Private lenders are a critical component of the real estate investing ecosystem. Without private lenders, fix and flip and rental property investors would have a hard time growing their businesses.
What is a Private Lender?
A private lender is a non bank lender who provides business purpose loans to real estate investors.
Private lenders, also known as hard money lenders, do not require a W-2 (salaried employment) or tax returns. Instead, private lenders lend based on the following pillars:
Does the deal make financial sense based on purchase price, rehab budget, ARV, DSCR?
Is the investor experienced, do they have assets to personally guarantee the loan?
The most common loans are bridge loans and rental loans.
What is a bridge loan?
A bridge loan, also known as a “fix and flip” loan, is a short term loan that allows an investor to purchase and rehab a property. Once the rehab is completed, the investor will either sell the property (“flip”), or rent the property and refinance the property into a longer term loan (“BRRR”).
Common bridge loan terms:
- up to 90% of purchase price
- up to 100% of rehab budget
- 7% – 14% interest rate
- 2 – 4 points origination fee
What are Origination Points?
The origination fee is the primary fee that a private lender charges. It is most commonly paid up front at closing and is typically 2% to 4% of the loan amount. Each percentage is referred to as a “point”.
What does it mean to buy down the interest rate?
Many private lenders will allow you to receive a lower interest rate by paying a higher up front fee. You can usually buy down 0.25% of the interest rate for a fee of 1 point (1% of the loan amount). Many lenders will limit the amount you can buy down.
What is a Rental Loan?
A rental loan is loan that is provided to rental property investors. Rental loans from private lenders are commonly available for terms up to 30 years, at fixed interest rates ranging from 3.5% to 6%.
The best private lenders for rental loans will carefully consider the debt service coverage ratio when approving the loan.
What is a DSCR rental loan?
DSCR means debt service coverage ratio and it is the primary way that a lender will qualify a rental property for a rental loan.
DSCR = Net Operating Income ÷ Debt Service
Net Operating Income or “NOI” = Rental Revenue – Property Management – Maintenance – Taxes – Insurance
Debt Service = Mortgage Principal + Mortgage Interest
Private lenders usually have a minimum DSCR around 1.2. Because the debt service depends on the loan amount, the maximum loan a lender is willing to provide depends on the DSCR and the underlying NOI.
The Best Private Lenders
Formerly LendingHome, Kiavi is a leader in the market and offers competitive rates for bridge loans and rental loans.
A new entrant in the private lending space, OfferMarket Capital is a subsidiary of OfferMarket, a fast growing commission-free investment property marketplace. OfferMarket Capital is a direct lender that provides some of the most competitive terms for bridge loans and rental loans. OfferMarket is among the best private lenders in Maryland, as the company is headquartered in Baltimore.
More information about real estate private lenders.