Getting a short term rental property business off the ground is no easy feat, and buying the property is the first challenge to tackle. Though it feels daunting now, you might be surprised by the wide range of financing options available to real estate investors. If you thought applying for a conventional loan at the bank was the only way to go, think again! Private money lenders are a great opportunity for seasoned short term rental property investors and beginners alike.
In this article, we’ll walk you through what exactly a private money lender is, the pros and cons of using one, how to find one, and ultimately if they are the right solution for your short-term rental business.
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What is a private lender?
A private lender is an individual with personal capital looking to loan to real estate investors. They profit from the interest you pay on the loan or, in some cases, from profit shares. They are not associated with a bank but there are private money lending companies that you, as a real estate investor, can take advantage of. Closing a real estate loan with a private lender has a lot of advantages over working with a traditional bank or financial institution. Private financing might be exactly what you need to get your short term rental property business up and running.
Pros and cons of using private money lenders for real estate
If you’re planning on buying a home for short-term rental, consider approaching a private money lender with your pitch. Private lenders are available for both buying a new property and refinancing a current property. Private financing for home purchases offers you a quicker turnaround, potentially more flexible loan terms, and less red tape to cut through. These are a few of the pros and cons of private real estate loans to take into consideration.
Pro: Deals are closed quicker than traditional loans
Conventional loans are notorious for having a long, drawn-out closing process. If you’re ready to jump into short term rental property management right away, private real estate loans move very quickly closing in as little as seven days. This is because with private lending you cut out the overarching institution (a bank) so if both parties (the private lender and the real estate investor) are onboard, the deal can close immediately. That said, be wary of lenders who want to circumvent important processes like having an attorney draw up the appropriate legal documents. A verbal agreement is not a firm foundation to build your business on!
Con: Higher interest rates
As attractive as the quick turnaround time is, the downside is higher than normal interest rates. Private money lending comes with more risks to the lender so interest rates tend to be notably higher than traditional loans. On average, private money loan interest rates start at seven percent and get up to 13% or higher. There is also a collection of different fees you’ll be charged upfront (like an application fee and an underwriting fee) which can easily total a few thousand dollars.
Pro: Asset-based lending
Private lenders are most concerned with the value of the property as opposed to the investor’s credit history. This isn’t to say that private lenders won’t check your credit score, but your personal finances likely won’t be put under the microscope to the degree that they would be with a financial institution. This kind of approach is referred to as asset-based lending.
What does this mean for you as the investor? It will be easier to convince a private lender of the potential of your fix-and-flip property. If your short-term rental property is in need of repairs before beginning to rent, many banks will hesitate to finance the loan. Add the quick turnaround time to the mix and it’s clear that private money loans are a really great opportunity for fix-and-flip properties. Ultimately, the asset-based lending approach is good news if you want to invest in a fix-and-flip property or have a less than impressive credit score.
Con: Relationships can be impacted
Many real estate investors land private loans from people they already have a relationship with like friends or family. This route does make it easier to get access to capital, but you need to think through how lending money from that person could impact your relationship in the future. And the flip side: how future changes in your relationship might impact your ability to maintain professionalism with the lender. Relationship dynamics are already complicated and are not made any easier when money is thrown into the mix.
Pro: Loan terms are more flexible
Private money lenders are not associated with financial institutions so the terms of the loan are completely up to their discretion. Which, in the spirit of full disclosure, can make private lenders either more lenient or stricter with their requirements. If you’ve already tried applying for a loan with a bank and didn’t quite meet all of the qualifications, private money lenders might be the perfect solution for you. Having an already established rapport with the private lender (for example, a friend or family member) increases the likelihood that they will be more flexible with the loan terms. There is also considerably less hoop-jumping involved in private money lending than conventional loans. Generally speaking, if you want to sidestep the headache-inducing process of traditional loans, private lenders are the way to go.
Con: Private money lenders value experience
Depending on your previous experience, this could work for or against you. If you are a first-time property investor, you may have a harder time securing a private loan because you don’t have any previous properties to demonstrate your experience. On the contrary, as an experienced investor, this can really work to your advantage. Don’t worry, being a first-time property investor does not by any means exclude you from closing a private money loan. You just have to get creative in how you show the lender that you are a dependable investor and your property is worth their loan.
How to find private lenders for real estate?
Finding and hooking a private money lender is where it can get tricky. Before you get discouraged, remember that private lenders are just as eager to connect with real estate investors as you are to connect with them. These deals are mutually beneficial! As much as they are helping you to get your short-term rental property business off the ground, they are profiting from the interest on the loan. Ready to find a private money lender and close your private real estate loan? These are your next steps.
Networking is key
The more you connect with potential lenders, the higher your chances of finding someone interested in funding your project will be. You should cast a wide net when it comes to networking. That is, be open to connections with all kinds of people from all kinds of industries. You never know where a connection might lead. Even if one person isn’t a good fit for you as a lender, they might know someone else they can put you in contact with. The secret to networking is patience and persistence. Start by reaching out to other short term rental property managers who work with private money lenders and see who they can connect you with.
Finding lenders online
Finding a private lender near you can be as easy as googling “private money lenders near me.” Alternatively, the American Association of Private Lenders has a Member Directory that allows you to filter by location to find a private lender near you. Before reaching out, read on to develop a solid pitch and business plan to knock your first lender meeting out of the park.
Cold calling is not off the table
In today’s day and age, “cold calling” tends to have a negative connotation, but you shouldn’t shy away from this tactic in your search for a private money lender. Determine who could be a potential private lender for real estate and reach out! You want to have a convincing pitch while coming across as confident credible. Read on to develop a solid pitch before reaching out to potential lenders.
Have a solid pitch
You should know your pitch inside and out before ever presenting it to potential lenders. Private money lenders want to see that you have thought through every detail of the project and understand what risks are involved. Their number one concern is if and when they will get their money back…so your pitch should focus on assuring them of why your project is a good investment. Unlike traditional bank loans, private money loans rely heavily on establishing a strong relationship with the lender. They want to see that you are trustworthy and are more than capable of managing their money well.
Before going into the pitch, identify what questions the private money lender might have and be prepared to answer clearly and confidently. Consider practicing your pitch with friends and family and asking them to look at it through the eyes of a private money lender. This can help you pinpoint the strengths and weaknesses of your pitch and go into your first meeting as prepared as possible. These pitches are like an interview for both parties…you want to go in knowing what you are looking for in a lender to determine whether or not it will be a good fit for you too.
Develop your business plan
A huge piece of the pitch is having a strong business plan that convinces the lender of the potential of your project. Developing a business plan does not have to be complicated and you probably have a lot of the details worked out already. It’s just a matter of presenting it in a clear and concise manner. Download our free vacation rental business plan template to get started.
Top private lenders for short term rental real estate
Instead of or in addition to your personal networking efforts, there are a lot of companies that offer private loans to real estate investors that are worth looking into. These are some of the best private lenders for short term rental real estate.
- Kiavi (previously known as LendingHome) provides short term rental property managers access to fix-and-flip and rental loans through their really user-friendly technology. Kiavi made it on Forbe’s list of the most innovative fintech companies in 2019.
- Groundfloor utilizes crowdfunding techniques to connect real estate investors like you with interested lenders. Groundfloor offers financing for fix-and-flip, renovate-to-rent, and rent-ready properties.
- CoreVest, a private lending company established in 2014, offers many types of loans including Rental Portfolio Loan, Credit Line, Build for Rent, and more. They have funded over $10 billion in loans so you can feel confident you’d have access to robust capital.
- LendingTree is a great way to compare different loans to get the best offer. They say it’s like shopping for a flight. You submit some information (online or via the mobile app) about what type of loan you are looking for, and then you get to compare offers and pick the best one for your project!
- Best Egg offers personal loans for everything from home improvement to credit card refinancing. They stand out from the pack “by mixing decades of banking experience with modern financial technology.” They have an A+ rating with the Better Business Bureau so you know you are getting quality, reliable service by using their platform.
Are private lenders the right solution for you?
There are tons of options when it comes to financing your Airbnb property which means you get to make whatever choice will serve you and your business best! Private money lenders for real estate could be the right solution if you are looking for a quick turnaround and flexible loan terms. The interest rates will likely be higher but depending on the property and your personal financial situation, your pitch could have a better likelihood of getting approved by a private lender than a financial institution.
So if you’re looking for a slightly more unconventional way to finance your vacation rental home, a private mortgage lender could be the right solution for you.
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