Despite the instability of the pandemic-impacted economy, real estate continues to be a profitable venture.
You stand to benefit a lot by investing in real estate: passive income, equity, monthly rents, and tax breaks, among others. Owning investment properties also comes with other benefits that aren’t financial, such as fulfillment and control.
Becoming a landlord in Los Angeles may be a smart way to generate a steady passive income stream and keep plenty of cash flowing to your bank account. However, it does take a hefty amount of money to get started. So, you don’t have a considerable bankroll, but you’re still interested? Taking an investment property loan might be the only way to seal the deal and kickstart your real estate business.
Real estate financing in Los Angeles comes in several forms, and there are specific criteria that real estate investors need to meet. Selecting the wrong kind of loan can hamper the success of your venture, so it is vital to understand the strengths and weaknesses of each type of loan and how the various alternatives compare before approaching a lender.
Do you already own a home? If yes, you’re probably familiar with conventional financing. Conventional mortgages are structured based on the assumption that the property will be in for the long term. If you plan to purchase a Los Angeles investment property, fix it, and return it to the market within a span of months, a conventional mortgage might not be the ideal financing method. That’s where hard money loans and private money loans come in.
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Understanding What Hard Money Loans and Private Money Loans Are
So, you want to get into Los Angeles real estate development?
You already have an idea about what sector you want to jump into, who your partners might be, and how it will expand your investment portfolio. Before you get started, though, you need to know where to source the financing.
Hard Money vs. Private Lenders – What’s The Difference?
Hard Money Loan?
A hard money loan is a short-term loan obtained from a private lender backed by the property it is financing.
The “hard” in “hard money” refers to the tangible asset used as the loan collateral. When the borrower defaults on a secured loan, the lender can take over ownership of the asset to recoup its losses.
These loans usually have shorter terms and higher rates than traditional mortgages. Hard money loans are a great short-term financing solution for Los Angeles property investors who don’t qualify for a conventional mortgage or need quick funding.
- Alternate definition: A loan used to bridge the gap between an investment purchase and long-term financing
- Alternate names: short-term bridge loans, asset-based loans
What Are Hard Money Loans Used For?
» House Flipping
Real estate investors who make money by buying low-cost homes, making value-boosting repairs, and then flipping the properties for profit may utilize the services of Los Angeles hard money lenders.
Since these projects usually happen quickly, professional fix and flip investors often prefer a faster form of financing. Also, house flippers generally try to sell the home within a short period – typically in a few months, so they don’t need a longer loan term as you’d get with a traditional mortgage.
» Purchasing Investment Property
Real estate professionals who want to invest in rental property but don’t qualify for conventional bank loans might seek out a Los Angeles hard money loan to finance their investment.
This method isn’t only for those who can’t get approved for a traditional loan due to their credit history. It is also beneficial for investors who need more money than a conventional lender is willing to lend.
» Obtaining Commercial Property
Business owners might use hard money loans to fund commercial real estate purchases if they cannot obtain conventional financing. Hard money lenders in Los Angeles may also help you with financing to purchase a unique property that doesn’t qualify for traditional financing.
Pros of Hard Money Lending
- Hard money loans can be closed quicker than traditional loans. They can get approved in as little as seven days
- Criteria is easy to meet as they do not use an underwriting process.
- A hard money lender is exceptionally beneficial, especially to newer investors.
- In Los Angeles, hard money lenders are licensed and typically have more experience in issuing loans.
- Your financial situation is not the primary concern.
- The lender provides collateral, so they don’t emphasize payment.
- The borrower may benefit from default if the collateral is substantial
Cons of Hard Money Lending
- Hard money loans entail significantly higher interest rates than traditional mortgages.
- Hard money loans come with a lower loan-to-value ratio because of real property protection.
- The lender faces considerable risk.
- They charge higher interest rates.
- The lender has to provide property for use as collateral.
Private Money Loan?
Private individual lenders are lenders who operate independently without ties to financial institutions. Los Angeles private money lenders make a profit generally by lending money to real estate investors, who then increase the value of their investment properties.
A private money loan might come from a friend, a relative, a business, a family member, or even a stranger who sees your project as an investment from which they hope to reap a reasonable return.
Unlike banks and hard money lenders, who have laid out terms, the borrower and the lender need to discuss the terms of a private money loan.
What are Private Money Loans Used For
» Real Estate Investors Who Can’t-Wait
Have you seen a lucrative bargain in the Los Angeles real estate market? You have to strike quickly before some other buyer grabs it before you do. A private money loan is perfect for you, with a typical turnaround time of only one to seven days for approval.
» Investors Who Understand the Art of Leverage
Having cash at hand provides extra bargaining leverage and—in many cases— results in massive discounts. Los Angeles private money loans can give you the upper hand when negotiating.
» Fix and Flip Professionals
Fix-and-flip ventures can be risky, but not if you know what you’re doing. Private money loans are easier to navigate and calculate than a bank loan, making them perfect for the short-term borrower who has a plan and knows what their returns will be.
Investors with Tied Up Capital
Is your capital tied up in other deals and investments and your bank is unwilling to extend further credit? A bridge loan from one of the best Los Angeles private money lenders is a perfect way to access additional financing and keep your growth on track.
Pros of Private Money Loans
- Most Los Angeles private money lenders offer up to 100% financing
- There are fewer guidelines and criteria, so funding can be received quickly (7 days or less).
- No minimum credit score since credit is not the primary factor considered for approval.
Cons of Hard Money Lending
- Shorter payback period
- High fees and interest payments
Differences Between a Hard Money Loan vs. Private Money Loan
Here are the main differences between hard and private money loans.
Hard money lenders in Los Angeles are licensed and experienced. You’ll receive not only funding but also guidance. On the other hand, private money lenders can essentially be anyone with money, regardless of experience and knowledge about loans.
The top Los Angeles hard money lenders usually have a streamlined process to deal with the processing of hard money loans. The loan terms can vary based on your property’s value and other factors, but the process mostly remains the same. In contrast, the terms of private money loans will vary from loan to loan, leading to trouble in some cases.
While hard money lenders try to advertise and promote their services to the general public, private money lenders are more exclusive, typically only relying on referrals.
What Type of Loan is Best for You?
Between hard money loans and private money loans, which should you choose?
Well, the answer is it depends on an investment by investment basis.
While either option has its strengths and weaknesses, two primary factors can help you determine the best choice: your ultimate goal for the property and your unique financial situation.
The main advantage of private loans is that they are more flexible for the borrower as there is more room for negotiation. In addition, you can still obtain a personal loan even if both conventional and hard money lenders won’t finance your project because of your credit history or because they think that the project isn’t worth investing in. Private loans are also much more negotiable, and the repayment time may be a lot shorter than on conventional and hard money loans, which is ideal for Los Angeles fix and flip investors.
On the other hand, hard money loans offer a level of expertise and security that your average private lender cannot. That said, unless you and your private money lender are both experienced with real estate investments, it could be more sensible to apply for a hard money loan.
Need a Hard Money or Private Money Loan in Los Angeles?
» RTI Bridge Loans is Your Premier Lender for Hard Money in Los Angeles
Working with an experienced private money lender who emphasizes quick, hassle-free closings, favorable terms, and creative financing solutions is crucial when you’re ready to finance your Los Angeles investment property purchase.
RTI Bridge Loans is the leader of Hard money lenders in Los Angeles, CA! We offer hard money loans, fix & flip loans, and private money loans to real estate investors in Los Angeles and surrounding areas. Our investment property loans in Los Angeles are structured to meet your needs, regardless of your real estate specialization.