In today’s economy the use of private money had become more widespread. Why wouldn’t it? It had supplied us investors with a true need – funds. So private lending has a stigma? Private money, hard money and similar names had become associated with high interest rates and hefty fees and in many instances it’s true. But they don’t have to be in all cases. I don’t want to talk about if private money is good or bad. I want to explore the right use of it.
When To Use Private Money
If you are making a long-term investment then probably the use of private money is not the right way to go about it. It makes sense if you use it as part of a bridge or temporary financing in your purchase process. For example as a strategy to acquire the property until you have secured an institutional mortgage. When you conduct a short-term investment it MAY make more sense. You’ll still have to explore it on a case by case, which is what I have done in a fix and flip investment in Dallas.
Here are the details
Purchase price: $85,000 After repair value (ARV): $145,000 Purchase costs: $2,000 Rehab costs: $20,000 Holding costs (w/o mortgage): $2,370 Selling costs: $11,800
Summary w/o financing
Total into the deal: $109,370 Net selling price: $133,200 Profit (as in cash transaction): $23,830 Summary with financing
|Financed % of AVR||80.00%||65.00%|
|Payments Per Period (6 months)||$3,951.81||$4,149.44|
|Total Payment for period (6 months)||$6,271.81||$8,861.94|
Profit with conventional financing: $17,560 Profit with private financing: $14,970 Difference: ~$2,600
As you can see in some instances it does make sense to use private money for your investment, or at least to consider. If you take the stigma out and consider the numbers you may find yourself using private lending more than you have planned. — Note: this post has no intention to suggest that the use of private or hard lending is good or bad. Always shop around for the best deal you can have when using private, hard, or institutional lending.