Finding the right money lender is one of the most important decisions to make while investing in commercial real estate, which can impact your overall investing success. That’s why it is suggested that you should not rush into finding the best lender by considering only a few factors like the lowest rates in the market or closing down with the first lender who agrees to a pre-approval loan.
Right money lender is not the one who is providing the lowest rates, but the one who provides you the best rates along with the best terms and conditions, which will benefit you in the long run.
Finding the right lender isn’t as simple as it may seem, and it’s essential to understand that somebody else’s best money lender might not be your right money lender.
Understanding who your right moneylender depends on your individual financial circumstances and your real estate property needs. In this blog, we will talk about the 8 guiding principles guaranteed to help you choose a private lender who will help you grow your wealth and minimize your risks.
1 – Do the groundwork about the Hard money industry
If you are a first-time investor or if you have never worked with hard money lenders before, then it’s vital to get a good understanding of the hard money industry. This is especially applicable for borrowers who have only worked with traditional mortgages and have never taken out a private loan.
This groundwork will explain how hard money lenders work and thus will help you sift out the good money lenders from the not-so-good ones.
Additionally, while you are doing the groundwork – it is also important to understand the meaning of basic terms like a loan to value ratio, down payments, loan origination fees, balloon payments, etc. Ensure that you understand these terms in depth before you start finding your best lender.
2 – Decide if you want to work with a direct hard money lender or appoint a broker
Although there is no hard and fast rule on whether or not hiring a broker does good to a borrower – it is a general practice to hire a broker to get your hard money loan funded. If you are someone who would rather work with a hard money lender directly, you can do so too, but the amount of time you’ll need to put it will increase.
When you decide to work with the direct hard money lender – it’s vital to develop some basic understanding of where their capital comes from. This is necessary to know that your hard money lender is the right partner for you to count on in times of immediate financing needs.
3 – Try to choose a Local Private Lender
Choosing a private lender who is a local in your locality has many advantages. First, a hard money lender who has expertise in the local market can help you immensely in making the right financing and investing decisions and can keep you away from undesirable areas or unprofitable properties.
The uncalculated benefits you get from working with the local hard money lender are huge, and it can reduce your costs by efficiently managing construction escrow too.
What’s more, if you develop a good relationship with your local hard money lender, you have a lender you can count on and a consultant who can consult you on making the right investing decisions.
4 – Look for referrals and reviews while shortlisting your private money lenders
It goes unsaid that the best way to choose the right private money lender for you is to start by looking for referrals and reviews. This is one of the most important steps while choosing the right private money lender because identifying scams in the hard money industry can get very challenging, and with every other lender trying to rope you in only to change the terms at the last moment – it has become all the more challenging.
When you meet your private lender, ensure that you ask for reviews from their previous customers to use it as a yardstick for comparison.
5 – Ask the right questions and look for authentic answers
The next step would be to ask the right questions to the shortlisted private lenders. These questions are over and above the basic fundamental questions like the terms and conditions of the loan, how fast you can close, and the loan term.
Asking specific questions like the loan origination fees, early termination clause, etc., is also very important in choosing the right private money lender. Please do not fall for the private money lenders who are only waiting to rope you in and sell you their product.
Understand that choosing the right lender can massively impact your investment success, and thus it’s important to proceed with patience.
6 – Chase Best value, the not Lowest rate
As a Commercial real estate investor, the chances are that you are working with slim margins, and you want to cut down on your costs as much as possible. While the lowest rate loan makes sense in terms of being cost-effective – it is important to understand that while hunting for the best loan in the market, your priority focus must be to find the best value and not on the lowest possible rate.
Besides, many low-rate loans come with huge hidden costs, which can fold after you start paying your monthly instalments, and this can hamper your profits largely. Thus, look at your loan as a long-term period and chase the best value in the long run.
7 – Stay away from the Lender Scams
Staying away from the lenders’ camps is as much important as finding the right lender itself. This is especially true for first-time investors who understand how the hard money industry works and the small for the traps said by unscrupulous players.
Some red flags to watch out for would usually be loan rates, asking for money upfront, low down payments, No borrower contribution requirements, non-transparent lender location, etc.
Looking for authentic and genuine private lenders is very important, and in the process, you should thus be very cautious in staying away from the red flags.
8 – It’s always better to have the freedom to choose your own vendors
Some private money lenders in the market require you to work with a specific set of vendors they have tie-ups or collaborations with. It is always good advice to work with private money lenders who give you the freedom to choose your own set of vendors as per your choice and liking.
This will protect your legal interests and give you a transparent picture of your investing by putting you at an authority to choose the vendors to work with and negotiate the prices as you wish.