There are many reasons why a real estate investor might want immediate access to private money to invest in real estate. This article will explore some of those reasons.
The first reason to use private money to invest in real estate is to protect your credit rating. Think about this… if you borrow the money from an individual, rather than a bank or lending institution, the loan will never be reported to the credit bureau. It will not count against your debt-to-income ratio, and no record of your payment history will be kept. No one will ever know about that loan unless you tell them.
Next, and one of the best reasons to use private money to invest in real estate, is to eliminate paperwork. I have never had to fill out a private money loan application to invest in real estate. Every lender I work with knows me and the type of investment I make. Many of them don’t even care to see the property. When I apply for a mortgage, on the other hand, the application process itself can take several days and there are mountains of paper.
Yet another reason to use private money to invest in real estate is easy access to quick money. Sometimes when a deal is especially good, moving super fast is a must. With bank financing, that kind of speed is often impossible. Even lines of credit don’t always give you the same speed capability as private lenders. With one phone call to one of my private lenders, I can close a deal other investors only dream of.
A big reason to use private money to invest in real estate is the leverage it gives you. Think about this… if you have $50,000 of your own money, is it better to pay all cash for a $50,000 property, or put $50,000 cash in a $500,000 property and use private lenders to finance the rest?
If you answered the $500,000 property, you’re right, and here’s why. Let’s say the $50,000 property rents for $500 per month, or $6,000 per year. Your Return on Investment (ROI) would be 12% the first year ($6,000 divided by $50,000). It is safe to assume that the rent for the $500,000 property could be about 10 times that of the $50,000 property, or about $60,000 for the year If your repayment to your lender totals $4,000 per month, or $48,000 per year, what is your return on investment (ROI) for the $500,000 property?
Of course, you have to factor in the cost of borrowing the money, but even after doing so, you can see that there really is no comparison. Using private money to invest in real estate gives you something called leverage. Leverage is the ability to move something very big with something very small… a lever. The lever, in this case, is your small amount of cash ($50,000). With it, you can “move” or control a $500,000 property, because the money from the private lender increases the power of your “lever.”
Here I have given you some of the many good reasons to use private money to invest in real estate. There’s more, but you should have a clear idea of why private money can be so useful in your real estate investing toolkit. If you would like more information, I have written another article on my website titled Private money for real estate investments.
Now go make more offers!