private/interest only loan vs bank loan

[Scott Dearmore]

New guy here! What is the advantage of beginning with a private loan or interest only loan, then going to a bank loan 12 months later when getting an investment property to hold on to? Why not start it off with a down payment and bank loan? Thank you!

[Jeff Lezark]

As @Franco Li alludes to, you're describing a common strategy found here called BRRRR - Buy, Rehab, Rent, Refinance, Repeat - and private money or hard money is typically the avenue most take to accomplish the first 2 letters in the acronym. Most banks do not participate in the purchase and rehab portion so private or hard money is usually the next best choice after all family options have been exhausted. The caveat here is that even private and hard money lenders look for experience in the flipping business of some sort. Banks are especially sensitive to lack of experience so new or relatively new investors are shut out.

To answer you directly, yes and no. There is an advantage to using private or hard money for your deals in that your chances of actually being approved are far greater in the private world and the time to close is dramatically shorter. I typically close loans in less than 10 business days from application and just recently closed a loan on a Tuesday that was applied for late on the prior Thursday. Banks simply can not do this and it matters. Why? Because you're competing for deals with other investors who use private money or cash and can close within days, not weeks or months. Sellers do not consider offers with delayed closings due to financing contingencies. 

The downside is my rates will be higher than what you'll find at a bank. For a well qualified borrower (740+ credit) with good cash reserves and all the stars in alignment a 30 year fixed rate with me will be in the high 6's to low 7's. A bank price will come in around 5% but not allow the loan to be taken in the name of your corporate entity and limit you to the number of deals they can do for you at those rates. I do not have those issues.

There's more but I'll leave it here. Hope this helps and welcome to BP!