Private capital lending is an alternative strategy for real estate investors to enter the property market, but what is private capital, who can use it, and what can they use it for?
PRIVATE CAPITAL DEFINITION
Private capital is an umbrella term for investment loans typically unavailable through public markets such as banks.
Private capital is accessed mainly by people with a high net worth who will use the funds for various investment scenarios, including real estate, private equity, and debt markets.
Institutional investors also frequently use private capital to make investments for others, such as insurance and pension funds.
HOW DO YOU ACCESS PRIVATE CAPITAL?
Access to private equity is different from traditional channels like a bank loan. Private capital reduces the risk to the lender by securing the loan against an existing asset owned by the investor. Collateral can be a house, infrastructure, or a block of apartments. Lenders are concerned with the ability of an investment to create a return that will benefit them and the lender.
Because an asset provides the collateral, the lender will usually have the option to take control of it should the borrower default on the loan. For example, if an investor purchases an investment home, the lender will be able to sell the property to recoup their funds if the investor fails to meet their obligations.
Terms for private capital are more flexible than most publicly available loans, as both lenders and borrowers can add terms and conditions that are unique to their circumstances. Flexible options include the duration of the loan, fees, and payment schedules, to name just a few.
PRIVATE CAPITAL ADVANTAGES
Private capital lenders are a lot more flexible in their terms and conditions because they work at a more personal level than the average bank or financial institution. Loans can be specifically tailored to an investor’s unique requirements. Also, a private capital lender will arrive at a decision much faster than a bank, which can be crucial for time-sensitive deals.
For example, an investor interested in a property that is a fixer-upper may only be able to secure a loan from the bank equal to the current value of the property. However, a private capital lender will consider lending funds on top to cover the renovation because they also have an interest in the property’s income potential.
Another advantage of private capital is that much of the red tape is removed during the approval process. Lenders know that an asset backs their funds, so they are not prone to the many regulations and restrictions that can slow a bank’s approval processes to a frustrating crawl.
PRIVATE CAPITAL DISADVANTAGES
Private capital lenders are more expensive than the traditional method for securing loans. The reason for this is because private lenders are willing to take on more risk than institutional lenders. More risk equates to higher fees.
Otherwise, if the loan isn’t risky, banks would gladly approve the loan. In the event of a worst case scenario – default – banks do not want to deal with the foreclosure and repossession process. This is where private lenders have the flexibility and resourcefulness to step in where banks fear to tread.
ABOUT July Ono.
JulyOno.com is a real estate investment company. We have been actively involved in the Lower Mainland area real estate investing for a number of years. Our mission is to provide local housing and commercial workspace to quality tenants while at the same time providing an above average return on investment (R.O.I.) for our investor partners and for ourselves. It is truly a win-win-win way of investing!
July offers her investor partners hands-free investment opportunities. If you are interested to learn how to earn an above-average return on your investment, backed by a solid asset, and without the hassle of being a landlord, please contact July Ono.