Private Money Financing Options for Investment Properties
Private money financing refers to loans obtained from sources other than financial institutions. This financing practice is often used by investors, business owners, and individuals with bad credit. Private loans can provide needed funds when banks or credit unions will not approve loans.
Private money financing can come from several resources. Many people turn to family or friends to obtain small loans or short-term financing. Cash advance companies provide loans on a short-term basis. Investors and investment groups provide funds through hard money loans. Funding sources offer private money loans to business owners and real estate investors.
Applying for private loans usually involves less paperwork than applying for mortgage notes or business loans through banks or credit unions. Funding sources are more interested in the return on investment than borrower's credit score. The type of financial documents required will depend on the type of collateral used to secure the loan.
Promissory notes are usually sufficient when private loans are provided by family or friends. Many people feel awkward asking loved ones to sign a contract. However, promissory notes can help prevent family disputes and misunderstandings. This simple contract ensures the recipient of funds is fully aware the funds are a loan and not a gift.
A promissory note should include the amount of the loan, number of payments, amount due with each payment, payment dates, rate of interest, and any action which will be taken if the borrower defaults on the loan. Promissory notes should be signed by all parties involved and notarized. This document is legally-binding and can be submitted to court if loan default occurs.
When private money financing is provided to purchase real estate, borrowers must submit financial documents and real estate contracts. Most private lenders require wage statements, bank statements, tax returns, real estate appraisals, and property deeds.
When business owners require private loans for their company, the funding source typically requires profit and loss statements, corporate tax returns, business licenses, insurance contracts, and inventory appraisals.
Private money lenders must abide by their states' usury laws when establishing a rate of interest. Funding sources assume a considerable amount of risk when providing funds for investment purposes or to bad credit borrowers. Most private funding sources will charge the highest rate of interest legally allowed which can be as high as 23-percent in some states.
Locating private money lenders is not difficult. The Internet is one good source for locating funding sources. Online real estate clubs and investment networking groups can provide referrals and share experiences and advice. Through networking, borrowers can locate suitable private lenders, as well as learn which lending sources to avoid.
It is strongly recommended to hire a lawyer prior to entering into private money loan contracts. Most states limit the number of private loans that can be offered before requiring the funding source to become a licensed lender. It is imperative for borrowers to engage in due diligence to reduce financial liability and ensure private money lenders comply with state laws.
About the Author:
Learn more about the process of obtaining private money loans from real estate investor, Simon Volkov. His website offers a comprehensive article library regarding personal finance, business financing, investment opportunities and more at www.SimonVolkov.com.