How do private lenders work?

Question

Need some advice. I am in the middle of a cash out refi on my investment property to invest in a duplex. The problem I'm having is that the banks want 25%  and that will take all my cash  and I would like to keep some cash for emergency funds. I think 20% down would be perfect. I think I seen some private lenders do 20% down. Need some guidance.

Will Barnard · Answer

Private lenders will likely be at higher rates than a conventional mortgage which will eat into your cash flow. That said, having adequate reserves is a must so perhaps you can find some other sources of funds to make up for the shortfall. Lines of credit could be an option, but be cautious as to not overleverage yourself, in a downturn or if anything major goes wrong, you are placing yourself at much higher risk factors.

Benjamin Wakefield · Answer

Is there anything you can do to add value to the property to increase the appraisal?

Interior finishes, paint, front door, landscaping, windows?

Scott Wolf · Answer

@Ezra Soto, what rate are you getting at the 25% down, and what is the loan amount?

More specifics may net you some lenders who can compete.

Tarik Shahin · Answer

It will be very difficult to get 80% financing on a 2-4 unit investment property and if you do find a private lender, you'll likely pay quite a bit in costs at a high rate that may kill the ROI on the deal. On 1-unit investment properties, you can get conventional financing with as little as 15% however you'll pay PMI until you're at about 70% LTV. Lenders also want to see that you generally have 6 months of the PITI of the subject property in reserves and additional reserves for each financed investment property that you have - a 401K or cash value in a life insurance policy count as reserves. If the appraisal is complete on the property you're refinancing, ask your lender if you can dispute the value with additional comparable sales to see if you can get a higher value to extract more equity. If the duplex is not feasible, try an SFR with 15% or 20% down. Best of luck!

Kenji Otokawa · Answer

Hey Ezra,

Sometimes small community banks or private lenders will do a 80% LTV loan. Lenders all have their own unique criteria for both the property and who they are lending to. I suggest reaching out to multiple lenders and asking around for those that are investor friendly. I will say that many gauge experience. The more experience you have, the more comfortable a lender will be lending to you. You may also want to look into DSCR loans. These loans require less documentation but are a little more expensive than conventional loans. Multiple lenders offer these types of loans. There are a lot of different loan products out there that may make sense for you. Hope this helps!

How do private lenders work?

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