Key Things to Look for in a Private Money Lender

When you’re looking for a private money lender to work with on your next deal, there are a few key questions to consider.

You’ll want to start the conversation by asking the potential lender what THEY are looking for in a deal. Always begin the relationship by listening, not talking.

After you know that you’re a good fit for the lender, here is what you need to know to see if they’re a good fit for you…

Question #1: What are your private money lender terms?

Private money lenders vary from all ends of the spectrum with what they like to invest in. Since they come in many forms, so do their rates and terms. Make sure you have confidence negotiating even if you are starting out. Don’t get discouraged if you have to walk away empty-handed from that first conversation.

Always know the range you want your rates and terms in prior to the conversation. Consider these aspects: the term or length of the loan, time to funding, interest rates, lender fees, and closing costs. Every lender knows what they like and what works for them. Loans generally consist of two cost components: the interest rate and upfront points. A point is equal to 1% of the loan amount.

Keep in mind that higher risk loans will have more expensive terms. A deal with less equity, your personal amount of experience, the exit strategy, the market and the repairs needed can all affect risk. Because of this higher risk the rate of return is higher as well. It’s important for you to have an idea beforehand of what you’d be willing to pay.

Regarding points, loans generally range from one to 10 upfront depending on the risk it involves. The points will always depend on the loan amount and the risk it brings, but one benefit to working with private lenders is that many of them do not charge points—and the ones that do are often willing to negotiate on the interest rate if you’d rather avoid point.

Question #2: What length of loans do you finance?

Since there are so many types of private lenders, you need to know what length of loans they finance. Particular loans are better for certain projects or deals, so go into the conversation knowing what you’re looking for.

A short-term loan is best for the fix-and-flippers that are wanting to purchase, renovate, and sell a property in one year. In this case, a private money lender helps out investors that are looking to make money on flipping houses. This type of loan is very appealing because it allows you to reduce the holding costs while getting the house ready for sale.

Long-term private money lenders are also out there looking to finance your deal. If you are wanting to refinance then they are your best option. The monthly payments don’t cost as much with this option and it puts you in a great place with your deal.

Question #3: What can you lend and on what types of deals?

Two important things you need to find out are how much do they have to lend and what types of deals will they lend on.

Private lenders will normally loan out an amount equal to a percentage of the property’s loan-to-value ratio or its after-rehab-value. The standard they’ll loan up to are 90% of the property’s LTV and 80% of the ARV.

What about equity? If lenders require equity in the deal it will likely be based on the type of collateral and amount as well as your personal financial condition. The equity amount varies for every deal, but the standard is for you to have 40% equity in the property.

Question #4: What do you know?

The more your private money lender knows the better, but that doesn’t excuse you for not doing your homework. It’s best to work with someone who has interest and knowledge in the specific deal you’re doing, but either way, you need to know what they know. Learn from them, but also learn by seeking out resources beforehand.

Don’t put yourself at a disadvantage. If you lack knowledge in a place you’re about to put your money in…be very careful.

The more you know the better chance at success you have.

Question #5: How involved do you want to be as a private money lender?

Lastly, one decision you need to make is how involved you want the lender to be in the process.

Your best bet is to work with lenders with a mostly hands-off approach. Too many cooks in the kitchen is no good unless you happen to be interested in that type of partnership.

Make sure that the expectations are clear and you’re both on the same page. If you don’t take initiative in this conversation and beat around the bush you might end up with a result you didn’t intend to have.