After making the decision of buying a commercial real estate property, the next decision to make is about the financing options for your real estate.
Private commercial real estate loan can be one of the best options for you! While there are many hard money lenders out there, you need to know who to approach in order to get the best deals!
Not all private money lenders will shower money on you when you need it the most and not all money lenders shower mercy on you when you’ve defaulted in a payment of interest rate due to a genuine reason!
So getting in touch with the right lending partner can almost make or break the deal for you! So it can be one of the most important decisions because when you need the cash most, you don’t want to be surprised by your private hard money [wiki] lender, right?
So we bring you the top 10 things you need to consider when you’re choosing a private money lender!
Here we go!
#1 – The Primary Terms of the Loan
First things first! The very first thing you need to consider while choosing a private money lender is the primary terms of the loan offered by him.
There are three major things you will have to consider here. The first one is the Loan-To-Value or LTV of your loan. This value is basically the ratio between the value of the property you’re willing to mortgage with the price of the asset you’re willing to purchase.
The higher the LTV your private lender offers you, the better it is for you! You need to do your homework and check out the Loan-To-Value rates offered by different money lenders!
It’s not very different from the window shopping you do at malls! You can simply take an evening stroll and check out the LTV rates of different private capital investors.
The second primary term that needs to be considered is the interest rates.
Remember that there is no hard rule that defines this factor. Never fall into the trap of believing that lower the interest rate, better it is for you.
It needn’t necessarily be that way!
You need to check with many private hard money lenders before you know the fair rate of interest that can be charged. It’s also advisable to hire a commercial loan consultant who can give you deep insights with regards to the fair interest rate that is charged in the market.
The third primary term is the “Points”. Points are lump sum payment of money at regular intervals of time say at the end of a year, that’s paid over and above the interest rate.
Let’s say that 1% is the charge of one point and you’ve signed a contract to pay 3 points after every year until the year of loan repayment. So at the end of the first year, you’ll be paying 3% of the loan amount!
All these 3 things are considered to be the primary terms of the loan and that’s the first thing to which you must be paying attention!
#2 – The Pre-payment Penalty Rates
Not all money lenders are going to tell you the prepayment penalty rates of the loan. You need to enquire them about this well in advance to save yourself the trouble of paying up high penalties later!
Compare the pre payment penalty rates with those of other private money lenders and make a fair option! This is one of the biggest mistakes private capital investors make while they’re looking for a loan for the purchase of commercial property!
Save yourself the pain of paying high pre payment penalty rates by enquiring about it before you purchase a loan!
#3 – Additional fees that are outside the League of Interest & Points
Private money lenders can charge you additional fees that are over and above the interests and the points.
These fees can be documentation fees, underwriting fees, legal fees and so on. These fees are not really negligible ones. And you must be know all these minute details too because a good investor is the one who knows the exact percentage of his return on investment!
You can’t ignore any small expense that has happened because yes these factors will definitely reflect on your actual return on investment!
#4 – The Testimonials From their Past Customers
Everyone seems to be a helping friend when you enter the world of real estate.
But who is an actual friend and who is wearing masks can only be answered by time! Or wait…really?
Is time the only answer?
No! Not at all! Every money lender will have a list of previous customers. Feel no shame in asking your private money lender about the testimonials expressed by their previous clients!
If your money lender is a genuine one, he’ll have no glitch in showing you the testimonial!
In fact, in a practical situation, money lenders will give you access to the phone numbers of their previous customers who you can call and ask about your commercial real estate hard money lender!
What’s the best way of knowing about your private money lender? Asking their own previous customers right?
So consider asking for testimonials and make a decision of choosing him or not only after you’ve spoken to a bare minimum of 10 to 15 people! Trust me; people will give you honest opinions and truest answers!
Number 5 – The CRE Loan Criteria
Many investors waste a lot of their time by following up a money lender who has non-favorable loan criteria.
Yes, not all private money lenders are flexible in all ways! Some lenders finance loans which are greater than 1,50,000 USD while some finance loans that are greater than 2,00,000 USD only!
So if you’re hunting for a loan of 1,00,000 USD, you’ll simply be wasting your time by following up with these money lenders who gave their set of criteria.
So you must definitely consider the loan criteria of a money lender before taking any other step!
Number 6 – The Property Criteria
Just like the loan criteria is important, so is the property criteria!
There are many private money lenders who lend only to those investors who are willing to purchase commercial property in a particular geographical location.
This is done because some money lenders are not risk takers and they want to lend loans only to those people who are going to invest in profitable properties in their opinion!
If they know that you’re going to invest in an area that’s out of their geographical domain, they’ll turn your proposal down upfront!
Number 7 – Details about the non-recourse financing
Non-recourse financing is when the lender and the borrower sign to an agreement that in the situation of loan principal amount repayment or interest amount payment.
The lender shall only be liable to seize the property that’s there on the mortgage and not go beyond that or recover the remaining money by laying his hands on other properties that are not mortgaged!
Non-recourse financing is the favorable one for the borrower but it does not always work like that!
There are private money lenders who prefer recourse financing wherein they get rights to lay their hands on all your private assets to the extent of the non-recovered portion of the loan amount or interest amount!
Number 8 – Rehab costs of the property
Some properties require extensive amount of rehab to be done for the property.
Before you strike a deal with your private money lender, get details on if your lender will be able to finance you for the rehab costs as well.
Rehab costs can be of great value for some properties and you’ll definitely need a lender again. So why run in search of a new money lender again when you can simply ask this even before purchasing your loan so you can rest assured that your rehab costs have got a safety net too!
Number 9 – Knowledge of the money lender
Asking your money lender upright about his experience in financing a loan that falls into your domain can be a great idea!
A lot of money lenders enter the business without knowing the technical aspects of the loan and you can’t waste your time explaining them the problems you’re facing every time, right?
There are different types of CRE loans and you need to ensure that your money lender is well aware of what he’s getting into!
Number 10 – Timeline for financing the loan
Each money lender will have his own set of methods through which he finances your loan and thus there are different time windows.
This is one of the most important things you need to ask your mortgage lender. Know in prior the amount of time he’s going to take to finance your loan.
Because if the time window is too large, there are high chances that you’ll lose the deal because time is of utmost importance in the real estate industry!
Having your stack of cash ready at the right time is most important and let not your money lender ruin it for you!