CONVENTIONAL VS. PRIVATE MONEY

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I wanted to write a post about how I am funding my projects, because Lord knows I don’t have the $6m+ it would take to purchase the homes I have done thus far. So, basically there are basically two routes you can go to purchase and fund projects: Convention lender (or Bank, i.e. Citibank, B of A, etc.) or “Hard Money” (Private fund put together for lending on the asset).

Terms:

Points= 1 point is 1% of the value of the loan. Example: If you have $500,000 loan, with 3 points, that means you are paying a fee of $15,000 on the loan.

Apr= Annual Percentage Rate. Basically the total interest of your loan, based on a year of lending.

For the first two projects I have started, I have used a local private lender, Meridian Capital, previously mentioned. They have been very easy to work with, they fund my construction bills in a very timely manner, and are generally very personable because they work with a lot of builders in my industry here in Nashville and understand the construction process. However, convenience does come at a higher cost.

On the latest largest project that was purchased at $2.5m, see previous post, we decided to go with a conventional, yet local bank, Franklin Synergy Bank. It helps that they are not a huge national bank like Chase, so I don’t feel like just a number on a spreadsheet. However, a conventional bank is much more conservative than a private lender, so often they will not give you as much money towards a deal as a private money lender. It is also a longer process, involving a lot more paperwork and approvals. They come at a much cheaper rate, however. It is tempting to continue to use hard money, because it is simple, and once you develop a track record, it is almost a seamless process to purchase a new home. I feel it was a good business decision (I have Stephen’s incredible real estate financing background to thank for that!) to broaden my sphere of financing options, which just keeps project costs down. After working with Franklin Synergy Bank, and Citibank in the past, I recommend finding a local bank for the purchase of a home, whether it be for your personal home or investment; the process is much easier and they are more likely to work with you on options.

In summary:

Pros to Private “Hard Money”

Asset-based lending: the loan is mainly based on the viability of the project, not your personal financial, credit score, etc.

Fast Closing: Often times, especially after you have solid a relationship with a hard money lender, they can offer a fast, easy closing.

Less paperwork: Much simpler approval process, usually only based on financial statements, and a relatively easy application of project and history of projects completed.

Cons to Private “Hard Money”

higher points: typically 1-2 +points more than conventional

higher APR rate: typically between 9-12% (vs. 3-5% with conventional)

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