Here's how to build out your portfolio
The following article has been supplied by RCN Capital.
In any entrepreneurial profession, one of the toughest attributes to master is patience. With a lot of business savvy individuals looking for success on their own, the tendency is to want it right now. Without patience, many real estate investors will struggle to find success in this industry.
However, there are a few tools that can catapult investors into being very successful earlier than expected. One of those tools is private lending. Private lenders are in a unique position in the industry where they have the freedom to adapt to market conditions much quicker than other types of lenders. Let’s discuss some specific aspects of what sets private lenders apart, and more importantly, how investors can capitalize on that partnership and accelerate their success in the investment space by building out their portfolio.
Flexibility with guidelines and exceptions
One of the first and most important ways that private lenders can help real estate investors with building out their portfolios is by being flexible with their guidelines and approving exceptions for certain deals they may not fit their guidelines to a T. This is much different from conventional lenders that will be more rigid with their guidelines and are less likely to approve borderline deals.
This flexibility allows investors to scale because there could have been deals in the past where they tried to get them funded and couldn’t find a lender that was willing to work with them on a specific deal. Most private lenders are equipped with an in-house treasury team that is tirelessly working with their account executives on deals and seeing if they can close loans that are favorable for both the investor and the lender. If investors have any deals where there may be shortcomings or the deal isn’t quite perfect, having a private lender as a source to send that deal could be the difference in whether or not that loan gets closed, and the investor can secure that property.
Easier approval leads to repeatable process
Perhaps the biggest perk for investors when it comes to working with a private lender is how easy it is to get approved and get the loan to the closing stages. With lower FICO score requirements being the first step to making life easier for investors, there are a number of different loan options available for them to take advantage of. They may not be able to qualify for everything, but private lenders are always trying to ensure that there is a program out there for every investor.
Also, in cases where the FICO score is too low for every program, partners in the investment space can always step in and help. With other forms of lending, getting someone to co-sign on an investment property may be difficult especially with conventional lending. However, with private lending geared towards investment properties, it is a viable strategy for an investor with a low FICO score to work with a partner on a few deals until they can get their credit score back on track and be able to qualify for loans independently.
In addition to lower FICO requirements, there is also less documentation to get approved by a private lender. Unlike conventional lenders that will typically ask for proof of employment, annual income statements and tax returns, private lending documentation is much less invasive for a potential borrower. Private lenders will look for a few months of bank statements, a standard loan application and business entity documents for the LLC that the investor has set up for the potential investment. There will be a few other requirements dependent upon the loan program each investor is looking for, but comparatively it will be much easier. With the process of getting approved becoming much more manageable, this will become addicting to investors. Investors will close loans faster, make more money and want to repeat this process as much as possible. If investors are truly looking to scale their business and add to their portfolio, partnering with a private lender is the most efficient way to do that.
Loan programs created specifically for investors
Another leg up that private lending has on the rest of the lending landscape is that their loan programs are designed to set up investors for success. With short-term and long-term options for investors, no matter what their goals are there is typically a loan program an investor can capitalize on.
Purchase and Rehab loan programs, otherwise known as fix and flips, are an extremely popular product in the investment space. Private lenders will have specific details within these programs that really help investors work towards their goals. A prime example of this is having no pre-payment penalties attached to short-term (12-month) loans. This benefits investors because most will complete the purchase and rehab before the 12-month term is up. With no pre-payment penalties, the investor can sell the property for a profit and move on to their next investment while avoiding any monetary setback.
Private lenders will generally fund 100% of the rehab project as well which ensures investors are not dumping their cash reserves into a rehab project. With much more cash at their disposal following a completed renovation project, investors can look for other investment properties right away and continue to scale.
As for the long-term options, most private lenders will opt for a true DSCR program (debt service coverage ratio). DSCR is a metric that measures cash flow, and this ensures that the borrower is making a sound investment. Due to private lenders having that peace of mind that a property will cash flow thanks to DSCR, they are able to offer lower interest rates than most other types of lenders. Investors gravitate towards private lenders because of this, and it can set them up for success because lower interest rates lead to lower monthly payments. From a cash-flow standpoint this is crucial and can bolster an investor’s portfolio tremendously.
Partner with a private lender today
With all the benefits for investors, partnering with a private lender should be a no-brainer going forward. This doesn’t have to mean that every deal an investor closes must go through a private lender but not having that possible outlet for a given deal is a missed opportunity.
Partnering with a private lender also lends itself to a level of familiarity and priority. Working with the same account executive over and over makes for a smoother process and if the account executive knows they can rely on an investor to send them strong deals that have a great chance of closing they will always pick up the phone and work tirelessly to get that loan closed. Investors can take advantage of many more opportunities when partnering with a private lender and if they aren’t currently working with one that should change today.
