Whether you are an established real estate agent or are new to the industry, you require investment. Over the years, the interest rates for loans are on the rise and the shift in work models from office to hybrid and remote work models has significantly impacted commercial real estate. Commercial tenants are downsizing and reconfiguring their office spaces to meet the current industry demands. On the other hand, property owners are facing inflation risks, higher maintenance costs, and increasing tax labour.
This is why you need to consider the available financing options before you invest in commercial real estate. Although there are several options available, the two most important ones are – banks and private lenders. The second method is not widely used but it can offer a wide variety of benefits and advantages. But, is it the right investment option for you?
The following article discusses private lending, its viability, its offered benefits to investors, and whether it is the right investment option for you or not. So, what are you waiting for? Jump right into it and get started with securing investment for your commercial real estate career.
What is a Private Lender?
Private lenders offer business loans that are often funded by groups of high-net investors and in some cases, banks too. Mostly, private lender loans are not occupied by owners, are valid only for short terms, and are more flexible than bank loans. Hence, these loans get approved easier and quicker than normal bank loans.
Most real estate investors take loans from private lenders for this same reason. The quicker and faster loan approval process ensures investors get the principal amount as and when needed. Generally, these loans have a higher interest rate than that of banks and private lenders expect decent returns.
Other than simpler, quicker, and faster funding, private lenders offer a better customer service experience. Since private lenders are smaller and independently operated, their approval decisions are largely based on the quality and potential of the commercial real estate in question. Hence, decisions and advice are offered based on professional experience instead of algorithms and technical processes.
What Types of Borrowers Choose Private Lending?
Now that we know what private lending is all about, let us discuss a few types of borrowers that generally reach for private lending.
Generally, banks do not offer loans to first-time investors and have strict loan policies. Sometimes, it becomes difficult even for seasoned investors to qualify for loans and secure money. This is where private lending can help and benefit investors. Moreover, most conventional bank loans do not approve loans that include renovation costs. This is quite inconvenient for investors who want to purchase a home and renovate it before putting it on the market or renting it. Bank loans that approve renovation costs have a longer processing time which is not feasible for investors who want to jump right into commercial real estate investing.
Some landlords rent multiple properties and need to protect themselves from any unforeseen legal issues. This is where private lending can help. This investment option allows entities and LLCs to borrow money in the name of their entities to take advantage of tax benefits and for better safety.
Why Choose a Private Lender?
Now that we know about the different types of borrowers who prefer private lending, let us discuss the benefits of the same:-
Fewer Loan Requirements
Property loans are a lot of work and require proper documentation for approval. Moreover, these policies have strict requirements that you cannot forfeit. However, this is not the case for a private lender. Private lenders only require you to have:-
- Solid equity to guarantee returns
- Enough cash reserves to pay the monthly interest
- Guarantee that the project will be complete
- Well-defined strategy to ensure profits and loan clearance in due time
Fewer loan requirements mean that there’s a higher chance that an investor’s loan will get approved. This is why most investors who cannot get loans from banks reach out to private lenders.
Most banks have fixed interest rates for loans, but this is not the case for private lenders. Other than fewer requirements, private loans are quite flexible and offer loans at rates that differ from person to person. Before you take a loan from a private lender, we recommend getting in touch with some of the industry’s best private lenders and researching their approval rates, interest rates, loan requirements, and other criteria (if any).
Increased Personal Control
Since private lenders are flexible and do not have any set requirements, you can easily negotiate the terms of your loan. This ensures that you do not get yourself into something you do not want or cannot afford. Moreover, the increased level of personal control helps customers discuss their needs and open the line for communication.
Private money lenders are quite efficient and approve loans within as little as 2 weeks. This helps real estate investors working on multiple projects gather money for investment. When you have multiple projects lined up, the cash flow from private lenders, as well as the returns from the projects, do not stop.
Freedom to Choose Projects
Most banks do not approve loans for unconventional projects or end up setting stricter terms. Since private lenders have years of experience in the industry, they are adaptable to the changing market and trends. So, even loans for unconventional projects get approved by private lenders without much complications.
Private lenders focus on creating relationships and offering personalized services, while big banks and institutions majorly focus on bureaucracy. Moreover, private lenders need to work closely with borrowers throughout the loan borrowing and approval process to understand their project plans, goals, and demands.
Why Not Choose a Private Lender?
Just like other commercial real estate financing options, private lender loans have their drawbacks. Although these loans have a quicker process speed and offer higher convenience, they offer loans at rates higher than that of banks. This is a major drawback for investors looking to secure money for a long-term investment.
If your project will help you get fast returns that can help you pay off the loan in a short time, you can reach out to a private lender. Moreover, if you do not need the loan to cover renovation costs, a bank loan would be profitable for you.
How should you Choose the Best Private Lender for You?
After you decide whether private lending is the right choice for you or not, you need to find the best private lender for your project. After all, selecting your lender is one of the most crucial decisions you need to make in commercial real estate investment. You can only properly evaluate a lender if you think of them as your project’s business partner. Some common factors you must think of include – the lender’s portfolio strength, their ability to make good investment decisions, their success parameters, customer responsiveness, and their expectations.
If you are considering real estate investment as a long-term career, you need a reliable lender that will support you throughout the journey. Moreover, a knowledgeable and good lender will educate you and offer advice based on their experience and investing knowledge. Hence, we recommend asking difficult questions and airing out any doubts you have to understand whether a lender is the perfect fit for your project or not.
How Do I Need to Prepare for the Loan Application Process?
Although private lenders are more flexible, they still have a loan application process that you need to pass. Similar to banks, private lenders will assess your credit history, cash flow, income, and assets via your recent account statement. Another common criterion is the average monthly cash inflow and outflow. After all, this helps them understand whether you have a stable source of income or not.
You will also come across some difficult private lenders who would ask to see your tax returns, proof of income, and profit-and-loss statements for your current and previous projects. In case you have a non-traditional income source that prevents you from getting a bank loan, they might ask several questions and ask for further documents. This is done to ensure you can afford the monthly installment and will eventually pay them back.
We recommend keeping your paperwork ready to move your loan approval process faster and get started with commercial real estate financing as soon as possible.
Ideally, one should keep their finances sorted before entering the commercial real estate investment industry. However, this can be quite difficult in the current industry and investors need to grab promising projects as soon as possible. This is where private lenders can help. One of the best investment options, private lending is a feasible option for investors who cannot get bank loans.
Whatever your reason for looking for private lenders, you should thoroughly research the lender’s portfolio and average interest rates. We recommend getting in touch with multiple private lending entities to ensure you’re getting the best deal possible. You can also ask a local, experienced real estate agent with connections to put you in touch with their preferred private lending entity.