10 Reasons Why Cash Buyers Should Consider Private Lending

Introduction

One of the keys to success in real estate investing is the ability to scale your business efficiently. While using your own cash might seem like a secure approach, alternative financing options like private lending through Nworie Capital can offer some strategic advantages. In this blog, we'll explore the benefits of transitioning from cash investments to private lending and how it can empower cash buyers to take their real estate ventures to new heights. 

1. Private Lending Increases Your Buying Power

To be clear, we are not talking about a 100% financing gimmick. Private money lenders expect investors to have some interest in the asset. Typically, around 20%, although in some cases it could be as low as 10% or as high as 30%. The key is that the leverage that private lending provides enables investors to buy more properties, more quickly. That increased buying power can be expressed in terms of higher value properties or more properties in a shorter period of time. Private lending provides additional buying power which can be invested and re-invested in many different ways.

2. Private Lending Provides Increased Diversification

Let’s say you have $100,000 to invest. In theory, you could purchase a property worth $100,000 in cash. However, that would mean that all the money is tied into one investment in one location. With the right leverage, you could acquire that same property for $20,000 in cash by using private money, then diversify your portfolio or investment locations with the remaining $80,000. You could invest in 4 more properties in different locations that are valued at around $100,000 each, or you could invest in 2 larger properties that are worth $200,000 each. There are many options of how you could use the additional leverage, but that’s the point. You now have many more options. A fix-n-flipper could flip 4 or 5 properties instead of just one. An income investor can generate monthly cash flow from 5 properties at once, instead of just one. Spreading risk across multiple projects with private funding can provide a buffer against market fluctuations and project-specific challenges.

3. Talk with Your Tax Advisor About Depreciation

The impact will vary based on your specific situation, so if you haven’t already, be sure to ask your tax advisor how claiming depreciation can help you. Consider taking depreciation from 5 properties versus just taking depreciation from only 1. The tax benefits for having the additional properties could far outweigh the costs for acquiring them. Additionally, things like 1031 Exchanges can also provide tax relief, especially when faced with higher short-term capital gains taxes. Since you will likely be meeting with your tax person soon (it’s that time of year after all), now would be a good time to include depreciation in your discussions with your tax advisor.

4. Private Lending Provides Faster Returns on Your Investments

In order to scale quickly, leverage is an important part of the equation. Whether you are an income seeking investor, or a fix-n-flipper looking for short-term capital gains, the ability to multiply your return on investment can make all the difference. In our example from earlier, a fix-n-flipper with leverage could use $100,000 to acquire 5 properties at once, instead of just one property, but having a private lender means the investor could also get money for renovations as well. Even if property values for a given neighborhood don’t necessarily go up, adding things like a bedroom or bathroom (or both) to a home has proven to be a sure-fire way to increase a property’s value in a relatively short amount of time. Private lenders often provide additional leverage for renovations and upgrades, which are important for increasing a property’s market value. With that said, increasing the return is not the only consideration. Decreasing costs is also an important benefit of scaling up.

5. Leverage Enables Investors to Take Advantage of Economies of Scale

If an investor is renovating 5 properties at a time, discounts will not be far behind. Things like discounts for purchasing flooring, cabinets, or counter-tops in bulk are common. Ultimately, the more you can buy at once, the cheaper it costs per item of material. If that investor buys 5 houses at once and renovates them concurrently, they could just as well sell 5 houses at once, when the renovations are complete. This concept is not only important for speed to return on investment, but also because it enables the investor to be re-investment ready in a shorter period of time.

6. Private Lenders Enhance Scalability and Portfolio Expansion

Cash buyers often face limitations on the number of properties they can invest in simultaneously. If you ask your bank or local credit union, they will tell you that they don’t want you to own any more than 2 or 3 houses at once. That is where private lending can help. With private lending, you can own as many properties as you can afford to acquire. Private lenders evaluate each deal based on a conservative return on selling the property after renovations, or the income that the property is currently generating, or its ability to generate consistent cash flow at some future date (this could be with or without renovations). Private lenders are much more supportive when it comes to scaling up your real estate business, diversifying, and expanding your investment portfolio.

7. Private Lending Mitigates Liquidity Risk

Using your own cash can tie up valuable liquidity, limiting your ability to respond to buying opportunities quickly or to deal with unforeseen challenges appropriately. Private lending allows you to preserve your cash reserves for emergencies. In a volatile market, cash is king and having more of it available is just a better position to be in.

8. Private Lending Enables You to Move Quickly

Having an established relationship with a private money lender means you can still move quickly to take advantage of attractive investment prospects as they arise, much like you could as a cash buyer. Realtors, agents, and sellers know that a buyer using private money is just as attractive as a cash buyer because they can close quickly, and they don’t have to worry about the types of issues that buyers run into when dealing with bank loans. Earlier, we talked about an example of a fix-n-flipper doing 5 properties at a time, but the reality is, that investor may decide to wait on buying the other 4 properties right away, so they can see what opportunities develop, knowing that they are able to arbitrage at a moment’s notice.

9. Private Lenders Provide Flexibility in Deal Structuring

With private money, you can negotiate terms that align with your business strategy. Whether it's a short-term fix-and-flip project, a short-term rental scenario (like Airbnb or Vrbo), or a long-term rental property, tailoring financing arrangements to suit your needs can enhance your ability to optimize returns and navigate various market conditions. Real Estate investors appreciate features like no monthly payments, which is where the interest payments are rolled into the loan and due at maturity (instead of being due monthly). Things like no minimum DSCR requirement for DSCR loans, no pre-payment penalty, interest rate buy-downs, and advanced draws for experienced investors are all popular features that represent additional examples of how private lending with Nworie Capital can provide the flexibility you may be looking for when structuring deals.

10. Private Lenders Can Expand Your Universe of Possibilities

Engaging with private lenders can foster relationships within the investor community. This not only provides access to capital but can also open doors to valuable connections, insights, and potential partnerships. Establishing relationships and building a network of investors and private lenders can be instrumental in securing funding for larger and more ambitious projects down the line.

Conclusion

In the ever-evolving landscape of real estate investment, adapting your financing strategy is essential for sustained growth. Transitioning from using your own cash to embracing private lending can be a game-changer, offering the flexibility, scalability, and access to capital needed to take your business to the next level. By leveraging private money, cash buyers can position themselves for success in an increasingly competitive market. Nworie Capital remains committed to helping investors unlock the full potential of their real estate ventures with the power of private lending.