Due to tight credit markets, real estate investors are looking for Private Money to fund their deals. In the following paragraphs I will elaborate on the types of Private Money to go after and the types to avoid.
Private Money is often equated with hard money loans. Hard money is only a small part of the Private Money space. Hard money is geared toward short-term financing. In the boom phase of the real estate market, it provides a quick source of money for the borrower, and a lucrative way of making short-term gains for the lender.
However, in the down cycle, when the valuations are attractive but there is no breakout in sight, hard money lenders tend to stay out of the market, or invest their money directly in real estate.
There are some clear-cut examples of Private Money, such as, when an individual lends money to another individual on mutually agreeable terms, it is considered Private Money; When a bank or a government department lends to an individual or organization, it is not.
The definition of Private Money gets interesting when we look into situations where institutions, such as, insurance companies or retirement funds, mutual funds, hedge funds, etc., lend large sums of monies to individuals or business entities for real estate deals, or take equity positions with the same.
There are two critical qualification requirements for Private Money:
1. The owner of the money is directly lending or investing it. That is, if there is an intermediary involved, then it is not Private Money.
2. The terms are flexible throughout the duration of the loan or investment period.
Based on the above, in the institutional space, insurance companies and hedge funds may be at the opposite ends of the qualification requirements in terms of ownership of the money and flexibility.
By their very nature insurance companies would not come into a flexible contract. They may lower the interest rates, but their underwriting requirements on the front-end of the relationship and their foreclosure approach at the tail end of the relationship may be as stringent as a bank.
On the other end of the spectrum, hedge funds don't own the money, but they could be pretty flexible with their underwriting and foreclosure approaches.
So even though we may want to classify certain non-bank entities' money as Private Money, it would be ill-advised to do so. The borrower might as well get a loan from a bank.
Therefore, the true Private Money sources are individuals or business entities which lend/invest directly, and whose underwriting and foreclosure approaches are flexible and are in tune with borrowers'/entrepreneurs', collateral's and market's conditions.
The flexibility of Private Money is not due to charitable or "Good Samaritan" reasons. The flexibility is by design to allow the entrepreneur enough time to provide decent and long-term return on investment to the source of Private Money.
Cheap money is always better than expensive money. However, savvy real estate entrepreneurs take quick and flexible Private Money over onerously underwritten cheap money, which comes with operational straight-jacket, any day.
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Lee Ali teaches real estate investors how to find and leverage Private Money in their investments. He also guides private lenders to find and evaluate right real estate entrepreneurs for their lending or investment needs. For a free report on Private Money visit
http://www.BankFreeInvesting.com
