In recent years the financial crisis, and the demise of the sub-prime mortgage industry left many small businesses unable to access funds. These businesses sought funding from private lenders, who were willing to take on the riskier clients for the benefit of higher interest rates.
Private Equity Mortgage Lenders Enter the Market
The result is that the private lending industry is growing. More and more private debt funders are responding to the burgeoning need for investment funding. Recently private equity firms have also responded to the call for funds with many of them entering the debt financing business. The higher interest rates charged in the debt finance industry make for attractive profits even when adjusting for risk.
The entry of private equity companies into the industry is great news for investors, as they are able to raise the large amounts of capital required for larger real estate investments.
Because of the higher interest rates borrowers usually turn to private lenders only once they have been turned down by conventional banks. The loans are short term typically over periods of one to five years. The funds are usually required to consolidate debt, purchase additional properties or fix up existing assets. Borrowers should always enter the relationship with an end game in mind as the private funds will have to be replaced with a cheaper, conventional mortgage by the end of the contract.
Although private funding is considerably more expensive than conventional real estate funding, there is certainly good news for borrowers. The end of the sub-prime era has increased the demand for private funds. This has in turn resulted in reductions in the required interest rates. For the real estate investor that buys to rent interest payments are tax deductible and this can help to off-set the cost of the higher interest.
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Benefits of Private Equity Mortgage Lenders
- Property developers who already have several properties may find it difficult to obtain additional funding from a conventional bank, but private lenders can and often do make funds available for investors to buy to renovate and flip or they make second mortgages available for the down payment on a promising property.
- Conventional banks are governed by strict regulatory requirements whereas private lenders are not subject to these regulations. This means that the borrower saves the time and effort required to fill out reams of bureaucratic paperwork.
- Whereas the private lender is really only interested in the value of the property being purchased, the bank will require information on rental, lease agreements, credit history and a property appraisal.
- The reduction of red tape means that the time between application and approval is foreshortened and private real estate investors are able to make a quick deal.
Finding a Private Lender
The best way to find a private lender is to approach a property broker who typically would have a number of lenders on his books. Private lenders do like to deal with brokers who assist in the evaluation of applicants and ensure that the right match is made. The broker also ensures the borrower approaches the lender with all the information required to secure the funds. In the private lending industry there is no one size fits all, each of the lenders deals in a specialised field. A broker can help to match the borrower with the best private lender.