How Private Money Lending Really Works

Private money lending can be an integral part of your real estate investments. When it comes to funding your next project, you may be wondering what the best options are and how the loans really work.

We’d like to shed light on how private money lending works to help you understand where private money comes from and how these loans can work to fund your next deal.

How Does Private Money Lending Work?

Private money lenders use private capital to fund loans, which are typically only used for business or investment purposes.

These loans are usually short-term. Private money loans offer financing for many situations, including residential and commercial construction, fix and flip rehabs, bridge loans for purchases or refinances, and land acquisition and development projects.

Here at Cetan funds, we have loan programs for all of these opportunities.

Sometimes private capital from a single private investor is used to fund these types of loans. However, it’s more common for borrowers to work with a lending company, like Cetan Funds, to ensure a reliable, experienced source of funding. (More on this later…)

Private money lending companies usually charge an origination fee, which is based on a certain percentage of the loan amount. These are known as points, and they cover the company’s overhead and operations.

Many companies also charge fees such as doc prep or processing fees, appraisal fees, credit report fees, and a host of other fees. Here at Cetan, we only charge a single administrative fee and consider most other fees, “junk fees.”

After the loan funds, the borrowers are charged interest each month. Most of these short-term loans charge interest-only payments.

Some charge interest on the full loan amount from day 1. Others only charge interest on the outstanding balance (like at Cetan Funds).

It’s important to know what your lender requires, so be sure to ask upfront. In any case, these interest payments go back to the lender to disburse to their investor(s).

The Ins and Outs of Private Money Lenders

When searching for the right private money lender for your project, you may come across several options to choose from.

Each type of investor has a different way that they originate and process their loans, and finding the one that works best for your individual needs will be one of the most important decisions you make for your project.

One type of lender you may find is an individual private investor. They can lend directly to borrowers using personal savings or self-directed retirement accounts.

This allows the investor to diversify their investment portfolio as they have full control over the types of projects they choose to fund.

The borrower may have a more challenging time finding an investor interested in their specific project. Also the investor may not have enough capital to take on many different projects at once, or may not have an appetite for certain investments.

It can also be risky borrowing from an individual for other reasons. For example, if something happened to that individual lender, it can put your funding source at risk.

Another type is a private lending company. Some companies function more like a broker for other private money lenders.

This type of private lending company can act as an intermediary, matching borrower loan requests with individual private investors. For their services, they charge a broker fee and often service the loan for the investor.

Another example of private lenders are direct lenders with private equity funds, like Cetan Funds. They raise capital from investors, pooling funds into structured investment vehicles.

The two Funds offered at Cetan Funds are the Cetan Income Fund and Cetan Opportunity Fund. Loans are funded directly from these private equity funds. The Fund, and its investors, own the entire loan portfolio rather than individual loans.

An advantage of this type of lender is that lending decisions are made in-house, allowing for greater flexibility and efficiency.

Institutional private lenders are one other type of funding source out there. These types of lenders often sell their loans to the “capital markets,” like hedge funds and global private equity firms.

This system is similar to the conventional mortgage secondary market of mortgage-backed securities, bought primarily by Fannie Mae and Freddie Mac.

But with private mortgage loans, instead of Fannie and Freddie, Wall Street firms are the typical buyers.

These loans have stricter underwriting requirements, which can lead to things like higher borrower down payments, slower closing times, and appraisal and inspection requirements.

In our opinion, working with a local, reliable private money lender with their own funding source and in-house streamlined process, is almost always the best way to go.

Why it Matters Where Loans Come From

As you can see, the funding sources for private money loans vary depending on the lender.

Loans can come from individual investors, private loan brokers, direct portfolio lenders with private equity funds or institutional lenders selling loans to outside firms. Which lender you work with can dictate the terms you may be offered on the loan.

Determining which type of lender you’re working with can be very worthwhile to ensure you can make the best possible informed decision of who to borrow money from.

Over the years, we’ve seen borrowers get in trouble when working with individual investors, brokers, and institutional lenders. Sometimes individual investors get skittish and don’t follow through.

We’ve also seen their available funds run out on borrowers, stalling projects or resulting in missed opportunities.

Brokers and institutional lenders, on the other hand, are often just playing the volume game. The more loans they close, the more money they make, without much of a long-term investment.

They get paid when the loan closes and move on after they get their fee, leaving the borrower behind.

Understanding where your private money comes from can help you understand the experience you’re going to get as a borrower.

You want a lender who will be there with you from start to finish, and then be a reliable source of capital as your business grows.

Why Choose Us As Your Private Money Lender?

Here at Cetan Funds, we feel that we hit the sweet spot between being a direct private lender and a larger hard money lending company.

We don’t have to broker to other private individual investors like some lenders our size, and we also do not broker or sell to a secondary market or Wall Street. We fund everything in-house with our own private equity funds.

This gives us the ability to better serve the borrowers, while providing strong, consistent returns to our investors. We’re invested in the success of our borrowers since our own capital is at risk.

One of our missions is to build strong long-term relationships with our borrowers too, so we can support them as their businesses grow. This then benefits us and our investors along the way as well.

It’s a win-win for everyone.

If you have more questions about how private money lending works, and which source of funding would be the best option for your next real estate project, give us a call or explore our website.

Our helpful staff is always ready to discuss financing options and can help guide you to the best fit for your project.