Conventional wisdom dictates that if you want to make a purchase with money you don’t have, you go to the bank to get a loan. It’s a time-honored system used by thousands of Americans every day. But it consumes an enormous amount of resources, either in the form of your actual monetary payments, the amount of time and energy put into appeasing the bank, and the opportunity costs of not borrowing more cheaply. Instead of rushing to the bank to fork over your money, why not try to find private investors? Although it requires a bit more cultivation of relationships on the part of the real estate investor, the benefits of acquiring private funding are myriad when managed responsibly.
The most convenient thing about a private loan is that it’s fast. There is no bureaucratic or administrative process to wait for—as soon as you reach an agreement with your lender, the money is yours. Presenting that cash up-front and in-full is a reliable way to buy fast and at a discount. Second, credit is not involved. This means two things: 1) you do not need to have good credit to secure a private loan, only the ability to pitch your idea effectively, and 2) the loan will not follow you for the rest of your life by showing up on the credit report. For an investor, debt can be crippling, and acquiring funding without affecting credit is a very valuable skill to learn.
One other advantage of private versus bank loans is that there is no limit imposed on the amount of funding provided. In other words, you may be approved for a bank loan, but not for one in excess of $20,000. If you can find someone with the demand (funds and will) to support your investment project, then you can ask for as much money as you deem necessary or fit. Further, rather than jumping through the legally-enforced hoops of a bank loan, the private loan allows you to control your environment, by actually participating in the drafting of the contract, rather than merely reading and signing it.
Perhaps the greatest advantage offered by the private loan is the tremendous flexibility it allows an investor. Especially in the world of real estate and investment, having cash in your pocket allows you to play by whichever rules make sense to you. It always affords you an exit strategy without leaving unfinished business with the bank. It means you can make offers on properties with the confidence that you are the buyer who will show up with the cash in hand. And it is much cheaper than having an investment partner, who will invariably take a larger share of your profit than a simple investor. If you can, work hard to cultivate your relationships with private investors, which may ultimately prove profitable for your business.
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Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
