Why Private Financing

As real estate entrepreneurs grow their businesses, they often encounter challenges working with traditional banks and credit unions. These include:

  • Unwillingness to lend against collateral needing intensive rehabilitation
  • Lending officers who fail to understand investor’s tax returns
    • High or accelerated depreciation losses
    • High expenses from property rehabilitation
    • Low or lack of 1099 or W2 income
    • Rental income that is in-place but not yet reported on past year’s tax returns
  • Various (and sometimes arbitrary) Fannie Mae or Freddie Mac limitations
  • Borrower’s debt-to-income ratio is too high
  • Inability to underwrite and close quickly (most banks require 45 to 60+ days)

Private financing is best used as a short-term bridge to permanent bank financing or a property sale. The table below compares private financing and traditional bank financing:

$
Private
Financing		Traditional
Bank Financing
Property Purchase Price$100,000$100,000
Expected Rehabilitation Cost$30,000$30,000
Initial Loan Disbursement$80,000$80,000
Appraisal Fees$0$1,500
Legal Fees$600$900
Other Fees / Points$3,000$1,200
AmortizationNone20 years
Time to Close5 days45-60 days
Construction DisbursementsUp to $28,500Unavailable
Initial Interest Rate10.0%6.5%
Other RequirementsPersonal Financial Statement and Basic DiligenceExtensive Diligence Documentation, Including multiple follow up requests, potentially
Illustrative Total 3- month Loan Cost
$5,600
$4,900
Illustrative Initial Monthly Payment$667$605