After the housing crisis in 2008, many banks changed how they handled providing mortgages for real estate, especially for investment property. With stricter qualification guidelines that left many investors without the upfront capital they needed, many now had to rely on cash to proceed with their deals. Several investors found themselves having to slow down their business because they did not have the liquid capital in which to invest in new property.
In recent years private money lenders have stepped in to fill the gap left behind, allowing real estate investors to expand their business. There are several reasons why these private money lenders have started looking towards real estate as a viable opportunity.
Huge market for rehabbers
Rehabbing or flipping houses has become more popular than ever. The housing market is once again viable, but there are still plenty of properties to buy for a steal that have been foreclosed or remain underwater or distressed after the housing market crash. Many real estate investors see the opportunity provided by the housing market, but do not have the available cash to properly take advantage of the situation.
The crash also led to tougher requirements for borrowers, including how much upfront money they need to pay in cash. Private lenders and hard money lenders can also set up more rigorous guidelines for lenders, while also benefiting from a larger pool of potential lenders looking for borrowing options.
One reason that providing private loans to real estate investors is so popular among private lenders is the fact that they can always seize the property in the case of a default loan. The lenders typically only look to the appraised value of the property when considering whether or not to loan the money, with the knowledge that the property serves as collateral. This makes giving this type of loan a safer option, since they will at least have the property if anything happens.
Another reason that real estate investment provides a lucrative opportunity for private lenders is that they can charge a high interest. Most people who turn to private lenders do so because they cannot secure funding through traditional means, such as a mortgage from a bank or paying cash. Therefore, the private lenders can charge a higher interest rate on the loan, which is typically around 12 percent. With loan amounts that will be in the hundreds of thousands, enough to cover a property, many companies have been able to net millions of dollars from offering these type of loans.
With so many advantages, many private lenders are looking towards real estate investors as a way to capitalize on lucrative opportunities. This also benefits the investors, as they have another option for funding to expand their business.