Real estate investors looking for financing will typically borrow money from one of two sources – a bank or a private lender. Because banks can be time-consuming and frustrating to work with, private lenders like LYNK Capital, LLC are an increasingly popular source of financing. In this blog we’ll take a look at some of the types of private loans available.
Private Mortgage Loan Types
Residential Renovation Loans (a.k.a. Fix and Flip Loans)
Renovation loans are one of the most popular types of private mortgage loans. They usually provide money to purchase a property, plus funds to complete needed renovations. In a typical loan structure, you’ll need to bring a down payment equal to about 10 to 20 percent of the purchase price plus closing costs. The loan will cover all budgeted renovation costs.
Be aware that construction funds will only be released by the lender upon the completion of work (in one or more draws), so you may need to pay for some renovations costs out of pocket before being reimbursed by your lender.
There are many lenders today offering renovation loans, both on the regional and national level. When selecting a lender, be sure to find one that has deep experience with renovation loans and will spend the time to learn and understand your project. Renovation loans don’t always go exactly according to plan, and it’s important to have a lender that can help you if things change. At LYNK Capital, we pride ourselves on our ability to learn the details of each project and help find solutions to problems when they arise.
Residential New Construction Loans
Private new construction loans are a great option for small builders in areas where there is a strong demand for new housing. Community banks have been the traditional source for new construction loans for many years; however, strict underwriting requirements make it difficult for many small builders to obtain needed financing.
When evaluating a new construction project, private lenders will typically want to see a property located in an existing, developed neighborhood with a low inventory of new homes and strong sales trends. Properties located in remote or newly developed areas are riskier, as the local market may not yet be proven. Most importantly, your ability to sell the property quickly upon completion (or better yet, before completion) is key to the lender being repaid at completion, so market absorption statistics will be closely reviewed.
There are fewer lenders offering private construction loans today, so finding and partnering with a lender that offers competitive new construction loans can accelerate your business.
Multi-Property Construction Loans
Multi-property construction loans are similar to residential construction loans but involve multiple properties. Examples may be the construction of a small townhouse complex, the conversion of an existing single-family residence into a modern duplex, or the construction of a larger residential subdivision.
These projects can be much more complex for a lender to underwrite, especially if permitting is not complete or if you’re attempting to finance the completion of site work into the loan. For this reason, very few private lenders will lend on these larger projects until permitting is completed. When considering a project that may involve complex permitting or development matters, one option may be to obtain an initial loan that finances only the purchase price of the property. In this case, the loan amount will typically be based on this “as is” value of the property (not subject to any improvements or subdivision), but you’ll then have time to complete the permitting process necessary to begin construction. Once permitting is completed, you can refinance your loan with a larger construction loan.
Private Bridge or Hard Money Loans
“Bridge” lending is a generic term that covers many types of short-term lending that may or may not include a construction component. The reasons for obtaining a bridge loan vary widely, but one of the more common reasons results from the slow and cumbersome process of banks. At LYNK Capital, we’ve funded many projects where the property is otherwise eligible for bank financing, but the bank couldn’t meet the borrower’s purchase deadline. By being able to close quickly, a private lender can allow the borrower to purchase the property and work to refinance with a bank after closing.
Options for Borrowers
In recent years, the types of private loans available to borrowers have increased as private lenders have become larger, more professional, and better capitalized. If you have any additional questions about obtaining a private mortgage through LYNK Capital, let us know. You can also click below to check out recent projects we’ve financed and to learn more about how private mortgage loans might work for you.