Most of the time, money for real estate purchases is readily available. The money most often comes from banks,
but there is a myriad of other potential lenders out there, including private investors, second mortgage
lenders, sellers, Realtors, hard-money lenders, sellers, and even other real estate investors. At various
times, and under varying circumstances, each can play a very active role as a lender in the real estate market.
The past decade or so has been a very good period in which to borrow money, whether from conventional or less
conventional sources, because interest rates have been very low by historical standards. Low interest rates
enable you to buy more expensive properties, because your payments are driven not only by the size of the loan,
but also by the rate of interest on that loan.
This is important not for reasons of prestige, but for a very practical reason: being able to buy a larger
property means a higher return, in terms of equity buildup, if the property
appreciates. In our previous
example, our $50,000 property increased 10 percent, yielding you $5,000 in equity on your $5,000
But if interest rates are low enough to enable you to carry the loan on a $100,000 property, and if that
property goes up 10 percent, your equity buildup will be $10,000, giving you a 200 percent return on your
original $5,000 cash investment.
There are large numbers of private investors who are fed up with the very low returns they
can make by putting their money in banks. Most of these investors aren't fools. They know that, in many cases,
the bank is investing their money in real estate and earning good returns that way. Many of these investors are
willing to cut out the middleman (the bank) and make the loans themselves, as equity partners, members of a
real estate syndicate, or some other kind of real estate investor.
One reason why private lenders may be more attractive to you than conventional lenders is that you don't
usually pay "points" (an assessed fee) on your loan. In addition, the closing expenses are substantially lower,
usually by as much as 1 percent of the total amount of the loan. Borrowing from private lenders is
less cumbersome, too, because they aren't subject to government regulation and usually don't require credit
checks or financial statements.
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