Serious house flippers in Pennsylvania prefer to finance their projects with loans from private money lenders rather than banks. To be clear, a private money lender is a non-institutional (not a bank) company or individual that loans money, secured by a promissory note and deed of trust, for the purpose of funding a real estate investment.
Real estate investors further breakdown the category of private money lenders into two sub-categories, and this can be a bit confusing because they reuse the title “private money lenders” for individuals who are loaning money as a side venture. The second sub-category of private money lenders are hard money lenders who are in business to lend money and have well-defined lending criteria and terms.
1) Conventional lenders (banks)
2) Private Money Lenders
2a) Private Money Lenders
2b) Hard Money Lenders
Why Private Money Instead Of A Bank / Conventional Loan?
1. Private money lenders know you need money fast when you’ve found a good deal, but banks take you through the conventional mortgage application process which could take a month or more.
2. Private lenders accept that you’re buying a distressed home to fix and flip it, but banks usually don’t approve financing for such homes.
3. Private lenders may allow you to make interest-only payments during your rehab and pay it off in full at the end of a short term, but banks will require interest+principal payments and charge you a prepayment fee when you pay it off after a few months instead of in 15 to 20 years.
Private Money Lenders For Residential Real Estate PA
Let’s consider both sub-categories of private lenders, first the individuals, generally family members or other people that you seek out for private money loans. If your Aunt Martha or your mom and dad are generous perhaps they would be willing to loan you money at a low interest rate for your next flip. With the right relative who will just loan you the money and not get involved this can work well. But if your mom and dad start taking over as your project manager you could run into trouble. One of the difficulties with private money is borrowing from individuals who really don’t understand house flipping and the risks involved. It can be hard to explain after the project has gone south that they’re likely to lose much of their loaned money. Families have been ruined over less.
Many flippers find it better to deal with hard money lenders who know and understand the house flipping business. It’s a professional relationship, not based on being a relative or having some connection. And while hard money lenders have tougher lending criteria and loan terms, these actually protect both the lender and the borrower. For example, Aunt Martha might approve a risky project that stretches you too thin, but chances are a professional hard money lender would not allow you to use their money to put yourself into that level of risk. A hard money lender can become a valuable part of your “team” as they also have experience in real estate investing and want you to succeed.
Summary
Flippers investing in residential real estate in Pennsylvania are taking advantage of the many benefits of dealing with private money lenders for residential real estate PA.