What is private capital lending?

The Preferred Funding Source for Real Estate Investors
A private capital loan is a loan secured by an asset, typically a piece of real estate. It is the preferred source of funding for most real estate investors for a variety of reasons.

Private capital lenders can be individuals or large companies serving small communities or an entire country. Speed is one of the primary reasons real estate investors favor private capital loans. These lenders do not have to conform to the same rules and regulations as banks, and thus, have less red tape to go through when putting together a loan.

Knowledge of Investing
Another reason many real estate investors come to private capital lenders is because these financiers understand the business of real estate investing more than traditional banks. This appreciation presents itself in their unusual criteria for loans. Instead of looking at standard measures like credit scores or income, they are much more concerned with the potential of the property and of the investor.

They also understand that real estate investors often need more than just enough money to purchase a property. They need the means to rehab it to rent or sell, which many traditional banks are unwilling to facilitate.

Amount Funded
The amount of a private capital loan is determined by a loan-to-value ratio. The LTV ratio ranges from lender to lender, but it is typically 65-70% of the quick-sale value of the property. The quick-sale value is not the same thing as the market-value appraisal. This value refers to the amount of money the lender could get for the property within one to four months of a potential default. Because private capital lenders base their loans on the value of the borrower’s real estate, it is important for them to know they could sell the property and recoup most of their investment should the debtor fail to pay.

Most private capital lenders choose to lend in a first lien position, which means they are the first creditor to receive compensation should the borrower default on the loan. This practice, along with a low loan-to-value ratio and higher interest rates, serves as security for the private capital lender.

The primary advantages these lenders offer over traditional banks is speed and flexibility. Many people feel that the creditor-debtor relationship is much more personal with a private capital lender than a traditional banker. Loans can be structured on a personal basis, and interest rates and LTV ratios are variable depending on the person and the property.

The loan-to-value ratio typically refers to the property’s after repair value, or how much the quick-sale value would be after it was rehabbed. Because of this, it is standard that borrowers provide a scope of work or list of repairs they plan to make to the property. Most of the time, private capital lenders will not even ask to see the property in person, although they may require an inspection. Lenders like to familiarize themselves with the buyer’s plan beforehand, but this is usually to ensure that they are on the same page. Again, private capital lenders are usually flexible and understanding if the amount projected in the scope of work isn’t exact.

The requirements and structure of a private capital loan depend on the lender’s perceived risk of the property and real estate investor. Often, real estate investors will use the same private capital lender for multiple properties, developing trust and flexibility for their loans.

Overall, real estate investors find that private capital lending is the best financing option for them. A combination of speed, flexibility and knowledge of the real estate market make private capital lenders the most convenient option.