This article is part of a larger series on Business Financing.
Private money lenders are used by short- and long-term real estate investors to finance properties. Short-term buyers use private money loans when they want to compete with the timeline of an all-cash buyer and intend to flip the property after making repairs. Private money lenders are also used by long-term investors who want to rehab a rental property before refinancing into a permanent mortgage.
These loans aren’t offered by traditional lenders. While providing fast financing in as little as 10 days, these loans will have higher interest rates than conventional mortgage lenders.
Kiavi offers real estate investment loans of up to $3 million for 12 months with funding in around 15 days. Kiavi can fund both first-time flippers and experienced flippers. Flippers with experience can get better rates and a dedicated manager.
Private Money Lender Rates, Terms & Qualifications
Similar to other types of real estate financing, private money lenders typically loan an amount equal to a percentage of a property’s loan-to-value (LTV), often based on a property’s good condition or its after-repair-value (ARV), which is used on property in poor condition and in need of repair. These loans will often not exceed 24 months and in many instances are for no more than a year.
Maximum Loan Amount
90% LTV; 80% of ARV
Minimum Down Payment
10% LTV; 20% ARV
Typical Loan Term
Up to 24 months
Private Money Lender Rates, Terms & Fees
Private money loans are typically interest-only. This means that private money borrowers pay monthly interest throughout the term of the loan and pay the balance at the end of the loan. Some lenders charge prepayment penalties if you pay off the loan before the due date. While the interest rates on a private money loan might be higher when compared to a conventional mortgage, the monthly payments might be lower.
5% to 15%
Lender Fees (Points)
1.5% to 10% of amount borrowed
2% to 5% of amount borrowed
$300 to $500
Minimum of 15 minutes
Time to Funding
Minimum of 10 days
Private Money Lender Qualifications
A national hard money lender will want a minimum credit score of at least 600. Keep in mind that better interest rates go to borrowers with higher FICO scores. Depending on the real estate investment project, some hard money lenders will look at the project’s potential more closely than the borrower’s personal financial statement. In addition to contractor bids, new investors will likely need a scope of work on the project from an experienced contractor. New investors may also need a higher credit score to qualify on their first attempt for financing.
Minimum Credit Score
At least 600
Curriculum vitae (CV), resume, or proof of past projects, typically one to thee years
Contractor bids typically required along with scope of work from experienced contractors
To get funded with a private money loan, borrowers will need to submit additional documentation, including proof of past experience, or licensed contractor bids. Once underwriters verify all documentation, the loan gets approved, and it moves to closing, where funds are distributed and the borrower takes possession of the property.
Lenders will want closing costs and fees paid in advance, prior to closing. Additionally, lenders may require these documents prior to closing:
- Purchase and sales contract
- List of past projects completed by the investor
- Licensed contractor bids
- Scope of rehab work
- Property appraisals
- Proof of down payment funds
Where to Find Private Money Loans
If you don’t have a track record of completing successful real estate investment projects and don’t have a real estate investing network, getting investor capital is tricky. If you structure a solid deal and can show investors their potential return on investment, you may find one willing to fund your project. There are several hard money lenders that offer private money lending. Two of the best providers we have surveyed include Kiavi and Lima One Capital.
Individual Private Investors
If you choose to pursue a private money loan from an individual investor instead of through a national private lender, there are a few steps you can take:
- Build a network: Relationship-building is key. Seek out and develop relationships with real estate agents, attorneys, financial planners, commercial lenders, and title agents. It’s likely these individuals know investors that may be interested in working with you. Friends and family may also be able to assist in building connections to potential investors as well.
- Prepare materials in advance: Earlier, we outlined a list of documents that will be needed when you work with a private money lender, including a list of your past projects and scope of work on this project. Have these ready to go prior to your search for financing to expedite the application process.
- Be prepared to make a pitch: If you aren’t working with a lending company and are instead working with an individual investor, a pitch deck and presentation may be required. This varies by investor.
Pros and Cons of Private Money Loans
Private money loans are advantageous small business loans for investors who want to quickly purchase and fix up a distressed or damaged investment property. The quick preapproval and fast funding time are two of the main advantages. However, there are disadvantages, including higher interest rates and shorter loan terms.
|Lower minimum FICO score of 600||Shorter terms, traditionally no more than two years|
|Ability to fund difficult projects traditional lenders won’t touch||Lender fees up to 10% of the amount borrowed|
|Preapproval can occur on the same business day and funding in as few as 10 to 15 days||Higher interest rates than a standard mortgage, between 5% and 15%|
Private money lenders typically offer loans that are secured by a real estate asset. These loans are used to purchase a house, condo, or multifamily building, often to renovate the property for short-term or long-term investment. Private money loans are available from national hard money lenders as well as investors. New investors seeking these loans will likely need the support of their contractor and stronger credit to qualify.