Private Money Lenders: How to Choose the Best One for Your Real Estate Investing Business

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Private money lenders can be a key partner in the success of real estate investors who are looking to scale their business. Whether for new construction loans, fix and flip financing or rental loans, real estate entrepreneurs often look to private money lenders for needed capital.

Many private money lenders provide specific bridge loan programs designed to help house flippers who buy, renovate and resell properties quickly. Others offer long-term solutions for rental investors to build their rental property portfolios. There are many choices in the marketplace for private lending, so it is important to choose the best lender for your fix-and-flip, buy-and-hold, build-to-rent and ground-up construction projects. Successfully selecting a private money lender will depend on multiple factors—and it is critical to know the important questions to ask:

Important questions to ask when deciding between private money lenders

Due diligence requires that you thoroughly vet the lender you will trust with your financing needs. Make sure the private money lenders you are considering are licensed to do business in your state, and when you are discussing terms, rates and fees with them, be sure you have a clear understanding of the impact the cost of borrowing capital will have on your bottom line. With that initial stage of vetting out of the way, here are some important questions to ask before choosing between private money lenders:

Which of these private money lenders will add the most value to my business?

It would be easy to assume that all private money lenders are pretty much the same. They offer similar fix-and-flip, bridge loan and construction loan products, they charge a similar range of points and interest and their borrowers are operating similar real estate investing businesses. Some might be asking what difference it makes in the long run which private money lenders you work with.

However, once you get beyond the most obvious questions about loan products and terms, it is critical to dig deeper into the loan processing and servicing operations of the private money lenders you are considering— from application to borrower approval, to loan funding and payoff—you will likely find significant differences.

Asking the right questions will help you choose between private money lenders to find the one that offers the features and flexibility that best serves your needs.

For example, will the lender who offers a lower interest rate charge you a prepayment penalty if you want to pay off the loan early? What if you complete your project in six months and pay off your 12-month loan in six months? Will the lender's processing procedures include lengthy delays that lead to loan extensions, and their associated fees, down the road? These are critical considerations when researching hard money lenders.

While you are discussing a hard money lender's loan programs, ask yourself if the lender gives you the impression that they want to help expedite the approval process. Is excellent customer service a priority? Will you work with one dedicated account executive, and will that person have the expertise that supports your business goals and a team behind them to expedite service? A private money lender’s commitment to prompt customer service is essential, and they should approach the relationship with you as a lending partner who knows your goals and is committed to helping you succeed.

Does this lender meet my standards?

Due diligence requires that you underwrite your lender, just like the lender will be underwriting you. Here are some important things to know about your lender to make an informed decision:

What is your typical turnaround time from application to funding?

Will I work with one person who is knowledgeable about my business and my projects?

Is there advanced fintech that supports your loan application and processing? How else does your technology benefit your borrowers?

Do you offer loan extensions? How do your extensions work?

Will I be charged a fee if I pay the loan off before the full term is up?

What if I am late on a payment? What can I expect?

Why should I choose you as my lending partner? What sets you apart from other hard money lenders?

Take notes during this conversation and determine how each lender answers your questions. How do they feel about you performing due diligence on them? If you get the impression that questions about their business practices are not welcome, that is a huge red flag. A reputable private money lender should both understand and appreciate your inquiry.

How do I make my final decision between hard money lenders?

When you have narrowed your search down to a few lenders who meet your criteria for a good lending partner,  the lender that prioritizes excellent customer service and is committed to your success is your best choice.

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