How to Use Private Money to Make Big Money in Commercial Real Estate

An experienced commercial real estate investor knows a good deal when it presents itself. Sometimes these deals pop up unexpectedly, and sometimes an investor may find a proverbial diamond in the rough. When a good commercial deal with the potential for excellent financial returns is high and an investor is in need of quick or hard-to-get funds, then private money may be the answer to bridge the financial gap.

 

Understanding the premise of private money

Private money lenders, also known as "hard money" lenders, provide loans to borrowers with tarnished credit who may not otherwise qualify for traditional commercial mortgages. Money is also provided for properties that, due to distress or needed repair, may be considered too risky and not be touched by a traditional money lender.

Primarily, private money lenders depend on the commercial property as the collateral for the loan. In order to protect their interest and to reward them for the extra risk, private money lenders will usually only lend up to 65% of the value of the property, and charge a much higher interest rate to the borrower.

 

Ideal situations for private money funding

Due to the steeper terms of private money funds, these loans are typically short term, usually only up to one year, but sometimes up to three or even 15 years. Private money funds can be a good source of funding for an investor who finds a distressed property and needs capital to purchase and renovate the property with the intention of selling or refinancing within a short time. Or perhaps an investor needs quick funds to close a deal. Private money lenders can usually close and fund more quickly than traditional mortgages and can provide a temporary financing option, or bridge, until a traditional commercial mortgage with reasonable interest can be obtained.

 

How to negotiate an optimal private money loan

When negotiating for a short term private money loan, an investor should always ask for the option to prepay the full balance of the loan before the due date without penalty. Some private money lenders will tack on huge charges for paying in full early. But if private money funds are meant to be a short term or bridge loan, then an investor will want to option to pay in full early.

 

Sometimes more time is needed to complete a refinance or obtain traditional funding. Private money lenders will often add a provision for extra fees and additional interest if the balloon payment is not met on time. A good investor should anticipate how long it will take to secure other financing and request to waive extra fees if more time is needed.

 

A usual option for repayment of private money funds is monthly interest only payments, with a balloon payment of the principal balance due at maturity. With short term loans of up to a year, the interest only payment option is a good deal to keep monthly payments lower.

 

Private money is ideal for certain investment situations

Private money or hard money lenders are in great demand and offer a beneficial service in providing funds to finance commercial and even residential property. Though it is easier to obtain private money for an investment, an investor must remember the limitations of private money funds, and the potential extra costs. But with the right plan and property, private money may be the answer to get a deal going and reap the financial rewards for a great commercial property investment.

 

Brice Sheppard is an author, teacher, investor and owner of one of the leading mortgage/real estate brokerages that specializes in investment real estate. Brice and his team helps investors make informed decisions when buying, refinancing, or selling their investment property. He can be reached at brice@sheppardfinancial.com or visit http://www.SheppardGroupLLC.com for tons of FREE articles, tips and investment tools.