can do with the money they make from a profitable career.
While a portion of profits will undoubtedly be allocated to the lifestyle of their choice, investors are advised to be smart with their money. Of course, you can reinvest into another property, but if you are looking for an alternative, there may be one option you haven’t considered yet: private money lending.
Investors who have the funds to do so should consider private money lending in real estate. This process offers the same type of underlying security and profit potential as rehabbing or wholesaling, but without actually acquiring new properties.
Private loan brokering connects borrowers with private lenders offering financing that may not be available from banks. With expertise on alternative lending options, private brokers play a key role for those who can’t qualify for traditional mortgages. This comprehensive guide will explain what private loan brokers do, who needs them, and how the process works.
What is a Private Loan Broker?
A private loan broker is an intermediary who connects borrowers seeking financing with private lenders willing to fund loans. They are experts at finding customized lending solutions for unique financial situations and credit profiles
While banks follow strict regulations on borrower qualifications, private lenders can offer more flexibility. A broker taps into their network of private lenders to match borrowers who may not meet conventional requirements with alternative programs they can qualify for.
Common types of private loans brokered include:
- Mortgages for low credit scores or self-employed borrowers
- Second mortgages and cash-out refinancing
- Commercial and business loans
- Short-term bridge loans
- Hard money loans for real estate investors
The broker handles communicating with multiple lenders to find the right loan product at competitive rates for each borrower’s needs They simplify and streamline the process of getting funded
Who Uses a Private Loan Broker?
Here are some examples of borrowers who benefit from working with a private loan broker:
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Borrowers with low credit scores: Those with scores below 600 will have a hard time getting approved by banks. A broker can find lenders willing to look at other factors.
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Self-employed borrowers: Irregular income sources make it hard to qualify for conventional mortgages. Brokers can find alternative programs.
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Real estate investors: Hard money and bridge loans help investors flip properties or finance renovations. Brokers have connections to these specialized lenders.
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Small business owners: Banks shy away from riskier business loans. Brokers access private capital willing to finance businesses.
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Homeowners needing cash: Banks don’t offer second mortgages. Brokers connect clients with private capital.
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Those needing quick financing: Brokers can source short-term bridge loans faster than banks.
The common theme is that brokers open up more options beyond just banks. Their expertise provides access to loans through alternative sources of private funding.
How Does Working With a Private Loan Broker Work?
The process of getting a loan through a private broker involves the following key steps:
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Initial consultation – The broker learns about your financing needs, goals, property, income, and credit profile. This helps them determine what loan types you may qualify for.
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Loan options – The broker researches products and rates from their network of private lenders and presents loan options customized for your situation.
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Application – You select a loan option and complete the application. The broker handles submission to the lender.
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Underwriting – The lender reviews the application and analyses the property, income, credit, and assets. The broker acts as liaison guiding you through this process.
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Approval – If approved, the broker handles paperwork and logistics so you can get funded quickly. They may negotiate the loan details on your behalf as well.
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Closing – The broker can arrange closing details including inspections, appraisal, title, insurance, and legal documentation.
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Ongoing support – Many brokers provide ongoing support if issues come up during your loan term, acting as an intermediary with the lender.
The key advantage is the broker serves as your advisor and advocate throughout the financing process. Their expertise and connections unlock funding you may not be able to access on your own.
Pros and Cons of Using a Private Loan Broker
Pros of using a broker include:
- Access to more loan options beyond banks
- Expert guidance navigating the process
- Advocacy in negotiating better rates/terms
- Simplified application process with a single point of contact
Potential cons include:
- Brokers charge fees for their services
- You still need to qualify based on income, credit, and collateral
- Less consumer protections than traditional banks
While brokers unlock more options, you still must meet the lender’s qualification standards. And you pay broker fees for access to their services and network. But for many borrowers, the expertise and expanded options make the fees worthwhile.
What to Look for in Choosing a Private Loan Broker
Here are key tips for selecting the right broker:
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Check licensing – They should be licensed in your state to legally operate. This ensures oversight.
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Look for specializations – Choose a broker well-versed in your specific type of loan (e.g. mortgages, business financing, etc.)
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Ask about their network – Do they work with multiple lenders or just a few? Broader is better.
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Compare service models – Some act as advisors, others just submit applications. Understand their role.
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Review ratings and complaints – Check online reviews and complaint records from governing bodies.
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Compare fees – Broker fees range from 1-5% of the loan amount on average. Many are negotiable.
Taking the time to vet brokers thoroughly ensures you find one well-suited to your borrowing needs.
The Bottom Line
Private loan brokers fill a valuable niche helping borrowers connect with alternative financing options. Their expertise, networks, and guidance make them indispensable for those who can’t get approved for bank loans. If your situation calls for a more flexible lending solution, consult a reputable broker.
Money Lending: How To Get Paid
Private money lending is attractive because of its flexibility, not only to borrowers but also to lenders. You see, with a traditional loan, lenders will generate income through interest payments made by the borrower. On the other hand, private loans allow lenders to negotiate exactly how (and when) they will be paid back for the loan. This opportunity opens up several perks not traditionally offered to investors. Read through the following agreements to learn more about making money as a private lender.
- Joint Ventures: As a private money lender, a profit split can be one of the most attractive options for financing an investment. Investors can negotiate to receive a percentage of the final profits in this type of agreement. The amount will vary based on the contract and the investment, though it could be quite profitable. In some cases, private money lenders will even find borrowers who propose this option. Just make sure you believe in the potential success of the deal, and you are all set.
- Exit Fees: This loan structure requires the borrower to pay a predetermined amount at the end of the loan term. The exit fee is often negotiated as a percentage of the overall price of the investment. In some cases, lenders may even negotiate an increasing exit fee that changes depending on when the loan is paid in full. For example, if the borrower needed a few extra months to repay the loan, then they would pay a larger exit fee.
- Interest Payments: As I mentioned above, interest payments are one of several ways to generate income from a private money loan. In fact, this is the most common setup in private money. Lenders can set an interest rate at the time of the loan approval and sit back and wait for the money to arrive. Typically, private money loans are associated with higher interest rates than other loans, making this a particularly attractive arrangement for lenders.
- Points: Points are essentially fees paid by borrowers in exchange for lower interest rates. Points are calculated as percentages of the overall loan, with one point referring to one percent of the loan amount. Some lenders prefer this system because points allow them to be paid in larger sums, with additional interest payments to follow. More often than not, points are paid at the beginning of the loan term and are suggested by the borrower as an incentive for granting the loan.
Step 5: Negotiate Terms
If a lender shows interest in your project, the next step is to negotiate the loan terms. These terms include the loan amount, interest rate, loan duration, and repayment schedule. Ensure these terms align with your project’s timeline and profit margins. Consider the following:
- Interest Rate: Competitive yet manageable within the project’s financials
- Loan-to-Value (LTV) Ratio: Typically, private money loans cover up to 65%-75% of the ARV.
- Points and Fees: Understanding all upfront costs involved in the loan.