A little known method for financing would be to obtain funds through a private lender or equity fund.
These lenders offer rehab lending programs that are based on the After-Repaired-Value (“ARV”) of the property and allow for up to 80-90% of the purchase price with 100% of the rehab budget.
Some programs are a combination of both debt and equity that includes the purchase price, entire rehab budget, all closing costs, six months of prepaid interest reserve and refunds your earnest money deposit back to you at the close of escrow.
Rates start are usually between 9%-14% but the rate can be reduced based on as-is value transactions. Terms are usually 1 year with extensions offered. Generally, no pre-payment penalty unless the loan term is less than 6 months.
The only lenders I am direct to lend nationwide.
As the inventory starts to dry up, the need for ground-up construction financing has created a niche that lenders are offering with high LTV/ARV Financing.
They will work with 1st time or Seasoned investors, they can offer them a hard money loan generally priced at 65% ARV on single-family residences.
If Seasoned, 100% Financing Available: 70-80% ARV with a Profit Split starting at 70/30. You must prove that you have completed 2-3 property rehab flips in the past 24 months. I have seen them consider loans from $100,000 to $5,000,000, sometimes above in certain cases.
What to Expect with Private Lenders?
Private money lenders normally focus on lending on non-owner occupied properties, but now some will offer owner user and owner-occupied business purpose loans on a case-by-case basis. Most prefer 1st lien position only, but I also know lenders who specialize in 2nd mortgages on single-family, condos, commercial, and improved income-producing properties.
Some things to keep in mind when considering a hard/money or private loan:
Purchase: Value is based on the actual purchase price.
Refinance: Value is based on lender’s opinion of the appraised value of real estate for refinances. They use their own appraisal review process and may require a site inspection.
Rehab: Value will be based on after repaired (ARV) or future value.
Some lenders offer flexible blanket loans that can include points, fees and may include an interest reserve into the loan and multiple income sources may be considered. Some will consider owned properties to cross-collateralize the loan to increase leverage. If you own a portfolio with equity and you want to establish a credit line against that for investments or flipping, they love to establish these relationships.
Types of Private Lenders?
There are many different kinds of private lenders, sometimes reference to them are interchangeable but they are actually different.
- Private Lenders – Could be an individual loaning their money, or loaning money through a trust, or through a fund.
- Hard Money Lenders – Could be an individual, or group of individuals, or an institution, you may never meet the check writer. This could also be a trust, fund, or another financial vehicle.
- Commercial Lenders – They will finance purchases and refinances of properties that are over 4 units. Sometimes they will finance purchases of businesses themselves.
- Alternative Lenders – They make unsecured loans, business loans, hybrid loans, loans to purchase equipment or expansion, or personal expenses like taxes, down payments, gap payments, closing costs, due diligence fees, etc.