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 |
| Amortization | None | 20 years |
| Time to Close | 5 days | 45-60 days |
| Construction Disbursements | Up to $28,500 | Unavailable |
| Initial Interest Rate | 10.0% | 6.5% |
| Other Requirements | Personal Financial Statement and Basic Diligence | Extensive Diligence Documentation, Including multiple follow up requests, potentially |
| Illustrative Total 3- month Loan Cost | $5,600 | $4,900 |
| Illustrative Initial Monthly Payment | $667 | $605 |