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Private Lending: Why It’s So Important

Not so much as an owner-financed home but loans made by a certain type of lender using its own internal guidelines without having to follow third party regulations? Private money, or so-called “hard money,” is a valuable asset in the world of real estate and without it many existing properties could ultimately fall into a state of disrepair such to the point where it detracts value from surrounding real estate. In the residential world, private loans are used to buy and rehabilitate investment properties. When a lender approves a loan using these standards the loan is then eligible for sale in the secondary market. Selling a loan means freeing up more capital for the lender in order to make more loans. Once the property is rehabilitated it can then be in a condition where traditional financing can be used. Private lenders look primarily at the “exit strategy” which means telling the story how the private loan would be paid off. Typically, the exit means the property will be sold once repaired. The private lender agrees and issues the needed funds to buy and rehab the property. If private lending didn’t exist, this same fourplex could fall into such a state of disrepair the only option is a complete demolition and building brand new from the ground up, a costly proposition compared to a private loan.