In today’s fast-paced real estate market, private lending—often referred to as hard money or bridge lending—has become a powerful tool for investors targeting commercial and multi-family properties. This financing avenue offers distinct advantages but also demands sharp awareness of its nuances. Here’s what savvy investors need to know.
1. What Is Private Lending?
Private lending involves loans made by non-bank entities—typically individuals or private funds—secured by real estate assets, not personal credit. This model prioritizes the collateral’s value and exit strategy over borrower creditworthiness.
Many private lenders structure loans around the asset itself, conducting internal valuations rather than relying on traditional appraisals.
2. Ideal Loan Structures for Investors
These loans are generally:
- Short-term: 6–24 months, designed for fix-and-flip, rehab-to-rent (BRRRR technique), or securing quick purchases.
- Asset-based: Approval and loan amounts are based on property value, not income or credit.
- Fast funding: Approvals in as little as 24 hours, with closings often completed within days to weeks.
- Interest-only payments: Balloon payments at term-end are common.
Typical funding covers 65–80% of the property’s value, with flexible underwriting and minimal reliance on full appraisals.
3. Why Investors Choose Private Lenders
- Speed: Traditional bank loans can take months. Private lenders bring agility—ideal for time-sensitive deals.
- Flexibility: Limited paperwork, little emphasis on credit history, and the ability to customize terms, such as rolling closing costs into the loan.
- Opportunity: Enables strategies like BRRRR, auction purchases, or stretching capital across multiple properties quickly.
4. Costs and Term Sheet Considerations
Private lending isn’t the cheapest option. Expect:
- Interest rates: Typically between 9–14% annually.
- Points (origination fees): Usually 2–4%, sometimes upfront, but often financed into the loan.
- Other fees: Title, inspections, underwriting, and occasional prepayment penalties.
It’s essential to compare the all-in cost to your expected returns to ensure profitability.
5. Risks and Limitations
- Higher cost: Short-term, high-rate loans demand disciplined execution.
- Exit dependency: You must have a clear exit—whether through sale, refinance, or repositioning.
- LTV constraints: Generally capped at 65–80% of the property’s value; deals requiring more leverage may be difficult to finance.
- Restricted use: Private lenders typically focus on investment or commercial properties—not owner-occupied primary residences.
6. Evaluating a Private Lender
Ideal lenders offer:
- Regional expertise: Lenders familiar with your target market provide valuable insights and faster underwriting.
- Transparent terms: Upfront disclosure of interest rates, points, fees, and any prepayment penalties.
- Deal types supported: Ensure the lender has experience financing multi-family, light commercial, BRRRR strategies, fix-and-flip projects, or auction purchases—depending on your business model.
7. Best Practices for Investors
- Plan your exit carefully: Whether refinance or sale, have solid projections and documentation.
- Account for all costs: Include interest, points, reserves, rehab budgets, taxes, insurance, and vacancy padding in your financial planning.
- Build relationships: Repeat investors benefit from established rapport and may gain better terms or faster funding.
- Choose lenders with aligned goals: Whether you need bridge financing, acquisition funding, or repositioning capital, work with lenders experienced in your specific deal type.
Is Private Lending Right for You?
If you’re targeting commercial or multi-family deals where time is of the essence—such as auctions or rehab with refinance intent—private lending can be a strategic edge. It’s not suitable for long-term holds, owner-occupied properties, or investors lacking discipline in execution.
But when leveraged correctly, with clear exit plans and accurate budgets, private lending enables you to move quickly, scale faster, and seize deals that traditional lenders simply can’t accommodate.
Bottom Line:
Private lending is a powerful strategy for commercial and multi-family investors—but it requires precision. Understand your deal inside and out: costs, timelines, value-add potential, and exit plan. Compare lender options, review terms meticulously, and proceed with clear discipline. With the right approach, private money can accelerate your real estate growth—fast.
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