Real estate investors often must learn to navigate alternative financing to secure funding when the bank says no. Here are some of the top ways that private mortgages can be helpful to real estate investors.
1. Credit and income qualification is easier
Traditional banks typically look heavily at past credit history, which can be a deal breaker for some investors. If you don’t have a lot of credit, or if what you do have is less than stellar, then a private mortgage makes a lot of sense. The other big deal with banks is income verification. Private mortgages may be a better option if you have recently changed careers, are between jobs, or have income sources that are hard to verify or document.
2. Speed and time to close are better
If you believe that time is money, you likely won’t love waiting around 45-60 days for a bank to close your investment loan. However, in cases where a property is being auctioned off, about to be foreclosed, or has multiple offers, the ability to move and close quickly can be even more valuable. Private lenders don’t have as many layers of approvals and signoffs required, and they are usually nimbler, providing greater flexibility and speed than a bank.
3. Construction and remodelling are considered
Many real estate investors build amazing equity when they take a distressed property and bring it back to life through major remodelling. In hot parts of Toronto, investors have also found value in demolishing and rebuilding an existing property on that same site. The problem is that banks don’t generally want to lend money against a structure that is in bad shape or will be destroyed. On the other hand, private lenders will consider these projects and often lend against the anticipated value of the finished product, providing more funds for the investor to work with.
4. Cross-collateralization is welcomed
One popular strategy among investors is to use equity from their home or another real estate asset as a down payment for buying an investment property. While this can be done with a refinance or home equity line of credit, it can also be accomplished with cross-collateralization. Banks don’t typically like to be in junior positions with their loans, but a private lender often welcomes this creative strategy. This allows the investor to keep their existing loans and still access equity.
As a real estate investor, understanding how to utilize a private mortgage in certain situations can open possibilities that might otherwise seem impossible with bank financing. However, private mortgages are not the best option for every property purchase. When deciding if a private mortgage is best, it should be weighed against all other options regarding interest rates, fees, and terms. If in doubt, consider meeting with a financial strategist to discuss further before deciding.
At CleveDoesMore, the best part of our job is helping people make informed choices to minimize their risk while building equity and wealth for their future.