Important terms to know when considering private money real estate investments
Jumping into the world of private lending as an investor can feel like one giant leap of faith. Most investors do a fair amount of research related to the risks and potential rewards of this type of investing before taking the plunge.
However, much of that research focuses on the results rather than the process. It is necessary to learn a whole new language to stay on top of hard money private lending as an investor. The terms below are important terms that will help new investors find their footing faster in this growing industry.
Loan to Value – The loan to value ratio, sometimes called the LTV ratio, refers to the risk lenders are taking by issuing the loan. In some instances, this ratio will cause lenders to require additional collateral or a substantial down payment by borrowers to help offset their risks.
Lien Position – This term refers to a lender’s position in the chain of repayment should an investment property fail and liquidation become necessary. Ideally, hard money lenders will be in first lien position, meaning they will have the highest priority among creditors to receive remuneration. Some loans, though, are issued with lenders in second lien position meaning there is one other lender or agency ahead of them in priority for repayment.
Loan Parameters – Parameters serve as guidelines lenders use to determine whether they will extend a loan to a prospective borrower or not. This can be a combination of things, such as existing debt by the borrower, borrower’s creditworthiness, or even the strength of the collateral. Each institution and lender will have its own lending parameters, but most successful lending entities do have some standards by which they judge a loan’s viability or attractiveness as an investment.
Bridge Loan – This is a sum of money lent as a short-term loan to bridge the gap between two transactions. For instance, if a family purchases a home before selling their existing home, they may need a bridge loan to help cover costs until their existing home sells.
Rehab Loans – With a rehab loan, the borrower is interested in fixing up a property that is in less than ideal shape when borrowing the money. Some borrowers plan to move into the property once rehabbed while others plan to rent the property out or sell it for a profit. During the interim, they need funds to make the necessary improvements and repairs. Those costs are covered by securing a rehab loan. Most banks are reluctant to offer these types of loans – especially if the borrower doesn’t intend to live in the home – giving hard money lenders abundant opportunities to profit from this type of investment.
Commercial Loans – Businesses use commercial loans to fund expansions, make repairs, research new product lines, upgrade equipment, and more. Some banks are reluctant to offer loans for these projects, which is where private lenders come into the picture.
Construction Loans – Whether building a home to live in, a multi-home unit, or a commercial property, construction loans give the average bank pause. This is excellent news for hard money lenders who are willing to do a little extra legwork to determine the viability of the project and to stay on top of things once the loan is set in motion and the construction begins.
Each of these terms will help private loan investors understand the investments they are making a little better while gaining insights about the numerous opportunities that exist to earn a profit through hard money lending.
When you are ready to begin investing, we can help you get your feet wet in the world of private lending while making a big splash for your financial future.