Private Lenders: What You Need to Know

June 21, 2018
Posted in Insights
June 21, 2018 DCT Capital Fund

Banks and investment companies aren’t your only options when planning to take on a loan to flip a property. Private lenders can be a good option for those who are looking for a relationship-based form of trust between loanee and lender.

That said, there are a few things need to be brought into consideration before making the decision to go with a private lender.

Know who you’re dealing with

Before agreeing to take on a loan, it’s important to take note that you are dealing with an individual; while companies and banks operate on a rigid set of guidelines, private lenders are more likely to act on emotion.

When you accept a loan from a private lender, you are entering a relationship with them for the duration of the investment. It’s important to know if you will be willing to work with and report to them, especially if the lender is a family member or close friend.

It’s also important to know what a private lender’s history is. Have they put their money into real estate before? Do they have a reputation of breaking contracts or agreements? Are they knowledgeable about the kind of project you want to undertake?

Detail Your Project

Shows on HGTV can make the process of flipping a home seem fun and glamorous, but television doesn’t show you the meticulous research and calculations behind every decision on a renovation.

Also, it’s important to know that your role in the flip is to manage the renovations and repairs rather than do them yourself, especially if you are not a licensed contractor.

At the minimum, know the timeline of a project, the list of renovations and repairs, and the expected cost of materials and labor.

Along with a budget, it’s important to know that you will turn a profit after all the expenses. Is the value of the property expected to appreciate in value by the end of the project?

Most dependable lenders will be expecting a detailed budget so that they know where the money will be going. This is also the lender’s opportunity to see if you have the financial literacy to handle a potential loan, before deciding to lend you the money.

Be Realistic

This point can not be stressed enough. There isn’t anything more disastrous than over selling a project and not being able to meet expectations.

Taking on a flip means taking on many responsibilities and also comes with more risks than most real estate investments. The decisions you make affect the finances of both you and your lender, as well as the living space of whoever buys the property.

Finally, look at the market. Is there a demand for newly renovated homes? If so who might be fulfilling that demand already? Finding the answers to these questions will make you conscious of the state of the market and who your competition is.

If you follow your best instincts and keep these aspects of home flipping in mind, you’ll be sure to turn a profit and contribute to the best interests of everyone involved in the process.