When considering approaching a private lender to fund your deal, you might be wondering how much equity is needed. Keep in mind that a private money loan is a business loan that uses investment real estate property as collateral. It is not an equity investment in your project.
The money used to fund private money loans is from an accumulation of personal money of one or more private investors. A private money lender seeks to reduce the risk a private money investor(s) might lose should your project go south.
Therefore, when applying for a private money loan consider what you would need to know if you were the lender to be confident that the risk associated with a project is minimal.
The asset you use as collateral for a private money loan from a non-bank private money lender with Hand Over Fist Funding is typically the basis for the loan. The majority of private lenders or people demand that you have at least 35% equity in the property (a 65% loan to value LTV). There are some lenders who may allow as little as 25% equity (75% LTV) or less but they will have other stricter requirements. The precise amount of equity varies depending on the private lender and their investors, but it usually depends on the quantity and nature of the collateral in addition to your own financial status.
Many private lending organizations will take additional collateral as a guarantee on the loan if you do not own any equity in the project you are working on. You might, for instance, have other properties with sizable equity or other possessions that might please a private investor.
If you do not have much equity in your project, a private lender will consider your project a higher risk. When your project is a higher risk, they will look at your financial situation a lot closer. Higher credit scores, other assets for collateral, and your experience will all help in reducing the risk. Some lenders will consider your relational capital when you have done several deals with them and pay the lender off then they will give better financing terms on future loans.
When you don’t have enough equity, you should generally look for an equity partner rather than a private lending group to fund your project. To find a possible partner it is recommended to participate in a regional real estate investment group.