Working with hard money loans is ideal for many people who work in real estate for a living, but it's certainly not the simplest process to understand. Like traditional loans, certain requirements must be met in order for a private money lender to feel comfortable working with you.
Not sure what those requirements are? Here are the three most important things a private money lender should know in order to feel financially secure enough to work with you.
How the Investment Is Secured:
Private money loans are typically secured with property. But in order for that property to be used as collateral, it must meet a certain equity requirement to ensure your lender gets their investment back. Because most people purchase their homes with a 15- to 30-year mortgage and home prices tend to increase over time, the amount of equity increases as a house ages. So investing in a piece of empty property might not be the best idea if you want to work with hard money loans. Instead, house flipping -- in that there is already a house to work with -- is a practice most commonly associated with hard money loans.
Whether the Money They Invest Will Be Returned:
This is likely the most important piece of information you need to provide to a private money lender. In order to provide this information to a potential lender, it's important that you have a game plan. What is the best-case scenario? Worst-case? Why should a lender trust you with their investment? These are all important questions that you need to answer before approaching private money lenders with a proposal.
How They Benefit from This Investment:
When you approach an investor for a business or for a house flipping project, it's essential to remember that they expect to gain something from working with you. Rather than framing your proposal around how their money will help you, it's important to think about how your business can return on their investment. This is an issue that many people fail to think about, but it's one of the most important pieces of information for private money lenders to know.
Private lenders aren't just good samaritans, they're business people. In order to work with them, it's important to think through these things.